Thailand: Permanent establishment risk in Thailand

Permanent establishment (PE) is a common term in international tax. The concept is very common in advice concerning cross-border business expansion. Many discussions between advisers and their clients will begin with a question along the following lines: “Do these activities to be undertaken create a PE risk?”

There is no single, standard, definition of permanent establishment. Some countries use the term within their domestic law and some do not.


Generally, the term is used to signify that a business entity has a sufficient involvement in the economy of a country to justify it being required to contribute to that country’s public expenditure – to pay tax. Some countries will tax non-residents on the basis of a very weak connection. Some countries require a strong connection and a strong degree of permanence in order to levy taxes upon non-residents. So the PE concept can be seen as a threshold above which a non-resident becomes taxable in another country. It can also be seen as a sourcing rule so that profits which are derived by the PE are deemed to be sourced in the country in which the PE exists. That then would usually lead to those profits of the non-resident being taxable in that (source) country.

PE risk will be viewed differently by different people. For some, establishing a PE and subjecting any profits to tax will be the risk. For others, the risk is failing to recognise the existence of a PE and being subjected, at a later stage, to underlying tax as a result of the PE as well as penalties resulting from this failure.

In Thailand, the analysis of PE risk is a two-pronged analysis. The first refers to the domestic law which allows Thailand to tax profits derived in Thailand. The second refers to any applicable Double Tax Agreement (DTA) which may then limit Thailand’s right to tax.

Section 66 and section 76 Bis

Section 66 of the Thai Revenue Code provides that a foreign company will be subject to tax in Thailand if the company “carries on business in Thailand”. The amount subject to tax is the net profit arising from the business carried on in Thailand. Section 76 Bis of the Thai Revenue Code casts a wide net to deem when a foreign company will be carrying on business in Thailand. It does so by stating that if the foreign company has an “employee, a representative or a go-between” to carry on the business in Thailand, then that company itself will be carrying on business in Thailand.

In combination, these are sometimes referred to as “permanent establishment taxes” and the non-resident must file a permanent establishment tax return.

An example

A Thai Company engages a Taiwanese company, that does not have a branch or business office in Thailand, to provide design and supervision services. The Taiwanese company sends employed engineers to Thailand to undertake the engagement. Section 76 Bis would deem the Taiwanese company to be carrying on business in Thailand. Section 66 would potentially expose the Taiwanese company to tax in Thailand on the business profit arising as a consequence of the employees being in Thailand.

The corporate tax rate in Thailand is currently 20%. There is also a profit remittance tax that will usually apply to the remittance of after tax profits so that some say that the effective tax rate in Thailand for PEs of foreign investors is 27%.

Double tax agreements

One must be cautious in making generalisations with respect to Double Tax Agreements. Each is different and nuanced to varying degrees. The individual, relevant DTA should always be referred to. However, DTAs generally limit the taxing right over business profits. That right usually rests with the country of residence of the taxpayer. However, this is subject to the proviso that the entity does not have a PE in the other (non-resident) country. “Permanent establishment” is then, critically, defined in each agreement.

Thailand is not a member of the OECD, however, many of its DTAs follow the format of the OECD Model Convention in respect of the definition of permanent establishment: “a fixed place of business through which the business of an enterprise is wholly or partly carried on”. Once again, a generalisation about DTAs can only be made with caution. However, the definition, in combination with the explicit inclusions and exclusions in the Model Convention will usually provide a narrower frame for Thailand to attach a taxing right to than that provided under the domestic permanent establishment taxes discussed above. The following elements must usually exist to sustain the argument for the existence of a PE under most DTAs:

  • The place of business is geographically fixed
  • The place of business has a degree of permanence. There is a lasting bond.
  • The place of business is at the disposal of the enterprise
  • The place of business must be functional to the carrying on of the business

The most obvious difference between the permanent establishment taxes in the Thai domestic law and the definition of permanent establishment in the Model Convention is that under the Thai domestic law, merely having an employee conducting business in Thailand will be deemed to be carrying on business in Thailand. Something more substantial is required under the Model Convention. Nonetheless, there are similarities in the way the Thai Revenue Department interprets section 76 Bis with the “agency” test for a PE under the Model Convention.

Reverting back to the earlier example, section 76 Bis would provide that the Taiwanese company was carrying on business in Thailand by virtue of the seconded employees. This provides Thailand with a taxing right over the profit arising from the business activity in Thailand.

However, if the employees do not conduct the business in a way which establishes a strong enough connection to be deemed a PE under the relevant DTA, then Thailand’s taxing rights will be nullified and the country of residence (Taiwan) would retain sole taxing rights over the business profits.

It should be noted that Thailand has an extensive DTA network. It has DTAs with 57 countries.

Limiting PE risk in Thailand

Companies and advisers looking to minimise the PE risk in Thailand (or any other country for that matter) should consider doing the following:

  • Communicate early, often, clearly and accurately
  • Involve the company’s tax department and/or advisers in decisions around the expansion of business operations into Thailand
  • Coordinate with international partners to ensure a thorough PE analysis in the first instance and to ensure filing obligations are met if a PE is in place and a tax liability arises
  • If DTA protection is desired, then ensure that the entity concerned is able to access treaty benefits. Are they a resident of the country with the treaty under that country’s national law? Does the concept of beneficial ownership throw a spanner in the works when it comes to accessing treaty benefits for certain types of income?
  • Evaluate contracts and scopes of work to see what will be done and by whom. The authority to conclude binding contracts resting with seconded employees could bring a non-resident into the realm of permanent establishment under the DTA
  • Obtain an understanding of the views taken by the Revenue Department in Thailand of what will and will not constitute a PE in Thailand. The views of the local authorities in the country of residence might be different to the views of the authorities in Thailand.
  • If a PE does, or will, exist then consider structuring contracts in such a way so as to limit the profits that are attributable to the PE in Thailand.
  • If a tax obligation arises, then ensure accurate and timely accounting records are kept so that tax filings can be completed promptly. Review filings periodically to make sure that all obligations are satisfied 


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