Tips for Thai Expats: Use RMFs and LTFs to Save on Thai Taxes

Chad Creveling, CFA and Peggy Creveling, CFA |
Categories
American expat tax planning
taxes

As the end of the 2019 tax year approaches, expats working in Thailand may wish to consider sheltering some of their income from Thai tax by contributing to Thailand’s Long-Term Equity Funds (LTFs) and Retirement Mutual Funds (RMFs). With a little bit of planning, you can save up to THB 350,000 (or about USD 11,700) this year in Thai taxes by contributing to both of these tax-advantaged funds.​

 

An image that shows upward growth of investments.

 

Important: LTF tax privileges are due to expire at the end of 2019, so this may be the last year that Thai taxpayers can make tax-deductible contributions to LTFs. Some capital market participants have proposed an LTF replacement for future years, but the proposed tax benefits are not as generous, and thus far nothing has been approved. RMF tax benefits, however, are expected to continue beyond 2019.

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

Long-Term Equity Funds were set up under Thailand’s IMF program to encourage longer-term investing in the Thai equity market. Retirement Mutual Funds 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 Subject to meeting LTF and RMF fund requirements, funds can also be withdrawn tax-free.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 THB 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 THB 500,000.

For LTFs: Individuals can deduct contributions of up to 15% of annual compensation or THB 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 to LTFs and RMFs in 2019 can total up to THB 1 million (about USD 33,750) and potentially lower Thai taxes by THB 350,000 (or roughly USD 11,700).

What You Need to Know About RMFs and LTFs

Here’s what else you need to know about RMFs and LTFs.

Retirement Mutual Funds

  • 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 THB 500,000.
  • If you contribute to a company provident fund, the total contribution to both the provident fund and RMF cannot exceed THB 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 THB 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.
  • To avoid Thai tax on Thai Provident Fund (TPF) distributions, TPF participants facing employment termination can request that their TPF account balances be transferred or rolled to an RMF until they meet requirements to withdraw their funds free of Thai tax. This could save a substantial amount in Thai tax, if the TPF balance is significant.

Long-Term Equity Funds

  • 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 15% of total annual compensation or THB 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.
  • Contributions and earnings can be withdrawn free of Thai tax after five years.
  • If you withdraw before the five-year 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

There are additional considerations for Americans who are taxed by the IRS on worldwide earnings and compensation. The tax-advantaged status of the RMF and LTF is not recognized by the IRS. In addition, both the LTF and RMF are likely to be considered Passive Foreign Investment Companies (PFICs) by the IRS and therefore subject to special tax rules and filing requirements.

Though the IRS does not recognize LTFs and RMFs as a tax-advantaged vehicle and classifies them as PFICs, they can still make sense for Americans, especially those whose compensation does not exceed the Foreign Earned Income Exclusion (FEIE). In this case, all compensation earned in Thailand would be shielded from tax by the IRS due to the FEIE. Contributions to an LTF and RMF would then save Thai tax. Even though earnings on the contributions would have to be reported annually under PFIC rules, you would still be ahead since you’re investing with funds you would have otherwise paid to the Thai Revenue Department.

If you earn in excess of the Foreign Earned Income Exclusion, contributions could still make sense, but the benefit diminishes as you enter the higher tax brackets. Compensation in excess of the FEIE will effectively be taxed at the higher of the U.S. or Thai rate. For someone in the 35% tax bracket in Thailand and the 33% or 35% bracket in the U.S., the Thai tax savings may not justify tying up the funds in an LTF or RMF. For someone in the 35% Thai tax bracket, but only in the 28% U.S. tax bracket, it still might make sense, but you’ll need to do the math and compare your options.

Don’t Ignore the Potential Benefits of LTFs and RMFs

For many Thailand-based expats, the Thai tax benefits of LTFs and RMFs can be a great holiday gift to yourself. Do yourself a favor and check them out—just make sure you understand the rules and regulations, and for Americans, the potential tax consequences.

This article is a revised and updated version of one that appeared previously on www.crevelingandcreveling.com.
 

Additional Resources:

The New and Improved Thai Provident Fund
Taxes Americans Need to Know About Before Investing Offshore
Anticipation Builds for Fund to Replace LTF—Bangkok Post

 

About Creveling & Creveling Private Wealth Advisory
Creveling & Creveling is a private wealth advisory firm specializing in helping expatriates living in Thailand and throughout Southeast Asia build and preserve their wealth. The firm is a Registered Investment Adviser with the U.S. SEC and is licensed and regulated by the Thai SEC. Through a unique, integrated consulting approach, Creveling & Creveling is dedicated to helping clients cut through the financial intricacies of expat life, make better decisions with their money, and take the steps necessary to provide a more secure future.

Copyright © 2019 Creveling & Creveling Private Wealth Advisory, All rights reserved. The articles and writings are not recommendations or solicitations, and guest articles express the opinion of the author; which may or may not reflect the views of Creveling & Creveling.