Retirement Mutual Funds (RMFs) and Long-Term Equity Funds (LTFs)—LTF Tax Privileges Revised

This article originally appeared in the American Chamber of Commerce of Thailand (AMCHAM)’s T-AB Magazine 5/2016 and has been shared with permission.

For many employed expats in Thailand, Thai Long-Term Equity Funds (LTFs) and Retirement Mutual Funds (RMFs) can provide worthwhile Thai tax benefits. This article discusses the merits of both types of investments, and highlights an important 2016 change to the LTF holding period. For a period of time U.S. citizens were unable to invest in LTFs and RMFs due to FATCA legislation; however, some Thai asset management companies are again accepting U.S. citizens.

Long-Term Equity Funds and Retirement Mutual Funds: The Basics

Long-Term Equity Funds (LTFs) were set up under Thailand’s IMF program to encourage longer-term investing in the Thai equity market. Retirement Mutual Funds (RMFs) were established to encourage people to save for retirement by providing Thai tax benefits on savings.

Both LTFs and RMFs provide current-year Thai tax deductions on contributions, and earnings grow free of Thai tax. Subject to meeting LTF and RMF fund requirements, funds can also be withdrawn tax-free. There are a number of different LTFs and RMFS managed by the various Thai asset management companies and distributed either directly or through affiliated bank branch networks.

How You Save on Thai Tax

For RMFs, individuals can deduct contributions of up to 15% of their personal income (including salary, bonus, fees, commissions, severance pay, or investment income) or Baht 500,000 per year (whichever is lower) from current Thai taxable income. If you have a provident fund at work, the total annual maximum tax deduction for both the provident fund and the RMF together is Baht 500,000.

For LTFs, individuals can deduct contributions of up to 15% of annual compensation or Baht 500,000 (whichever is lower) from current-year taxable income. This is in addition to any contributions made to a provident fund and/or RMF. For high-income earners, combined contributions can total Baht 1 million (about USD 28,000) and save Baht 350,000 in Thai taxes (about USD 10,000).

What You Need to Know About RMFs and LTFs

RMFs:

• You get a current-year Thai tax deduction on contributions.
• Depending on the fund’s policy, the fund manager may invest in equity funds (Thai as well as international), debt instruments, or mixed funds.
• Returns grow free of Thai tax.
• The maximum annual contribution is the lesser of 15% of total annual compensation or Baht 500,000.
• If you contribute to a company provident fund, the total contribution to both the provident fund and RMF cannot exceed Baht 500,000.
• Contributions need to be recorded before the end of the calendar year.
• Funds can be withdrawn free of Thai tax after age 55 (and if held for five years or more)
• To qualify for Thai tax benefits, you must contribute at least every other year for a minimum of five years. The minimum contribution is 3% of taxable compensation or Baht 5,000, whichever is lower.
• If you fail to meet the required minimum contribution schedule or withdraw funds prior to reaching age 55, or have not met the five-year holding requirement, you will have to pay back any tax deduction you received along with penalty fees. In addition, any capital gains will be subject to a 10% tax.
• Since 2015, the tax benefits of employer Thai Provident Funds can be preserved by transferring to RMFs after employment ends.

LTFs:

• You get a current-year Thai tax deduction on contributions.
• Unlike RMFs, LTFs invest primarily in Thailand-listed stocks. You’ll therefore want to make sure a Thai-only equity holding makes sense in your diversified portfolio.
• Returns grow free of Thai tax.
• The maximum annual contribution is the lesser of 15% of total annual compensation or Baht 500,000.
• Contributions can be made in addition to those made to provident funds and RMFs.
• There is no need to make ongoing contributions to maintain tax benefits.
• Change in 2016: New LTF contributions and earnings can be withdrawn free of Thai tax after seven calendar years. This is an increase from the previous holding period of five calendar years.
• Effectively, 2016 LTF contributions must be maintained for five years and two days. Anyone contributing to an LTF on the last business day of 2016 would need to maintain the investment until the first business day of 2022.
• If you withdraw before the holding period, any tax deductions you received will need to be paid back along with penalty fees. In addition, any capital gains will be subject to a 10% tax.
• Contributions must be recorded by the end of the calendar year.

The rules regarding LTF and RMF contributions can and do change, so make sure you check the current status before making any contributions.

Who Can Benefit from RMFs and LTFs?

Aside from Thai citizens, many foreigners with a long-term commitment to Thailand through work, marriage, or lifestyle can benefit from contributing to LTFs and RMFs. Those on short-term expat assignments in Thailand will have to carefully weigh the potential benefits against the various rules and regulations required to maintain the tax-exempt status of each fund.

Special Considerations for Americans

Recently some Thai asset management companies have reopened their RMF and LTF programs to U.S. citizens. Americans are taxed on worldwide earnings and compensation, however, so before investing, U.S. citizens should note that the tax-advantaged status of the RMF and LTF is not recognized by the IRS. Additionally, both LTFs and RMFs are likely to be considered Passive Foreign Investment Companies (PFICs) by the IRS with their earnings subject to special tax rules and filing requirements.

Nevertheless, RMFs and LTFs may still make sense for some Americans, especially those whose compensation does not exceed the Foreign Earned Income Exclusion (FEIE—$101,300 in 2016) and housing deduction. For these Americans all Thai-earned salary would be shielded from U.S. tax already.

Contributions to LTFs and RMFs would save Thai tax and therefore lower the overall tax burden. Even though investment earnings may be reported annually under PFIC rules, the Thai tax savings could still make this a worthwhile trade-off.

If you earn in excess of the FEIE and housing deduction, contributions could still make sense, but the benefit diminishes as you enter the higher U.S. tax brackets. Compensation in excess of the FEIE and housing deduction will effectively be taxed overall at the higher of the U.S. or Thai rate. For someone in the 35% tax bracket in Thailand and the 33% or higher U.S. brackets, the Thai tax savings may not justify tying up the funds in an LTF or RMF and filing Form 8621 (PFIC).

For someone in the 35% Thai tax bracket, but only in the 28% U.S. tax bracket, contributions could make sense—but you’ll need to do the math to determine your overall (Thai + U.S.) tax savings.