Eight years after establishing its tax incentive scheme to attract foreign companies, the government has finally released a new and improved tax package for Regional Operating Headquarters (ROH).
The benefits
Under the proposed scheme, ROH companies will be entitled to an exemption from corporate income tax for a period of up to 15 years in respect of profits derived from services provided to affiliated companies outside Thailand. Income derived from domestic services will be subject to a reduced corporate tax rate of 10 per cent for up to 15 years. ROH companies will be granted the zero and 10 per cent tax rates without having to meet any qualifying income proportion thresholds, ie, the requirement for 50 per cent or more of their total income to be derived from certain qualifying services, a condition for eligibility under the original ROH regime.
The proposed ROH package modifies several other existing ROH tax privileges, such as putting a 15-year cap on the tax exemption on dividend payments received from its affiliated companies, and exemption from withholding taxes on dividend payments to foreign shareholders. To be entitled to this set of benefits, the ROH companies must meet the 50 per cent qualifying income proportion threshold.
Personal tax incentives for expatriates working for ROH companies have also been expanded. Expat employees are now eligible for the reduced personal income tax rate of 15 per cent for up to eight years, compared to four years under the current regime. They will continue to be exempt from paying personal income tax on income derived from work performed outside Thailand. Again, the incentives will only be granted where the 50 per cent qualifying income proportion threshold is met.
The conditions
In addition to providing more attractive benefits, the government has also lowered some of the eligibility criteria under the proposed ROH scheme. Under the original regime, the ROH would only qualify for the benefits if it provided the qualified services to at least three affiliated companies outside Thailand. This requirement has been relaxed, such that the ROH can qualify for the benefits by providing services at least one foreign affiliated company in the first two years, increasing to two by the third year and three by the fifth year.
Furthermore, the criteria for qualifying services (originally, business management and planning, research and development, marketing and technical support) have been relaxed and the Revenue Department is now willing to consider non-listed services on a case-by-case basis.
On the other hand, two new qualification criteria have been introduced. First, ROH companies are required to have business expenses in Thailand of at least Bt15 million per year or at least Bt30 million from actual foreign investment. Second, certain minimum conditions for ROH personnel have been established, such as requiring 75 per cent of ROH employees to be qualified staff and for the five top executives to be each earning at least Bt2.5 million in annual salary.
A Royal Decree is expected to be issued in the coming months, along with the relevant regulations. The proposed ROH incentive will not adversely affect companies which have applied or qualify under the original ROH regime. Such companies may choose to continue to enjoy the benefits under the original scheme or submit a new notification to the Revenue Department as a ROH under the proposed scheme.
The competition
This new ROH package is an indication of Thailand's eagerness to offer investors a comprehensive tax benefit that is competitive with similar incentives available in other Asian countries.
For example, under Singapore's Regional Headquarters Award, qualifying companies are granted a reduced corporate income tax rate of 15 per cent for up to five years on incremental qualifying income.
Malaysia has a similar regime, and offers corporate tax exemption for a period of 10 years on specified sources of foreign income for an approved Operational Headquarters (OHQ).
Both Malaysia and Singapore require that qualifying services be provided to at least three related network entities in three countries and that the regional headquarter provide at least three qualifying services. In comparison, Thailand's ROH now only requires a minimum of one qualifying service and gives companies more time to meet the three qualifying service recipient requirement.
Note: Tax law is complex and professional advice should be taken before acting on the information provided.
Paknapa (TawinyarT) Panich is an associate director at KPMG Thailand.