New incentives for establishing a regional operating headquarters in Thailand

Introduction

The Board of Investment of Thailand (BOI) issued an announcement in December 2001 offering attractive tax incentives to foreign companies that are willing to set up a regional operating headquarters (ROH) in Thailand. Two decrees to deal with the matter are expected to be issued in February 2002. The announcement is summarised below, but it will be necessary to wait to see the text of the decrees to assess the full nature of the benefits offered.

Requirements for a ROH

• The ROH must be a Thai registered company or juristic partnership.
  
• The ROH must provide "qualifying services." This includes management, technical and other support services, such as technical support, research and development and training to subsidiaries or branches in Thailand or elsewhere.
  
• The ROH must have 10 million Baht minimum paid up capital.
  
• The ROH must provide services to subsidiaries or branches in at least three countries.
  
• At least 50% of the revenue of the ROH must be derived from foreign subsidiaries or branches. (For the first three years this is reduced to one third).

Tax concessions

• The ROH will pay 10% corporate tax instead of the usual rate of 30%: (1) on its income from qualifying services; (2) on net profits from royalties derived from R & D in Thailand; and (3) on interest from loans made to branches or subsidiaries, where the loan is made from borrowings.
  
• No tax is payable on dividends received by the ROH from domestic or foreign subsidiaries.
  
• No withholding tax on dividends paid by the ROH to foreign companies that do not carry on business in Thailand.
  
• Depreciation is permitted at 25% for building costs in the acquisition year, with the balance to be depreciated over 20 years.
  
• No personal income tax on income received by the ROH's expatriate employees for work performed outside Thailand. But such salaries will not be a deductible expense of the ROH or other subsidiaries that directly/ indirectly carry on business in Thailand.
  
• 15% flat rate personal income tax on salaries derived from employment by the ROH, subject to conditions. This concession will only apply for only two years.

Shortcomings

Whilst the incentives offered are attractive, there are certain drawbacks:

• The income that qualifies for the reduced 10% tax rate is limited to income from qualifying services and other sources as set out above . Any other income of the ROH will still be subject to 30% tax.
  
• The ROH must receive income from at least 3 "branches or subsidiaries." This expression is not defined. Quaere whether for example, representative offices, or minority owned companies will qualify.
  
• Where the ROH sells shares in any subsidiaries, the gain will still be subject to 30% tax.
  
• The personal income tax reduction to a flat rate of 15% on salaries will only apply to a contract for 2 years only.
  
• Not less than half of the ROH's income must derive from the subsidiaries (concession for the first three years to one third only).
  
• The announcement is silent as to how many expatriates a ROH would be permitted to employ and how many work permits it can sponsor.
  
• VAT will be 0% on services supplied by the ROH that are exported, but otherwise will be subject to 7% VAT.

Conclusion

There are of course many issues other than tax that a foreign company will consider before it decides where to locate a regional office. Whilst there are a number of attractive incentives being offered to a company that wishes to set up an ROH in Thailand, the publication of the decrees must be awaited before the benefits can be conclusively evaluated.