Apollo Investment Management

Thai dividend taxation and NVDRs

A sequential title for this page was in my mind yesterday, but having received a courteous reply in English from the Thai NVDR Co, let us assume that the (continuing) misrepresentation on their website is an honest oversight. The damage to investors is, after all, only slight, compared to that documented in my 1999 rant, 'Perfidious Thais'. It may, however, be useful to know that voting rights are not the only difference between Thai NVDRs and the underlying shares.

NVDR's are Non-Voting Depositary Receipts, introduced to allow foreigners to buy Thai shares in excess of foreign-shareholding limits. Before the introduction of NVDR's, any Thai company for which the foreign shareholding quota was full had two-tier pricing, with the foreign shares trading at an erratic premium to the local price, and frequently very illiquid. If foreign limits are to be maintained, the introduction of NVDRs was an improvement. Although NVDR issuance entrenches the position of the controlling shareholder, with potentially undesirable consequences for corporate governance, that has not so far caused problems in any company which we own.

For one of our companies, we own both foreign shares and NVDRs, and were surprised to receive different amounts of dividend. The dividend on the NVDR was subject to withholding tax at 10%, although the dividend on the ordinary shares was partially exempted.

We looked at the website of the Stock Exchange of Thailand (SET), which says that:

"By investing in NVDRs, investors receive the same financial benefits (i.e., dividends, right issues or warrants), as those who invest directly in a company's ordinary shares. The only difference between investing in NVDR and company shares is in regard to voting."

- and that Thai NVDR Co., Ltd (Thai NVDR) is a 99.99% subsidiary of the SET (www.set.or.th/nvdr/en/about/about.html).

We wrote to Thai NVDR and received the following reply.

"In response to your question, please be informed X is the company promoted by the Board of Investment (BOI). The dividend payment paid to investors who invest in X received the privilege to exempt from income tax on those dividends.

"Moreover, we would like to clarify that Thai NVDR Co., Ltd. (Thai NVDR) as the registered holders of X received the dividend from X and then paid out the dividend to NVDR holders who invested in X-R at the same dividend ratio.

"However, the NVDR holders are not entitled to receive the tax privilege on the dividend because the Thai NVDR is not the company which receives the tax privilege form The BOI. The dividends paid to NVDR holders must be always 10% withholding tax.

"Note: According to the Section 34 of the Investment Promotion Act (B.E. 2520), which grants this exemption, applies only to the investors who directly invest in the promoted firm. Since individual or juristic persons who have bought NVDR are not direct investors, they are not entitled to the exemption."

So now we know, but would have preferred to know earlier - so record it here in case of interest to others.

Claire Barnes, 7 Aug 2008

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