From a tax standpoint, the Thai branch of a foreign entity is the same juridical person as the head office. With that in mind, some readers might be curious how this concept would come into play in determining withholding tax liabilities in a cross-border financing transaction.
Let’s say you wish to undertake project financing to fund your new factory by borrowing money from a foreign bank with a branch in Thailand. When you pay interest to the head office of the bank abroad, should you withhold tax at a rate of 10% (reduced from 15% by virtue of a tax treaty)? Or do you need to withhold tax at all in light of the fact that the overseas bank has a branch office doing business in Thailand even if the branch does not participate in the loan?
The short answer is if it can be determined that interest received by the overseas head office is includable in the Thai tax base of the branch, no withholding tax on interest will be applicable.
If you think this is not your problem and you are going to deduct the 10% tax from interest and simply pay it to the Revenue Department anyway, you would be wrong. Most loan documents require Thai borrowers to absorb the withheld tax on a gross-up basis so that the foreign bank will receive the net amount of interest free from such withholding. Not only are you not allowed to deduct the tax from interest payments but also you will need to pay it yourself to the Revenue Department in addition to the interest amount.
Most tax treaties to which Thailand is a party follow the Model Tax Convention on Income and on Capital drafted by the Organization for Economic Cooperation and Development. The commentaries on this convention apply the “attribution rule”, meaning a branch office in Thailand will be treated as if it were a separate and distinct taxable entity from its overseas head office.
Where a tax treaty applies, the Thai branch will be liable to pay tax only on its own profits, and interest payable by the Thai borrower to its head office abroad will not be treated as revenue of the Thai branch. Hence, such interest will continue to be subject to 10% withholding tax as if there were no such branch in Thailand.
In many loan syndications, the situation could get more complicated. For example, the Thai branch is likely to help facilitate the transaction by acting as a security agent holding collateral for the benefit of the head office. If you are the borrower, can you rely on this fact and claim the overseas lender should be deemed as doing business in Thailand via the Thai branch? If this claim is successful, there will be no withholding tax on interest for you to absorb.
Recently, there was a case in which the head office of a foreign bank acted as a facility agent and its Thai branch as a security agent for the lenders in the same syndicate. Upon payment of the service fees, there was a question about whether the borrower should apply the tax exemption rule granted under the relevant tax treaty to the payment of the facility agent fee to the head office as if the head office did not have a branch in Thailand; or if the borrower should withhold tax of 3% on the fee as if it were taxable revenue of the Thai branch of the bank.
The Revenue Department ruled that even if both the head office and the branch participated in the same loan transaction, insofar as the head office dealt with the borrower directly by itself, the branch was not required to include the service fee revenue received by the head office (100) in its Thai tax base (50), as the Thai-German tax treaty did not apply the Force of Attraction Rule to the case.
Furthermore, since the Thai-German tax treaty exempted tax for offshore services provided outside the country, the borrower was not required to withhold tax at the rate of 15% on the facility agent fees of 100. Only withholding tax of 3% on the security agent fee of 50 to the Thai branch was payable to the Revenue Department.
Although the ruling did not address the interest payment, it implies that even where a foreign entity has a branch office in Thailand, insofar as the attribution rule applies under the relevant tax treaty, the Revenue Department will treat the head office and the Thai branch as if they were separate legal entities for tax purposes. As a result, when the borrower pays interest to the overseas bank, it is mandatory that withholding tax of 10% be paid to the Revenue Department.
This article was written by Rachanee Prasongprasit and Prof Piphob Veraphong. They can be reached at admin@lawalliance.co.th