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Double Tax Treaties

Thailand is party to "Agreements for the Avoidance of Double Taxation", so-called "tax treaties", with many countries. The purpose of the treaties is to prevent a company from one country being taxed twice on income earned in the other country.

The treaties provide that ordinary income earned in a country by a company that does not have a significant business presence in that country is exempt from taxation within that country. If that company does have a significant business presence-- in tax treaty terminology, a "permanent establishment"-- in the country in which the income is earned, the tax paid in that country is considered a credit against any tax which might otherwise be owing in the company's home country.

The tax treaties also apply to individuals performing services in the other country.

The specific terms of the tax treaties to which Thailand is a party vary, but they usually have the characteristics described below. One should note, however, that in addition to the terms of each treaty varying to some degree, the issues presented under the treaties can be extremely complex. The advice of an accounting or law firm should be sought when analyzing the impact of tax treaties on a foreign company's or individual's activities in Thailand.

I. Permanent Establishment
  A critical element in analyzing the impact of a tax treaty on a foreign business's income earned in Thailand is the determination of whether that company has a "permanent establishment" (P.E.) in Thailand. Usually, the existence of a P.E. is determined by whether the company has a "fixed place of business" in Thailand. The treaties normally list examples of what might be considered a fixed place of business. For example, the Thai-Singapore tax treaty says a P.E. will include especially: a place of management; a branch; an office; a factory; a workshop; a warehouse; a farm or plantation; a mine or similar place for extraction of natural resources or a building site, construction, installation or assembly project which exists for more than six months.

Certain things, which might otherwise be considered fixed places of business, are specifically excluded from classification of a P.E.Most importantly, a Thai-registered subsidiary of a foreign company does not create a P.E.Other establishments that do no constitute a P.E. include Representative Offices, and certain types of warehouses and other storage facilities that are used for limited purposes specified in the treaties.

The treaties usually include a provision that states that the presence of a broker, general commission agent or other type of agent in the other country might create a P.E. The determination of whether the presence of an agent creates a P.E. often hinges on whether that agent acts exclusively or almost exclusively on behalf of the foreign company.

II. Effect of Permanent Establishment
  If a foreign company has a P.E. in Thailand, the ordinary business profits earned by or through the P.E. in Thailand are subject to the Thai Corporate Income Tax, and the company receives a credit in its home country for the tax paid in Thailand. The credit is not absolute. It can only be used against taxes which would be owing in the home country from the specific income which was earned by the P.E. That is, if the tax burden in Thailand is higher than in the home country, the credit cannot be applied to taxes owing from income earned in the home country or someplace other than Thailand.

If the foreign company does not have a P.E. in Thailand, the ordinary income earned by the company in Thailand is not subject to tax in Thailand. Likewise, payments of ordinary income sent abroad to that company from Thailand should not be subject to the income tax withholding which ordinarily might apply under the Thai Revenue Code.

III. Specific Types of Income Subject to Tax
  Under the treaties, certain types of income are subject to special treatment. These types of income include most notably rental income from immovable property, dividends, interest, royalties and income from shipping and air transportation. The tax treaties themselves do not impose a tax on these types of income. The treaties merely allow taxation subject to specified maximum amounts. If the actual tax under Thai law is lower, the lower rate applies. Again, the terms of the various treaties are not identical, but the following generalizations can give a guide to the special treatment of these types of income.
A. Income From Immovable Property
  Even if a company does not have a P.E. in Thailand, normally that company's income from the rental of immovable property in Thailand is subject to the Thai Corporate Income Tax.
B. Dividends
  "Dividends" as used in the tax treaties applies to more than ordinary company dividends. It generally refers to any disbursal of profits from the company. The tax rules for dividends paid by a Thai company to a foreign company vary considerably depending not just on the terms of the applicable tax treaty but also on the relationship between the Thai company and the foreign company. Any disbursal of profits from a Thai company to a foreign company-- or vice versa-- should be analyzed in the context of the applicable tax treaty.
C. Interest
  The tax treaties allow interest paid by a Thai company to a foreign company to be taxed, even if the foreign company has no P.E. in Thailand. A maximum tax on interest income is stated in the tax treaties. Often, the maximum varies depending on whether the party receiving the interest is a financial institution. For example, under the Thai- Singapore tax treaty, interest payments to a financial institution are subject a maximum tax of 10 percent, but interest paid to ordinary companies is subject to a maximum tax of 25 percent.
D. Royalties
  Under the terms of the tax treaties, "royalties" paid by a Thai company to a foreign company not having a P.E. in Thailand may be taxed in Thailand up to a specified maximum rate. Usually the rate under the treaty is 15 percent, although certain treaties specify the maximum rates depending on the type of royalty income. For example, under the treaty between Thailand and France, the maximum rate for royalties paid for literary, artistic or scientific work is 5 percent, while other royalties are subject to a 15 percent maximum.

The tax treaties define "royalties" broadly. In particular, some types of "management fees" paid by a company in Thailand to a company abroad might be considered royalties under the tax treaties.

E. Shipping And Air Transportation
  The tax issues facing companies involved in international transportation services are complex. Under the tax treaties, normally air transportation service income is only taxable in the country where the company's "effective management" is located, while income for ocean transportation is taxable both in the country in which the company's effective management is located and in the other country, although the tax in the latter is generally subject to a 50 percent reduction.
F. Personal Services
  The income earned for services performed by foreign individuals in Thailand is generally subject to the Personal Income Tax. However, if the foreigner comes from a country having a tax treaty, such income might be exempt if the individual meets criteria specified in the treaty. The criteria relate to the amount of time the individual is located in Thailand during the tax year, the nature of the services and for whom the services are performed.
G. Exchange of Information
  The tax treaties also have miscellaneous provisions about tax administration between the two countries. Often this includes an agreement to share taxpayer information. Especially given the increasing influence of technology, foreign individuals and businesses should be aware that activities in Thailand might potentially be reported to the revenue departments of their home countries.
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