Understanding Share Premium in Thai Corporate Law and Its Tax Implications

Explanation of Share Premium in Thai Corporate Law and Its Tax Implications

What Is Share Premium? (Thai Legal Definition)

In Thai corporate law, share premium refers to the amount a company receives from issuing new shares above the shares’ par value (face value)​. Under Section 1105 of the Thai Civil and Commercial Code (CCC), a company cannot issue shares below their par value, but it may issue shares at a higher price than par if the company’s Memorandum of Association permits it. The difference between the issue price and the par value is the share premium. For example, if a company’s share has a par value of THB 10 and a new investor pays THB 80 for each share, THB 10 is recorded as share capital and the extra THB 70 is the share premium (the amount “เกินมูลค่าหุ้น”). This premium amount must be fully paid up at the time of share issuance, together with the first installment on the shares​. In summary, share premium is essentially additional paid-in capital – money paid by shareholders beyond the nominal value of the shares to reflect the true value of the company’s equity.

Accounting Treatment of Share Premium

When a Thai company issues shares at a premium, that premium is recorded in the company’s accounts as part of shareholders’ equity, not as revenue. In practice, the company will set up a “share premium” reserve or account in the equity section of the balance sheet. The par value portion of the new shares goes into the registered share capital account, and the excess (premium) goes into the share premium account. No part of the share premium is recorded in the profit-and-loss statement, since it’s not income from business operations. Instead, it’s treated as paid-in capital from owners. This means it does not affect the company’s net profit or taxable income in the accounting period of the capital increase.

It’s important to note that share premium funds are part of the company’s equity and can typically only be used for limited purposes (such as offsetting certain expenses or losses, or other capital adjustments) rather than being freely distributable as ordinary profits. The premium must be properly accounted for in the books: the company should clearly record the amount in a “share premium” or “paid-in surplus” equity account. Proper documentation (share subscription agreements, board/shareholder resolutions approving the premium, etc.) should support this entry for both accounting and regulatory compliance.

Share Premium vs. Registered Capital

Registered capital in Thailand refers to the amount of capital that a company is authorized to raise, as stated in its constitutive documents (the Memorandum of Association). This is calculated as the par value of each share multiplied by the number of shares. When a company issues shares at a premium, the share premium portion is not added to the registered capital – only the par value portion of the new shares increases the registered (and paid-up) capital. In the example above, if the company issued a new share at THB 80 (par THB 10 + premium THB 70), the registered capital increases by THB 10 per share (the par value), not THB 80. The extra THB 70 is recorded separately in the equity as share premium.

In other words, share premium does not count toward the company’s registered capital (ทุนจดทะเบียน). The Department of Business Development (DBD) will record the issuance of new shares (and thereby an increase in registered capital by the par value amount only). The DBD documents for the capital increase will typically note the number of new shares, their par value, and may mention that they were issued at a premium, but the official registered capital figure remains based on par value. The share premium exists on the balance sheet but is not part of the company’s authorized capital in the eyes of corporate registration. This distinction is important: for instance, legal reserve requirements (5% of profits set aside until reserves equal 10% of registered capital) are based on registered capital only, not including any premium.

Bottom line: The share premium increases the company’s equity (and total paid-in capital from shareholders) but does not increase the registered capital amount on file with authorities. This means, for example, that if a foreign business owner uses share premium to inject funds, it won’t raise the official registered capital (which might be relevant for certain thresholds or fees), but it will strengthen the company’s equity position internally.

Tax Implications for Company and Shareholder (Corporate Income Tax)

One major advantage of using share premium to inject funds is that it typically does not create a taxable event for the company under corporate income tax (CIT). The Thai Revenue Department (TRD) has historically regarded genuine share premium as a capital contribution, not as taxable income of the company. Because the company is receiving money in exchange for issuing equity (shares), this is not considered “revenue arising from business operations.” The company does not pay CIT on the share premium amount in normal circumstances. In our example, the THB 70 per share premium that MXMCo. receives from the investor (Peter) would not be counted as part of MXM’s revenue, and thus MXM would not owe corporate income tax on that THB 70. Instead, it’s recorded as equity on the balance sheet.

For the shareholder injecting the money (e.g. Peter in the example), there is also no tax on the act of investing. Peter is simply purchasing shares; he is not earning income from this transaction, so he (or Jim as an existing shareholder) doesn’t incur any Thai income tax from the share issuance itself. Essentially, transferring money into the company in exchange for shares is a capital transaction, not a taxable profit. The new shareholder’s “reward” is the ownership interest in the company, not an immediate income item. (If in the future the shareholder sells the shares at a gain or receives dividends, those could have tax implications, but buying newly issued shares does not trigger personal income tax.)

Important caveat: While normal share premium is not taxed as income, Thai authorities require that such transactions be bona fide. If the share premium is extremely high or structured in a dubious way, the Revenue Department may scrutinize it. In rare cases, if they believe the premium is essentially a disguised subsidy or hidden income injection (for example, issuing shares at an unjustifiably high price to cover losses), they could attempt to reclassify it as taxable income​. For instance, Thailand’s Supreme Court ruled in 2014 that a company with massive accumulated losses and a 40:1 debt-to-equity ratio could not justify a huge share premium paid by its parent company; the court agreed with the Revenue Department that this premium was essentially a capital “subsidy” and should be treated as taxable income to the Thai company​. This was an exceptional case where the economic substance doctrine was applied – since the company had no realistic value to warrant a premium, the injection was seen purely as a cover for financial support​.

For a typical foreign business owner running a normal company, as long as the share issuance and premium have a reasonable business basis (e.g. reflecting the true value of the company or its growth prospects), it will be respected as capital​ In practical terms, using share premium is a common and legitimate strategy to inject funds into a Thai company without incurring corporate tax, provided it’s done correctly and not abusively Engaging a tax advisor for very large or unusual premiums is wise, but for ordinary cases there should be no CIT on the contributed premium.

Other Taxes: VAT and Specific Business Tax

Apart from corporate income tax, other Thai taxes like VAT (Value Added Tax) or Specific Business Tax (SBT) do not apply to share premium or capital contributions. VAT is a tax on the sale of goods and provision of services​. When a company issues new shares, it is not selling goods or services to the investor; it’s exchanging a portion of ownership for money. This transaction is outside the scope of VAT – essentially an investment activity rather than commercial trade. No VAT is charged on the money a shareholder pays for shares, and the company cannot charge VAT on issuing its own shares. Similarly, Specific Business Tax (a tax on certain financial service businesses and real estate sales) does not apply here​. SBT is only levied on specific industries (like banking, finance, real property businesses, etc.) and on certain transactions that are in lieu of VAT. Raising capital through share issuance is not a taxable service or business revenue, so it does not trigger SBT.

In summary, a share premium will not attract VAT or SBT. The new capital coming in is not treated as the company’s income from sales, and the act of issuing shares is not a service – thus it falls completely outside the indirect tax system. There is also no stamp duty or transfer fee on the issuance of new shares at a premium (stamp duty in Thailand may apply on transfer of existing shares in some cases, but not on the creation of new shares by the company). The investor simply pays the agreed amount to the company, and the company issues the shares – no additional transaction taxes are imposed on that process. This makes share premium a very tax-efficient mechanism for putting money into a Thai company.

Compliance with DBD and Recording Requirements

When properly executed, issuing shares at a premium is fully legal and should not cause issues with Thailand’s Department of Business Development (DBD) or other regulators. It’s important to follow the formal steps: the company must have authorization (in its Memorandum or Articles) to issue shares above par value​ and the shareholders must approve the capital increase (usually via a special resolution). The DBD will require certain filings for the capital increase – including details of the new shares. In the filing, the company typically specifies the number of shares, the par value, and notes that shares were issued at a premium, along with the total amount received. All such documentation should be submitted within the required timeframe (the DBD usually asks for registration of the capital increase within 14 days of the shareholders’ resolution). If the premium is substantial, the DBD may also require evidence that the funds were indeed paid into the company (for example, a bank slip or shareholder payment confirmation) to ensure the capital (including premium) is fully paid-up. This is part of normal anti-fraud and company capital verification practices and is not an extra tax or penalty – just a compliance step.

From an accounting standpoint, the company must correctly record the share premium in its books (as discussed earlier). Typically, the journal entry will debit the cash/bank account for the full amount received and credit two equity accounts: “Share Capital” (par value * number of new shares) and “Share Premium” (the excess amount). These entries should align with the particulars filed with the DBD. So long as the accounting is done correctly and transparently, the Revenue Department will see that the funds are recorded as equity, not income. It’s advisable to keep a paper trail – e.g. the shareholder resolution approving the premium, and any valuation or rationale for the share price – especially if the premium is high. This way, if ever questioned by the Revenue Department, the company can demonstrate that the premium was a bona fide capital contribution reflecting the company’s value, not an attempt to hide taxable income.

The DBD itself is generally concerned only with corporate law compliance, not tax. As long as the capital increase procedure is followed (proper approvals, filing forms, updated shareholder list, and new share certificates issued), the DBD will accept the registration of the new capital. There is no additional fee or tax to the DBD for having a premium – fees are based on the increase in registered capital (par value). The Revenue Department will not treat the share premium as revenue if it’s legitimately documented as a capital transaction. In typical cases (company in normal financial health, and premium reflecting fair value), no red flags are raised. Only in extreme outlier cases (as noted, where a premium appears to be an injected gift to cover insolvency) would the Revenue Department step in. If your company’s situation is straightforward – e.g. you have a growing business and a new investor or existing owner injecting extra funds for expansion – using a share premium is routine and should not draw any negative scrutiny.

Is Using Share Premium Safe and Tax-Efficient?

For a foreign business owner in Thailand, issuing new shares with a share premium is both a safe and efficient way to inject capital into your company under most circumstances. It is a commonly used mechanism for funding Thai companies, especially when the investor wants to contribute more money than the nominal capital and avoid immediate tax costs. When done correctly, the company receives the needed funds without incurring corporate income tax, and the investor increases their equity stake without any personal tax on the purchase. There is no VAT, specific business tax, or other hidden tax on this capital contribution, meaning the full amount can be put to use in the business. Additionally, since it doesn’t count as revenue, it won’t inflate the company’s profit (which could otherwise trigger higher income tax or profit-sharing obligations).

In terms of compliance, Thai law explicitly allows share premiums, and the process is well-established. So long as you follow the legal formalities and maintain clear records, neither the DBD nor the Revenue Department will object to a share premium. In fact, treating incoming funds as share capital/share premium (equity) is far cleaner than trying to introduce money as loans or other means – it strengthens the company’s balance sheet and avoids creating debt. It’s also transparent to regulators that the money is part of the company’s capital base. The only precaution is to ensure that the premium is justifiable (which typically it is, in an arm’s-length investment). If you have a solid business case for why the shares are priced above par (for example, the company’s assets, goodwill, or prospects make it worth more than the nominal value), then using a share premium is entirely legitimate.

In conclusion, using share premium in Thailand is a legitimate and effective strategy for capital injection, with minimal tax impact and straightforward compliance steps. It allows foreign owners to capitalize their Thai company efficiently. Just make sure to record everything properly and comply with the DBD filing requirements. When done properly, share premium is safe, does not incur additional taxes for either the company or its shareholders, and helps you stay fully compliant with Thai corporate and tax regulations​. This makes it a highly useful tool for minimizing tax liability on funding and for strengthening your company’s financial position while staying within the law.

Sources: Thai Civil and Commercial Code Section 1105​l Grant Thornton Thailand – “Share premium: capital or income?”​; ONE Law Office – Tax treatment of share premium (Lexology)​.