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Permanent Establishments in Thailand
21/12/2023
Setting up a business in a foreign country can be a complex process, especially when it comes to understanding the legal and tax obligations. In Thailand, the terms “carrying on business” and “having a permanent establishment” are significant factors that determine the taxation requirements for foreign companies.
This blog post aims to provide a clear understanding of these terms and the process of establishing permanent establishments in Thailand.
Key points
- Permanent Establishment (PE) in Thailand includes fixed places of business, construction projects, service provisions, and agent-concluded contracts.
- Establishing a PE requires a fixed business location, revenue-generating activities, a minimum duration, usually 6 months, and, for agents, contract-concluding authority.
- Tax obligations for PEs include corporate income tax, withholding tax on head office payments, VAT on sales, and social security contributions for employees.
- Thailand’s Double Taxation Agreements provide tax relief for foreign companies with PEs to prevent double taxation.
What is Carrying on Business in Thailand?
When a foreign company conducts business activities in Thailand, it is considered to be “carrying on business in Thailand.” This can be established through a registered company/branch or by having agents or employees conducting business on behalf of the company in Thailand.
The Revenue Department states that if a foreign company has a branch in Thailand, it is liable to pay corporate income tax. Similarly, if the company has agents or employees in Thailand, their actions play a significant role in determining the company’s income derived in Thailand.
What is Permanent Establishment?
Permanent Establishments (PE) can take several forms, depending on the type of business activities conducted by the foreign company. In Thailand, the Revenue Code specifies various types of PE, including:
Fixed Place Permanent Establishment: This type of PE involves a fixed location, such as an office, branch, factory etc, where the foreign company carries out its business activities. It also includes construction and installation projects that last for a specified period.
Construction PE: When a foreign company undertakes construction projects in Thailand that exceed a certain duration, it may create a Construction PE. The duration threshold varies depending on the type of project but is typically 6 months.
Service PE: A Service PE is created when a foreign company provides services in Thailand for a specific period, typically for longer than 6 months. It includes activities such as consultancy, technical assistance, or management services.
Agent PE: An Agent PE is established when an agent, either an individual or a company, habitually exercises the authority to conclude contracts on behalf of a foreign company in Thailand.
What is Criteria for Establishing Permanent Establishment?
To determine whether a foreign company has a Permanent Establishment in Thailand, certain criteria must be met. The Revenue Code outlines the following conditions:
Fixed Place: The foreign company must have a fixed place of business in Thailand, such as an office, factory, or branch.
Business Activity: The business activities conducted in Thailand must be of a revenue-generating type. If the activities are preparatory or auxiliary in nature, they may not be considered a Permanent Establishment.
Duration: The business activities must be carried out for a specific period or exceed a certain threshold set by Thai tax laws. This period is usually 6 months but this is not for all cases.
Authority: In the case of an Agent PE, the agent must have the authority to conclude contracts on behalf of the foreign company.
What are the Tax Implications of Permanent Establishment?
When a foreign company has a Permanent Establishment in Thailand, it becomes subject to Thai taxation laws. The company is required to pay taxes on the income derived from its business activities in Thailand. The following taxes are applicable to Permanent Establishments:
Corporate Income Tax: The foreign company is liable to pay corporate income tax on the profits derived from its Thai operations.
For more information about Corporate Income Tax in Thailand, please see here.
Withholding Tax: Any payments made by the Permanent Establishment to its foreign head office, such as royalties, interest, or service fees, are subject to withholding tax at the applicable rates.
For more information about Withholding Tax in Thailand, please see here.
Value Added Tax (VAT): If the Permanent Establishment engages in the provision of goods or services subject to VAT, it must register for VAT and charge the appropriate rate on its sales.
For more information about VAT in Thailand, please see here.
Social Security Contributions: If the Permanent Establishment employs staff, it is required to make contributions to the Thai Social Security Fund on behalf of its employees.
For more information about Social Security in Thailand, please see here.
Double Taxation Agreements
To avoid double taxation on income, Thailand has entered into Double Taxation Agreements (DTAs) with several countries. These agreements provide mechanisms for the elimination or reduction of taxes on income derived by foreign companies with Permanent Establishments in Thailand. The DTA provisions override domestic tax laws, providing relief and clarity to businesses operating in multiple jurisdictions.
More information on Double Tax Agreements can be found here.
How can Belaws help?
For more information about the risks of permanent establishment in Thailand, why not talk to one of our experts now?
Please note that this article is for information purposes only and does not constitute legal advice.
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Consultations can be hosted via WhatsApp or Video Conferencing software for your convenience. A consultation with one of our legal experts is undoubtedly the best way to get all the information you need and answer any questions you may have about your new business or project.
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Frequently asked questions
What is the risk of permanent establishment in Thailand?
The risk associated with a Permanent Establishment lies in the potential tax obligations imposed on the foreign company for the income generated through its activities in Thailand. Failure to comply with taxation laws could result in penalties or legal repercussions.
What are the tax implications of remote working in Thailand?
if remote working leads to a foreign company meeting the criteria for a Permanent Establishment, it could trigger tax liabilities in Thailand, including corporate income tax, withholding tax, VAT on sales, and social security contributions for employees, among others.
What is the risk of permanent establishment?
Determining a Permanent Establishment involves several criteria such as having a fixed place of business, conducting revenue-generating activities, meeting certain duration thresholds, and, in the case of an agent PE, the authority to conclude contracts.
What is the U.S. treaty of Thailand?
The U.S. treaty with Thailand refers to the Double Taxation Agreement (DTA), which focuses on avoiding double taxation for businesses operating in both countries, especially those with Permanent Establishments in Thailand.
What is the permanent establishment tax?
Yes, the United States and Thailand have a tax treaty known as the Double Taxation Agreement (DTA). This treaty aims to prevent double taxation on income earned by companies with Permanent Establishments in Thailand, providing mechanisms for tax relief and clarity.
How can I ensure my company doesn’t accidentally create a Permanent Establishment in Thailand?"
Understand the criteria—fixed place, revenue-generating activities, duration thresholds, and contract authority—that determine a Permanent Establishment in Thailand to avoid unintentional creation.
Can you share instances where foreign companies faced tax issues due to misunderstanding Permanent Establishment rules in Thailand?"
Yes, instances exist where companies misjudged their presence, triggering tax liabilities. Awareness of these cases can help prevent similar pitfalls.
How does Thailand’s Double Taxation Agreement benefit foreign businesses regarding Permanent Establishment taxes?
he agreement prevents double taxation, offering relief for businesses operating in Thailand while having establishments in other countries.
How does Thailand attract foreign investment while ensuring compliance with Permanent Establishment-related tax laws?
Thailand’s investment policies aim to attract foreign businesses while ensuring they understand and comply with tax laws to avoid issues.
Are there recent updates in Thailand’s tax policies affecting foreign companies with Permanent Establishments?
It’s important to stay updated on potential policy changes to navigate tax laws effectively.
What are the requirements for a foreign company to register an office in Thailand and how does this impact Permanent Establishment status?
Registering an office can affect a company’s Permanent Establishment status. Knowing the requirements is crucial to manage this effectively.
Are there guidelines for employing remote workers in Thailand without triggering Permanent Establishment status?
Specific guidelines may exist to manage remote work arrangements and avoid unintentional establishment status. Understanding these is essential for compliance.
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