Thailand Foreign Company Project Tax Structures
Tax Insight | September 2013
When a foreign company enters into a contract with a customer in Thailand to undertake a project in Thailand - a construction project, installation project, assembly project or similar, which project requires both a supply of goods and a supply of services to the customer in Thailand, and the supply of services requires the foreign company to be in Thailand for 6 months or more, the Thailand tax laws will deem the foreign company to be carrying on a business in Thailand (i.e. deem a Permanent Establishment in Thailand), and subject the foreign company to the following taxes in Thailand:
* The 5% withholding tax is not a final tax, but a prepayment of the 20% corporate income tax on net profit (i.e. it is a tax credit against the 20% corporate income tax on net profit).
The Contract-Splitting Arrangement
A popular solution for reducing the Thai tax burden is to split the project into two separate components, a supply of goods from abroad (offshore contract) and a supply of services in Thailand (onshore contract). That is, by splitting a project into an offshore supply of goods contract and an onshore supply of services contract, only that income that is earned under the onshore supply of services contract should be subject to tax in Thailand.
Structure Options for the Onshore Services Contract
For the onshore supply of services contract, the 3 common structuring options for foreign companies in Thailand are as follows:
Choosing either of these Thailand structuring options will enable the 5% withholding tax on the whole gross income under the project to be reduced down to 3% on the gross services income under the onshore contract, and enable the 20% corporate tax to be reduced down to 20% on only the net income from the services under the onshore contract, as follows:
* The 3% withholding tax is not a final tax, but a prepayment of the 20% corporate income tax on net profit (i.e. it is a tax credit against the 20% corporate income tax on net profit).
Three Important Rules to Follow
The contract-splitting arrangement is popular in Thailand, but that doesn't make it risk-free. As with all tax-planning, important tax risk management has to be done and here below are three important rules to follow (complied from real-life cases of foreign companies coming to Sherrings for help):
Firstly, the rules established by the Supreme Court in Case No 124/2540 must be followed for the contract-splitting arrangement. These rules are as follows:
Secondly, the chosen structure in Thailand for the onshore supply of services component has to be a legally-entitled supplier of the services. If the onshore supply of services cannot be legally performed by or assigned to a Thailand Company or Incorporated Joint Venture structure, then the only option for a foreign company to supply the onshore services is via a Thailand Branch office structure.
Thirdly, foreign companies need to note that the structure in Thailand for the onshore supply of services component needs to earn a net profit percentage of 15% (i.e. cost of services should not exceed 85% of gross services income). If a net profit percentage of 15% is not earned, then the 20% corporate income tax on net profit will not be large enough to absorb the 3% withholding tax deducted from gross services income. And whether or not a claim is submitted for a refund of the excess 3% withholding tax, this causes a tax investigation by the Thailand Revenue Department's tax audit officers, who, not being keen at all to refund tax to foreign companies, commonly find expenses to disallow in order to turn a tax refund position into a tax payable position. If you don't plan to pay enough 20% corporate tax to cover the 3% withholding tax, then the more-likely-than-not scenario is that at the end of the project, you’ll be paying additional corporate tax to cover the withholding tax, plus penalties and surcharge as well.
This Tax Insight is general information only. It should not be used to determine any particular matter without consulting with an experienced Thailand tax advisor.