The EU’s Generalized System of Preferences and its impact on Thailand

Since 1971, the EU’s Generalized System of Preferences (GSP) allows developing countries easier market access to the European Union through tariff reductions. It is a unilateral measure by the EU and there is no expectation or requirement that this access is reciprocated by the countries concerned.

Thailand is one of the beneficiaries of the GSP.

With the latest reform of the GSP being applicable from January 1, 2014, out of the 172 counties previously eligible for the GSP, the following will not continue to be the recipient of GSP benefits:

  • 33 overseas countries and territories of the EU Member States,

  • 20 high and upper middle income countries as classified by the World Bank during three consecutive years, based on Gross National Income (GNI) per capita, and

  • 34 countries with a preferential trade agreement (FTAs –with two years of transition to allow for adjustment to the new regime) or a special autonomous trade regime.

Thailand is still on the list of countries receiving the GSP benefits for the year 2014. Beginning January 1, 2015, however, China, Ecuador, Maldives and Thailand will be excluded from GSP benefits, as they have been classified by the World Bank as upper-middle-income countries. Their exports will then enter the EU with a normal tariff applicable to all other developed countries.

It was expected that at the time of removal of the GSP benefits for Thailand, the EU and Thailand would already have concluded a Free Trade Agreement (FTA). Taking the current political struggle into consideration, it seems to be a goal that will not be achieved on time. The impact of that failure on Thai businesses can not be underestimated.

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Doing Business in Thailand – Personal Income Tax

New personal income tax provisions for 2013

2012 saw the beginning of a significant reduction of the corporate income tax in Thailand. The long established 30% rate was reduced to 23% in the year 2012 and further 20% in the year 2013. Now, for 2013, did the Thai government decide to also reduce the personal income tax for Thai tax residents.

 The old rates applicable for the year 2012 are:

NET INCOME TAX RATE
0 – 150,000 exempted
150,001 – 500,000 10.00%
500,001 – 1,000,000 20.00%
1,000,001 – 4,000,000 30.00%
4,000,001 + X 37.00%

The new system creates more tax brackets and further reduces the tax rates for certain tax brackets. The new rates for 2013 are as follows:

NET INCOME TAX RATE
0 – 150,000 exempted
150,001 – 300,000 5.00%
300,001 – 500,000 10.00%
500,001 – 750,000 15.00%
750,001 – 1,000,000 20.00%
1,000,001 – 2,000,000 25.00%
2,000,001 – 4,000,000 30.00%
4,000,001 + X 35.00%

In addition to the implementation of the abovementined new tax rates, the government was forced to apply a ruling of the constitutional court. Previously it was required for married couples to combine the income of husband and wife for personal income tax purposes. Such regulation was considered unconstitutional. It was ruled that husband and wife should be able to file their taxes separately.

 For income sourced from employment the married couple can now choose to file their tax return jointly or separately. Please note that in case of a separate tax filing both remain liable for unpaid taxes of the other spouse.

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Doing Business in Thailand – Corporate Income Tax

Under the Revenue Code of Thailand (“RC”) the corporate income tax rate (“CITR”) on profit for Thai companies is 30%. However, pursuant to Title I, Section 3(1) of the RC, this rate may be reduced for some or all such companies if the Prime Minister’s Cabinet issues a Royal Decree (“RD”) to such effect.

On 14 December 2011 the Cabinet issued RD 530. As a result, the CITR for “small to medium enterprise companies (“SMEs”, currently defined as any company with a capitalization of not more than THB 5,000,000 on the final day of the tax year and which company does not have income exceeding THB 30,000,000 in that same tax year) is now as follows:

(1) exempted on net profit up to THB 150,000 for all of the following tax years which begin on or after 1 January 2012;

(2) 15% on net profit from THB 150,001 up to THB 1,000,000 for all of the following tax years, which begin on or after 1 January 2012;

(3) 23% on net profit of THB 1,000,0001 or more for the tax year, which begins on or after 1 January 2012; and

(4) 20% on net profit of THB 1,000,0001 or more for all of the following tax years, which begin on or after 1 January 2013.

It should also be noted that a further CITR reduction by way of exempting net profits up to THB 300,000 was later provide by RD 564 and applies to all tax years, which begin on or after 1 January 2013.

RD 530 also provided that the CITR for all companies–including those that are listed on the Stock Exchange of Thailand (“SET”) (*but not including those which are listed on the SET’s Market for Alternative Investment (“MAI”)) for the three consecutive accounting periods would be:

(1) 23% on net profit for the tax year which begins on or after 1 January 2012; and

(2) 20% on net profit for the following two tax years, which begin on or after 1 January 2013.

*the CITR for the companies that are listed on the MAI on the SET remains 20% per the prior RD 467.

These CITR reductions are clearly welcomed by those investing and doing business in Thailand. However, it should be noted that although the CITR reductions for SMEs are “permanent”, they are not so for all other (non-MAI listed) companies. It is unclear, if it is “planned” to extend or even increase these reductions after the expiration of the reductions when they expire after fiscal tax-year 2014.

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Foreign Business Investment in Thailand – Work Permits

If a non-Thai person wants to to live and work in Thailand he must obtain a work permit. Thailand regulates work permits through the Working of Aliens Act (“Act”). The definition of “working” under the Act is very broad. It is defined as “engaging in work by exerting energy or using knowledge whether or not in consideration of wages or other benefit”.

In order to obtain a work permit, the applicant must at least:

(1) “have a place of residence in Thailand or have been permitted entry into Thailand for temporary stay under the law on immigration but not as tourist or in transit; [and] (2) not be disqualified or prohibited under the conditions prescribed by the Minister as published in the Government Gazette.”

This means that the applicant must have an immigration visa in order to apply for and receive a work permit. This visa must not be a tourist visa. The common visa used to support a work permit in Thailand is a “non-immigrant B (i.e. “Business”) visa”. Application for such a visa must be made to and received from a Thai embassy or consulate–obviously, outside of Thailand.

The Act prohibits non-Thais from engaging in — what are currently thirty-nine — specific occupations. Permission to do such work will not be granted. Other occupations are open to non-Thais; however, the work performed by any non-Thai must be strictly limited to the activities and conditions to conduct such activities, including the specific work location (although an additional location(s) may be included or later added on a showing of good cause).

*Please note that the upcoming economic integration of the Association of South East Asian Nations (ASEAN) Economic Community will not change the requirement for obtaining a work permit in Thailand. However, it is expected that, in order to enable the “free flow of skilled labour” (a primary goal of this integration), the requirements and process to apply for a work permit (and any renewals thereof) in Thailand. And that, as a result, Thailand may well become more non-Thai worker friendly for ASEAN workers if not all non-Thai workers.

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Foreign Business Investment in Thailand – Investment Incentives through the “Board of Investment”

Thailand created the Board of Investment (“BOI”) to support foreign investment into Thailand. The Investment Promotion Act (“IPA”) regulates the promotions provided for certain businesses in Thailand. They consist of tax and non-tax incentives, depending on the category of investment.

Non-tax incentives include:

• permission for foreign nationals to enter Thailand for the purpose of studying investment opportunities;

• permission to bring into bring skilled workers and experts to Thailand to work in investment promoted activities;

• permission to own land; and

• permission to send money from Thailand in foreign currency.

Tax incentives include:

• exemptions from or reductions of import duties on machinery;

• reduction of import duties for raw or essential materials;

• exemptions from corporate income tax and dividends;

• a fifty percent reduction of corporate income tax;

• double deductions for transportation, electricity and water supply expenses;

• an additional twenty-five percent deduction for installation or construction of facilities expenses; and

• exemptions from import duties on raw or essential materials for use in production of exports.

These incentives are also generally subject to certain conditions, such as: minimum capitalization of the investor company and the company maintaining a 3:1 debt to equity ratio, as well as, the investment activity providing desirable training and knowledge transfer to Thai nationals.

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DUENSING KIPPEN is a multi-service law firm specializing in all Thailand inbound investment and outbound divestment transactional matters, as well as, dispute resolution by litigation proceedings and international arbitration. DUENISING KIPPEN is the only firm in Thailand whose attorneys include three MCIArb internationally certified arbitrators. And, as a member of the International Alliance of Law Firms, with 63 member firms and 100 offices in 45 countries, DUENSING KIPPEN is able to provide its clients with high quality cost effective legal services worldwide. DUENSING KIPPEN can be reached at: contact@duensingkippen.com or for more information visit them at: duensingkippen.com

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Foreign Business Investment in Thailand – The Foreign Business Act

In 1999 Thailand enacted the Foreign Business Act (“FBA”), which regulates business by foreigners in Thailand. [It should be noted that certain business activities, for example banking, insurance and telecommunication are regulated–and generally more stringently–by legislation specific to them.] Three “negative lists” annexed to the FBA group businesses restricted to foreigners:

Annex one lists “businesses not permitted to be operated by aliens for special reasons”. Foreigners are strictly prohibited from majority ownership of businesses engaging in these activities.

Annex two lists business activities that relate to “national safety or security, or affecting arts, culture, tradition, local handicrafts or natural resources and environment.” These may be majority owned by a foreigner, but require approval of the Prime Minister’s Cabinet. As far as we are aware, no such approval has ever been granted.

Annex three, lists “businesses in which Thai nationals are not yet ready to compete with aliens.” Foreigners may own and operate these businesses if they obtain a license or certification to do so from the Ministry of Commerce. Annex three is quite extensive and includes most common business activities.

In sum, there are very few business activities that are not covered by the FBA, manufacturing and exporting being two of the notable very rare exceptions.

The FBA defines a non-Thai as:

“(1) a foreigner natural person;
(2) a juristic person not registered in Thailand;
(3) a juristic person registered in Thailand and having the following characteristics:
(a) a juristic person at least one-half of whose share capital is held by persons under (1) or (2), or a juristic person at least one-half of whose total amount of capital is invested by persons under (1) or (2);
(b) a limited partnership or a registered ordinary partnership whose managing partner or manager is a person under (1).
(4) A juristic person registered in Thailand at least one-half of whose share capital is held by persons under (1), (2) or (3), or a juristic person at least one-half of whose total amount of capital is invested by persons under (1), (2) or (3).
For the purpose of this definition, shares of a private limited company that has bearer certificates shall be regarded as shares of aliens, unless otherwise provided by ministerial regulations.”

It is also very important to note that it is illegal under the FBA for both the Thai and foreigner benefiting therefrom, for any Thai to be “nominee” (in other words, in name only and not actual) shareholder. Section 36 of the FBA states:

“A Thai national or a juristic person who is not an alien under this Act who assists, supports or jointly engages in a business prescribed in the Annexes belonging to an alien and in which business the alien is not permitted to engage, or jointly engages in the business of an alien by showing that the person is the sole owner of the business, or holds shares on behalf of an alien in any partnership or private limited company or any juristic person so that the alien can evade or violate the provisions prescribed in this Act, including an alien who allows a Thai national or a juristic person which is not an alien under this Act to conduct such acts, shall be punished by imprisonment for not more than three years or a fine from Baht one hundred thousand to Baht one million or both, and the Court shall order the termination of the assistance or support, or the termination of the joint business operation, or the termination of the holding of shares or being a partner in the partnership, as the case may be. If the alien violates the Court’s order, the alien shall be liable to a fine from Baht ten thousand to Baht fifty thousand per day throughout the violation period.”

But there are several exceptions of this stringent rule. For example, specific countries–such as the United States, Australia and Japan–are allowed certain exceptions to FBA under treaties with Thailand. Furthermore, there are also exceptions to these foreign ownership restrictions available to all nationalities under investment promotion legislation in Thailand.

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DUENSING KIPPEN is a multi-service law firm specializing in all Thailand inbound investment and outbound divestment transactional matters, as well as, dispute resolution by litigation proceedings and international arbitration. As a member of the International Alliance of Law Firms, with 63 member firms and 100 offices in 45 countries, DUENSING KIPPEN is able to provide its clients with high quality cost effective legal services worldwide. DUENSING KIPPEN can be reached at: contact@duensingkippen.com or for more information visit them at: duensingkippen.com

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Doing Business in Thailand – Private Company Limited

A “private company limited” is a “juristic person”, which means it is a fictional “person” in the send that the law assigns to it most of the rights and obligations that a natural person has (the exceptions being those which the law considers only a natural person can have).  It is the most common way for foreigners do business and invest in Thailand.

A minimum of three natural persons is required to “promote and form” a private company limited. These “promoters” will then become the first shareholders of the company. And a private company limited is required to maintain at least a minimum of three shareholders at all times. Each share must represent at least a minimum investment of five Thai Baht. Thus, the minimum theoretical share capital of a private company limited is fifteen Thai Baht.

The law requires that a private company limited be managed by on or more “directors”. The directors are not required to be a shareholder of the company but, unlike many jurisdictions, Thai law requires that all directors be natural persons.  Unless otherwise prohibited by laws regulating some businesses, the director may be a non-Thai and is not required to reside in Thailand.

There are several reasons why this so but perhaps the main reason is the same reason that such an business entity is so popular worldwide–the limitation of investor liability to the amount of capital contributed to the company. This is where the word “limited” (abbreviated to “LTD”) in the name originates.

A private company limited is subject to corporate income tax. A private company limited is also required to collect “value added tax” on the goods or services it provides (if its initial annual income from the business exceeds Thai Baht 1,800,000). In some instance the company may be required to collect a “specific business tax” rather than the value added tax. And the company is required to withhold tax various percentages of tax and remit them on behalf of certain services the company pays for.

As a general rule, non-Thais may own up to 49% of the share capital of the company and may have a majority of non-Thai shareholders. However, there are certain business activities, which require a lower non-Thai shareholding percentage as well as an equal or majority of Thai shareholders. On the other hand, there are notable exceptions to this which all allow for 100% foreign shareholding of a private company limited.

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DUENSING KIPPEN is a multi-service law firm specializing in all Thailand inbound investment and outbound divestment transactional matters, as well as, dispute resolution by litigation proceedings and international arbitration. DUENISING KIPPEN is the only firm in Thailand whose attorneys include three MCIArb internationally certified arbitrators. And, as a member of the International Alliance of Law Firms, with 63 member firms and 100 offices in 45 countries, DUENSING KIPPEN is able to provide its clients with high quality cost effective legal services worldwide. DUENSING KIPPEN can be reached at: contact@duensingkippen.com or for more information visit them at: duensingkippen.com

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Doing Business in Thailand – Representative Office

One of the most interesting ways to start a business presence in Thailand for a foreign investor is the “Representative Office”. The Representative Office is not a distinct legal entity or “juristic person” under Thai law. Therefore, there is no requirement that it have partners or shareholders of any kind.

The law limits the functions of the Representative Office to supporting roles such as:

  • Searching for local sources of goods or services in Thailand for the offshore head office or affiliates or subsidiaries of the offshore head office;
  • Checking and controlling the quality and quantity of goods purchased or manufactured in Thailand by the off-shore head office or affiliates or subsidiaries of the off-shore head office;
  • Giving advice and assistance concerning goods of the offshore head office or affiliates or subsidiaries of the offshore head office sold to agents or consumers in Thailand;
  • Disseminating information concerning goods or new services of the offshore head office or affiliates or subsidiaries of the offshore head office; and/or
  • Reporting on business developments in Thailand to the offshore head office or affiliates/subsidiaries of that office.

The Representative Office is allowed to have foreign employees. And these employees are granted significant income tax relief. However, a Representative Office itself is not allowed to receive any income from its activities in Thailand. Thus, the operations of the Representative Office must be financed in their entirety by the offshore head office. Even so, a Representative Office is still required to file annual audited financial statements to the Thai Revenue Department.

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DUENSING KIPPEN is a multi-service law firm specializing in all Thailand inbound investment and outbound divestment transactional matters, as well as, dispute resolution by litigation proceedings and international arbitration. DUENISING KIPPEN is the only firm in Thailand whose attorneys include three MCIArb internationally certified arbitrators. And, as a member of the International Alliance of Law Firms, with 63 member firms and 100 offices in 45 countries, DUENSING KIPPEN is able to provide its clients with high quality cost effective legal services worldwide. DUENSING KIPPEN can be reached at: contact@duensingkippen.com or for more information visit them at: duensingkippen.com

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Doing Business in Thailand – Limited Partnership

The third form of partnership under Thai law is the limited partnership. The limited partnership is – as the registered ordinary partnership – a juristic person.

The limited partnership has two different kind of partners. These different partners are subject to different liabilities:

1. One or more partners are liable only to the amount they contributed to the partnership;  and

2. One or more partners are jointly and unlimited liable for all obligations of the partnership.

The difference between the partners is not only in relation to their respective liability. The different partners are also subject to different restrictions:

  • the firm name cannot contain any of the names of the partners with limited liability;
  • partners with limited liability cannot contribute services to the partnership. Their contribution is restricted to money and other properties;
  • partners with limited liability are entitled to transfer their shares without consent of the other partners; and
  • creditors of a limited partnership have no action against the partners with limited liability prior to dissolution of the partnership.

The partners with unlimited liability manage the limited partnership. In case a partner with limited liability interferes in the management of the Limited Partnership, he we will become jointly and unlimited liable for all obligations of the partnership.

A limited partnership, as a juristic person, is subject to corporate income tax. The partners of such limited partnership are subject to personal income tax on the share of profits received from such limited partnership.

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Doing Business in Thailand – Partnership: Unregistered or Registered

Thai law distinguishes between unregistered partnerships and partnerships which are registered with the government. The relevant difference is the legal status of those partnerships. Whereas an unregistered partnership does not have the status as a “juristic person”/an entity that the law gives most of the same rights and obligations as a natural person, a registered partnership does (but note, an unregistered partnership is considered a juristic person for tax law purposes—see below). In both an unregistered and a registered partnership:

  • the individual partners are jointly and unlimitedly liable for the obligations of the partnership;
  • the partnership is established through a contribution of money, other properties or service to the partnership by the partners; and
  • the share of each partner in the profit and losses is determined by the amount of such contribution

Since an unregistered partnership is not considered to be a juristic person, all partners are jointly and unlimitedly liable for the performance of the obligation incurred. However, an unregistered partnership is taxed as if it were a “person”/personal taxpayer and separately from its partners. In other words, the partners of an unregistered partnership are not then further taxed on the profit that they receive from it.

On the other hand, a registered partnership is considered a juristic person, similar to a company. Thus, a creditor of a registered partnership is required to initially pursue his claim against the registered partnership itself. Only upon default of the registered partnership has such creditor the right to claim settlement from any one partner for any debts incurred on behalf of the entire registered partnership. And the liability of a partner in a registered partnership continues for two years after such ceasing to be a partner, with respect to debts incurred by the registered partnership.

A registered partnership is also treated like a company with respect to tax and as such is subject to Thai corporate income tax. And the partners of such registered partnership are subject to personal income tax on the share of profits received from such registered partnership.

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