Foreign company is selling shares in Thai company at a profit is subjected to tax
Section 70 of the Revenue Code specifies that an juristic person who is not registered in Thailand but receive income from within Thailand shall be subjected to income tax in Thailand. The income tax shall be withheld by the payer of that income and submit to the Revenue Office in the area.
According to this Section, if the foreign entity is selling shares in a Thai company at a profit (price that is higher than cost), unless otherwise exempted under the relevant tax treaty, the Thai buyer is required to withhold tax at the rate of 15% of the profit amount.
In a recent case, a Japanese company, (A), is holding half of the shares in another Japanese company, (B), decided to purchase all the remaining shares in (B) to increase its holding to 100%. Then after the purchase, (A) sold 5% of the shares in (B) to a Thai company. The treaty between Thai and Japan does not provide for any tax exemption on profit so when (A) sold its shares to the Thai company, the Thai company must withhold 15% on any profit made by (A) in this transaction. Since the Revenue Code places the duty to withhold tax on the buyer and imposes a surcharge of 1.5% per month for the failure of tax submission so in transaction like this the buyer has to ensure of the correct profit calculation.
Providing the rights of using production formula to the affiliated company in aboard
Q: A foreign company registered in Thailand is operating 1) manufacturing of printing ink, metallic ink, plastic resin, compound plastic and master batch, 2) procurement of raw materials, components, and parts for various industries which the company has obtained a BOI promotion for both businesses.
In the manufacturing business in item 1, the company has invented a new production formula which has been developed from the base production formula of the headquarter and the company would like to give the rights to use and rights to sublicense the new production formula to the headquarters in return for royalty payment. The company would like to confirm whether it will need to obtain the Foreign Business License in providing such service or not.
A: As the company is a juristic person registered and operated the businesses in Thailand, therefore giving the rights to use and rights to sublicense of the new production formula to the headquarter abroad in return for the royalty payment shall be considered as doing business under List 3 of the Annex to the Foreign Business Act B.E. 2542 in which the Foreign Business License will be required prior to operation.
Operating the business of electricity generation
Q: A foreign company registered in Thailand would like to operate the business to generate electricity from the renewable energy, such as sunlight, wind, and/or biomass fuel, and/or other energy, to sell to the Provincial Electricity Authority (PEA) and/or other electricity purchasers in Thailand. The company would like to confirm whether it will need to obtain the Foreign Business License in operating such business or not.
A: To sell and distribute the electricity that is generated by the company, either Thailand or aboard, it shall not be considered as doing business under the List Annexed to the Foreign Business Act B.E. 2542, so in this case, the Foreign Business License will not be required. However, with reference to the first paragraph of Section 14 of the Foreign Business Act, the foreign company who is operating the business that is not mentioned in the Annex List of such Act, must have the minimum registered capital of not less than 2 million Baht and it must be fully paid-up.
Providing machine for use in the joint research project or using in the contract research
Q: A foreign company registered in Japan, A, would like to make the 1) joint research, or 2) contract for research and development of new product named TRF Pellets with a Thai company in Thailand, B, who is operating the business of manufacturing and trading of pulp and paper. If A sends the machine to B in Thailand to be used in the research and development process, will A be required to obtain the Foreign Business License?
A: In case 1) joint research: A sends the machine to B in Thailand for the purpose of their joint research in which both A and B agree to jointly invest their assets, labors, and funds for using in the research and development without paying any compensation to each other and will not sell the product to other parties and to jointly own the intellectual properties from the research process.
This kind of joint research shall be considered as a research for future business between A and B; therefore, sending the machine into Thailand to be used in the joint research by A, shall not be considered as doing the business under the Foreign Business Act B.E. 2542, so the Foreign Business License will not be required.
In case 2) contract for research and development: A will pay service fee and provide machinery (without charge) to be used in the research to B. A will own the intellectual property that will arise from the research process.
In this case, if the machine will only be used in the research process and A does not receive any compensation or special discount to the service fee for using the machine, then providing the machine for the contract research shall not be considered as doing the business under the Foreign Business Act B.E. 2542, so the Foreign Business License will not be required.