Tax Law Supporting Foreign Investment

To promote Thailand as a financial and business investment center in Southeast Asian regions and to help boost foreign investment, the Thai Government has introduced a tax incentive package to boost investments by foreign investors in Thailand through the establishment of regional operating headquarters in the country. In implementing the tax incentive package, the government has issued two Royal Decrees, namely Nos. 405 and 406. The first decree governs a reduction and exemption of the rates of tax and duty, the second decree permits the foreign regional operating headquarters to deduct expenses in connection with depreciation of buildings. In effect, the Royal Decrees provide tax privileges to the regional operating headquarters and foreigners working at these headquarters and to companies or juristic partnerships holding shares of capital in these establishments.

In order to qualify for the tax privileges under the Royal Decree, a regional office must be a company incorporated under Thai laws having the primary business objective of providing managerial and technical services or providing accessory or support services to its associate enterprises or branches, irrespective of whether these enterprises or branches are located in Thailand or abroad. The provision of supporting services includes general management, business planning, or technical and financial support. Under the Royal Decree, an associate enterprise is defined as a company or a juristic partnership which has managerial or supervisory power or control over the regional operating headquarters or which holds shares of not less than 25 per cent of their capital.

With respect to the tax privileges for foreigners working in the regional operating headquarters, these foreign employees will have their income in the form of salary earned in connection with their employment with these headquarters exempted from computation of personal income tax at year's end, provided that they consent to the Thai tax authorities collecting tax withholdings on their income at the source of payment at the flat rate of 15 per cent. In addition, they will not be required to account for the amounts of their income whose personal income taxes are exempted when they file income tax returns. In the case where the income of the foreign employees are subject to a withholding tax of less than 15 per cent, they must also consent to the Thai tax collectors deducting tax at the rate of 15. Further, the foreign employees must also waive their rights to obtain a full or partial refund of the difference from the Thai Revenue Department.

Further, the regional operating headquarters also enjoy the tax privileges in the form of a tax reduction on income they earn or receive from an associate enterprise or foreign branch, provided that such income represents a payment from the associate enterprise or foreign branch in consideration of services provided by the regional operating headquarters, interest on loan obtained by the regional operating headquarters for re-lending, and royalties arising from technological researches and development. Tax exemption is also granted in the case of the distribution of dividends by the regional operating headquarters to their associate enterprises or branches, or in the case of receipt by them of dividends from these enterprises and branches. However, in order to qualify, the regional operating headquarters must satisfy the following conditions:

1. It must have the amount of paid-up capital on the last day of each accounting period of not less than THB 10 million;
2. It must provide services to their associate enterprises or foreign branches located in at least 3 countries;
3. It must have income in respect of the provision of services and royalties from the associate enterprises in an aggregate amount of not less than 50% of their total income, unless an exemption is granted in respect of the amounts.

An indirect tax reduction also applies in the form of expenses permissible for deduction in the case of depreciation for buildings acquired or purchased by the regional operating headquarters initially at the rate of 25 per cent of the cost of the buildings.