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Advantage of Tax Exemption on Offshore Dividend
The eligible offshore dividend will be required to meet certain conditions, however. Taxand Thailand explores the effect this new decree will have on companies with operations throughout Thailand.
Conditions of exemption
The conditions of exemption eligibility, per the Royal Decree No. 442, are:
- The Thai company must hold at least 25% of the total shares with voting rights in the offshore company paying the dividends for at least 6 months from the date the shares are acquired to the date the dividends are paid; and
- The dividends are generated from the net profits subject to income tax in the country of the company paying the dividends and the tax rate must not be less than 15% of the net profit regardless of whether the country of the paying company provides the tax reduction or the tax exemption for such net profit.
The rationale of this tax privilege is to encourage Thai companies to export its capital to expand its business outside of Thailand. The offshore company must be an 'operating company' while 'holding company' or 'paper company' will not be allowed to enjoy this tax incentive.
At present, the Thai Revenue Department is in the process of amending this restriction and will allow the offshore holding company to be under this privilege. Unfortunately, further conditions with strict monitoring and approval from the Revenue Department will be provided alongside this relaxation.
It should be noted that a tax exemption on offshore dividends will be suitable for the jurisdictions in which no tax is imposed on dividend distribution. If dividend tax (withholding tax) applies in offshore jurisdictions, tax credit on tax withheld will not be utilised in Thailand under this tax privilege.
Thailand has no 'controlled foreign company' rule (CFC) against the offshore holding corporate structure and it is interesting that the Ministry of Finance (MOF), is considering bringing the CFC rule to be one of the five anti-avoidance measures under Thai tax law. The other measures include transfer pricing, thin capitalisation, treaty shopping and general anti-avoidance rules.
IPO Holding Structure
In 2012, the Thai Securities Exchange Commission (SEC) provided the relaxation on requirements of a 'holding company' to be listed in the Stock Exchange of Thailand (SET). For example, the holding company is allowed to hold shares less than 75% but not less than 50% in the operating company (core company).
As a result, the holding company, for listing in the SET will allow the offshore operating company more flexibility to raise funds through the holding company in the Thai stock market. The holding company can be majorly owned by a foreign investor without any limitation on the foreign ownership under the Foreign Business Operation Act, and therefore there will be no need to obtain the business license for a holding business in Thailand. However, if the holding company provides other business as opposed to just existing for a holding purpose, a foreign business license may be required and the business may be subject to certain restrictions.
Conversely, the Thai company is able to set up the offshore operating company and raise funds by way of the holding company in the Thai stock market. To date, there are two Thai companies that have expanded their businesses outside of Thailand - in the construction business and industrial estate, with fund raising under holding structure for the initial public offering (IPO).
In general, the listed company in the SET will be exempt from the corporate tax (not taxable income), and no withholding tax is due on dividends received from the company incorporated under Thai law.
For the listed company, dividend received from a local Thai company is preferable for tax efficiency (no withholding tax) rather than dividend received from an offshore company (non-creditable withholding tax).
Offshore operating companies located in preferable jurisdictions should be taken into account regarding no dividend tax, for example in Asia: Singapore, Hong Kong, Mauritius, Malaysia. This is to avoid non-creditable withholding tax when the offshore dividend (after tax withheld) is distributed into Thailand.
Thailand is willing to conduct a 'tax reform' after launching VAT in 1992, and abolishment of dividend tax is a part of this tax reform. These amendments respond to the full implementation of ASEAN Economic Community (AEC) in 2015 for tax competition purposes.