Published in the Bangkok Post on December 5, 2002 © Seri Manop & Doyle © Seri Manop & Doyle
Applying Regional Operating Headquarters tax breaks creatively
Since the government implemented the new Regional Operating Headquarters (ROH) legislation in August, many investors have sought to utilize the law in ways that the authorities might not have originally anticipated.
One of these methods involves Thai and foreign businesses investing in mainland China.
Along with the rest of the world, many Thailand-based multinationals have invested or are currently looking to invest in China. In the event these China investments become profitable, the Thailand investor will typically face tax issues when repatriating profits to Thailand.
These corporate investors may now utilize the ROH legislation in combination with the Thailand-China Tax Treaty in order to reduce or eliminate tax normally associated with this process.
Suppose a Thailand company enters into a joint venture to purchase 25% of the shares of a company established in mainland China. Later, the China company realizes a substantial profit and distributes a dividend to its shareholders including the Thailand company.
The Thailand shareholders' receipt of the dividend payment would normally be subject to Thai corporate income tax at 30% of annual net profits.
If, however, the Thailand company qualifies and is properly registered as an ROH, its receipt of the dividend would be exempt from corporate income tax.
The ROH law grants various tax incentives including:
- exemption from corporate income tax on dividends from ROH-associated enterprises;
- reduction in corporate income tax from 30% to 10% on income derived from performing administrative, technical, R&D and other qualifying services for ROH offshore branches or associated enterprises;
- reduction in corporate income tax from 30% to 10% on royalties derived from ROH offshore branches or associated enterprises;
- reduction in corporate income tax from 30% to 10% on interest received from ROH foreign branches or associated enterprises for loans granted, provided such loans are made from other sources (not the ROH) and extended to ROH branches or associated enterprises; and
- exemption from withholding tax on dividends paid to offshore shareholders not carrying on business in Thailand, but only on the percentage of the dividend that represents the amount of ROH income derived from performing qualifying services.
Using the above example, suppose the Thailand company also performs administrative, technical or other qualifying services on behalf of the China company in return for a fee.
Ordinarily, the service fee received by the Thailand company would be subject to the standard Thailand corporate income tax. If, however, the Thai company is properly registered as an ROH, the tax on such fees would fall to 10%.
In order to qualify as an ROH the Thai company must:
- be properly registered in Thailand;
- have paid-up registered capital of at least 10 million baht;
- have branches or associated enterprises in at least three other countries (specific conditions apply); and
- income received from offshore branches or associated enterprises must account for at least 50% of total income (except during first three years when the minimum is one-third of the total income).
Thailand companies investing in China can maximize the tax benefits available by utilizing the ROH law in combination with the Thailand China Tax Treaty.
In the above example, if the Thailand ROH receives administrative, technical or other qualifying fees from the China company, the Thai investor would receive a reduction in the applicable Thai corporate income tax to 10%.
In addition to Thai taxes, however, the above transaction would also be subject to China withholding tax, usually 20%.
However, if the transaction qualifies under the Thailand-China Treaty as a business profit and the parties otherwise qualify, the fee paid by the China company would be exempt from the 20% withholding tax.
Foreign Companies
Foreign investors in Thailand with interests in China are also interested in the structure described above. This is because all the ROH/tax treaty benefits available to Thai-held companies in Thailand.
Suppose a Taiwan investor initially utilizes a Hong Kong holding company to purchase 25% of the shares of a company operating in China. This Taiwan company also operates a wholly owned subsidiary in Thailand, which qualifies for and is registered as an ROH.
To take advantage of the ROH law, the Taiwan investor has the Hong Kong holding company sell its shares in the China company to the Thailand ROH.
After the sale, the Taiwanese-held ROH would then own 25% of the China company and enjoy the same ROH/tax treaty benefits (on dividends, service fees, etc.) as the Thai-held ROH in our original example.
The law also grants an exemption from the Thailand withholding tax (normally 10%) if the ROH issues a dividend to its shareholders offshore.
For example, if our Taiwanese-held ROH issues a dividend to its shareholder in Taiwan, there would be not Thai withholding tax on the portion of dividend that represents the amount of income the ROH derived from performing qualifying services on behalf of the China company (or any other ROH-associated enterprises).
Accordingly, the new ROH law opens some new investment opportunities for Thailand companies in China. How widely the scheme will be utilized, however, will depend largely on the willingness of the Revenue Department to co-operate with those companies interested in receiving the benefits available.
Michael Doyle is a partner in the Bangkok law firm Seri Manop and Doyle Tax and Legal Counsellors. Mr. Doyle will be speaking on the above topic to the Joint Chambers of Commerce in Taipei on Jan 16. If you would like the text of the presentation, please send your request to .'; document.write( '' ); document.write( addy_text685 ); document.write( '<\/a>' ); //-->
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