Thailand Business Forms and Tax Implications

Chalermchai Intarasupa | 23 June 2011

Set out is a brief summary of the legal and tax considerations in respect of the establishment of business operations in Thailand.

A. Branch Office

A foreign company may establish a branch office to conduct business in Thailand.  The branch office is treated as the same legal entity as its head office.

In order for a foreign company to establish a branch office to provide services in Thailand, a foreign business license (“FBL”) must be obtained from the Ministry of Commerce (“MOC”).

Technically, a separate permit is required for each transaction (contract) entered into by the branch office. Note that a permit is normally granted if the applicant is a party to a contract with a Thai government authority or state enterprise.  If the applicant is a party to a contract with a Thai private enterprise, in issuing a permit, the MOC will scrutinize the application and normally base its consideration on the level of technology of the work to be performed, the benefits to the country, etc. A letter in support of the application from the Thai parties to the contract is required.

If a company’s services are regarded by the MOC as involving high technology, that would, in the MOC’s judgment, ease issuance of a business permit.  Furthermore, the company’s prospects of obtaining a permit would be improved if its services were offered under a contract in which one party is a government entity or the company can establish that its services are unique and cannot be provided by a Thai entity.

B. Subsidiary

A subsidiary is a limited liability company under the Civil and Commercial Code (“CCC”). A subsidiary is treated as a separate entity from its shareholders or parent company. Shareholders will be liable only for any unpaid value of the shares held by such relevant shareholders. The minimum registered capital required by law is only Baht 15. At least 25% of the value of the shares must be paid up. If the subsidiary has a foreign national working in Thailand, such foreigner must obtain a work permit. One criterion, among others, of the Ministry of Labor in granting a work permit is that the company’s paid up capital must not be less than Baht 2 million.

A subsidiary will be regarded as an “foreigner” under the Foreign Business Act B.E. 2542 (1999) (“FBA”) if 50% or more of its shares are owned by non-Thai national or if the majority of the number of its shareholders are non-Thai nationals. Under the FBA, such foreign subsidiary is prohibited from engaging in some business activities, including services, and is required to seek a business permit from the MOC.

If the services to be provided by a company are subject to restriction under the FBA, the company can thus engage in services only through a joint venture with majority Thai nationals. In such cases, foreign investors generally enter into a shareholders’ agreement, adopt by-laws and/or otherwise provide for arrangements to ensure that matters relating to the control or management of the company, restriction on the transfer of shares, and other matters are satisfactory.

A subsidiary must have directors to manage the company. The number is not specified by law. There are no requirements on nationality and domicile of directors. However, for the convenience of managing the company on a day-to-day basis, at least one director should be present in Thailand. If the company needs to obtain a work permit for a foreigner working in the company, a director must sign the application. The required formality is that such director who signs an application for a work permit must be a Thai national, or if he is a foreigner, he must hold a work permit. Thus, initially, at least one Thai director would be required in order to obtain work permits for foreign nationals.

Tax Implication
A. General Tax Implications for a Foreign Company

A foreign company that carries on business in Thailand, among other countries, is liable for Thai taxes on profits that are earned from the operation in Thailand. See Thai Revenue Code § 66. Under Section 76 bis of the Thai Revenue Code, if a company or a juristic partnership organized under a foreign law has an employee, a representative or a go-between in Thailand, for carrying on its business and thereby derives income from or in Thailand, such company or partnership is deemed to be carrying on business in Thailand, and such employee, representative or go-between, whether an individual or a juristic person, will, insofar as the said income or gains are concerned, be deemed to be the agent of the said company or partnership and will have the duty and liability to file a return and pay corporate income tax on behalf of such foreign company or partnership.  The establishment of a branch office in Thailand will always trigger tax liability as doing business in Thailand.

The Juridical Council gave its opinion to the Revenue Department that in the case of services, the place where a contract is executed is not important but the place where the work is performed is important. The Revenue Department has issued a number of rulings along the line of the Council’s opinion that although a foreign company signed a contract in Thailand with a Thai customer, if the service itself is performed abroad, it is not considered as doing business in Thailand.

B. Branch Office and Subsidiary

The branch office and the subsidiary company’s tax status if that of income generating entities, and they will thus be subject to taxes. In case of a branch office, tax liability under Section 76 bis of the Revenue Code falls on the local person or entity who is an employee, a representative or a go-between of a juristic company or partnership organized under a foreign law for carrying on its business and thereby derives income or gains in Thailand. No permanent or physical presence of the foreign entity is required.  The question as to whether the local person or entity is an employee, a representative or a go-between and to what extent it is “carrying on business in Thailand” must be decided on a case-by-case basis.

A branch office or a subsidiary will be subject to Thai taxes as follows:

  1. Corporate Income Tax

    Both the branch office and the subsidiary company will be subject to corporate income tax at the rate of 30% of its net profit in an accounting period. An accounting period must be a twelve-month period, and the company can decide its own accounting year. The first accounting period may be less than 12 months since it commences from the date of incorporation in the case of a subsidiary, or the date of receiving a permit, in the case of a branch office. A change of an accounting period is subject to the consent of the Revenue Department.

  2. Withholding Income Tax: Profit Remittance/Dividends

    A branch office is entitled by its nature to dispose of any profit or gain arising from the operation in Thailand to the parent company. In this regard, the branch office will be subject to withholding tax on disposal of profit at the rate of 10%. This is not applicable to a subsidiary company since, under Thai law, a limited company cannot dispose of profit to its shareholders except through payment of dividends. However, the subsidiary company is similarly required to withhold tax on dividend payments to its shareholders at the rate of 10%, irrespective of whether the recipient is an individual or a corporate entity or is a resident or a non-resident of Thailand.

  3. VAT

    VAT is a broad-based tax on consumption of goods and services operating at all stages of production and distribution, including import. VAT is currently levied at a rate of 7% on gross receipts, but may be increased by Royal Decree to a maximum of 10%. See Royal Decree (No. 479) B.E. 2551 (2008).

    VAT paid by the branch or subsidiary to other VAT traders may be offset against the VAT collected by the branch or subsidiary from the customers of its services. The branch or subsidiary may obtain a credit or refund of excess VAT paid on a monthly basis.

C. Comments

In determining the appropriate business form to be set up in Thailand, the following factors should be considered: (i) the scope of activities or businesses to be carried on in Thailand, (ii) the liability to which the parent company could be exposed, and (iii) the tax implications of each business form.