Private limited company
By far the most prevalent form of entity that is used in Thailand is the private limited company. A private limited company is simply a company that has at least 3 shareholders (all of which can be US nationals and/or corporations once the Treaty privileges are invoked) and at least 1 director who is resident (domiciled) in Thailand (who may also be a US national). Entrust TEFL
The liability of the shareholders is limited to the amount of the private limited company’s share capital. The shareholders appoint director(s), who act according to a registered set of articles and memorandum of association, both of which remain under the control of the shareholders.
The business activities of a Thai private limited company are set out in its memorandum. The activities are usually drafted in very wide terms and provided the memorandum does not allow any of the 6 restricted business activities under the Treaty, a private limited company would usually be able to undertake virtually any kind of activity that a US corporation would require of it to undertake in Thailand. But whilst a private limited company is the most widely known and most common form of doing business in Thailand, it may not be the most advantageous structure for tax.
As the activities of a private limited company are revenue-generating activities, it is therefore liable to all the corporate and transaction taxes payable by taxable entities in Thailand, the two main ones being corporate income tax, which is payable at the rate of 30% of the net income earned by the entity plus profits remittance tax at the rate of 10% of net profits remitted out of Thailand (equating to 37% income tax on net income), and VAT at the current rate of 7% on all sales of goods or provision of services by the Thai private limited company.
In terms of its legal attributes, a representative office entity is the same as a branch office, i.e. an arm of the US corporation that forms it. But whereas a branch office conducts activities for commercial gain (i.e. for revenue-generating purposes), a representative office conducts its activities for its head office only – not for any consumer, i.e. a representative office conducts non revenue-earning activities. And as the activities are non revenue-earning, the Thai Revenue Department has prescribed that provided a representative office complies with the rules and conditions for representative offices, it shall not be subject to either income tax in Thailand or VAT in Thailand.
A representative office entity in Thailand is the right tax-effective and cost-effective choice for a US corporation carrying out any non revenue- earning activities in Thailand, such as:
- Sourcing goods and services in Thailand for the US corporation.
- Checking and controlling goods purchased or goods manufactured in Thailand for the US corporation.
- Providing information and advice in relation to goods sold or services provided by the US corporation to consumers in Thailand.
- Propagation of information concerning new goods or services of the head office; and/or
- Reporting on matters in Thailand to the US corporation.
The above activities are those listed in the Thai Commerce Ministry guidance for representative offices, and in the case of a US corporation’s activities in Thailand not exactly fitting into the guidance, but are nevertheless, non revenue- generating activities (such as, for example, a US corporation is required to research/gather information in Thailand and report back to the US head office only), it would be a worthwhile exercise to seriously consider a representative office entity for the activity in Thailand.
Similarly to a private limited company entity, a Thai branch office of a US corporation would usually be able to undertake virtually any kind of activity that a US corporation would require it to undertake in Thailand (except for, of course, the six restricted business activities under the Treaty).
But unlike a private limited company, a branch office is the exact same legal entity as the US corporation that forms it, and therefore, a US corporation forming a branch office assumes all liability for the operations of the branch office in Thailand.
That being said, however, if it is the case that the business activities in Thailand requires the US corporation’s guarantee of performance of the activities in Thailand and/or the activities in Thailand will be conducted for a finite period of time after which time the activities in Thailand would cease (for example, business activities involving a particular project to be carried out for a period of time in Thailand) then a branch office entity could be a bit more favorable.
A branch office in Thailand pays the same 30% rate of corporate income tax as a private limited company plus the same 10% profits remittance tax (making the total income tax payable equal to 37%) and the same rate of VAT (current rate of 7%) on all sales of goods and provision of services by the branch office.
But whilst there are no major Thai tax payable differences between a branch office and a Thai private limited company, an exit from a branch office entity in Thailand is far less cumbersome, far less time consuming and therefore far less than an exit from a Thai private limited company entity, which is required to comply with all the legal dissolution and liquidation procedures prescribed in the Thailand Civil and Commercial Code.
Unlike for a branch office and the similarly for a representative office, the Thailand Revenue Department has prescribed that regional office entities in Thailand are not subject to corporate income tax or VAT in Thailand.
And similarly as for representative offices, the Thailand Ministry of Commerce has prescribed that regional office entities shall not undertake activities in Thailand for commercial gain, but shall undertake non revenue-earning activities for the head office company only.
The prescribed non revenue-earning activities for regional office entities are as follows:
- Coordination or supervision of operations;
- Consultation or management services;
- Personnel training or development;
- Financial management;
- Marketing & sales promotion management;
- Product development; and
- Research and development services.
- Regional operating headquarters
Finally, for a US corporation that is carrying out the types of business activities listed above for regional offices, but those activities are being conducted for commercial gain, i.e. a charge is made by the regional office to the branches or affiliated companies in SE Asia for the services rendered to them by the regional office, the US corporation would be wise to consider a type of legal entity in Thailand known as a Regional Operating Headquarters (ROH).
An ROH entity in Thailand has the same legal attributes as a private limited company, but it is additionally registered as an ROH entity under the Thai Revenue Code, which provides ROH entities the following exceptional tax privileges:
- 0% income tax on income generated from branches/affiliates outside Thailand; and
- 10% income tax on income generated from branches/affiliates in Thailand.
should note that whilst the Treaty of Amity may override the Thai FBA in relation to ownership, it does not however override the Thai FBA in relation to the minimum capital requirements of foreign entities in Thailand.