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1.Introduction

On 19 March 2025, the Thai Revenue Department (“TRD”) issued Tax Ruling No. Gor Kor 0702/1626, introducing a significant change in the tax treatment of outbound payments for software and IT-related services. This ruling adopts a rights-based approach, focusing on the specific contractual rights granted to Thai companies when classifying payments as either “royalties” or “business profits”. The development brings Thailand’s tax practice closer to international standards, particularly those of the OECD, and provides much-needed clarity for businesses engaged in cross-border technology transactions, including cloud computing and custom software development.

2.Key Facts and Scenarios

A Thai application development company engaged three foreign service providers – Company A (United States), Company B (Ireland), and Company C (Hungary) – for various technology services. The nature of services, billing arrangements, and intellectual property (IP) rights varied across these providers:

• Company A (US): Provided IT infrastructure, data storage, and cloud computing services. Company A retained all IP rights, granting only limited, revocable, non-exclusive, non-transferable, and non-sublicensable user rights to the Thai company.
• Company B (Ireland) and Company C (Hungary): Delivered custom software development services. Two scenarios were considered:
• Scenario 1: IP ownership transferred to the Thai company.
• Scenario 2: IP retained by the developer, with the Thai company receiving only limited user rights.

3.Rights-Based Analysis and Decisions

a) Cloud and Hosted Software Services

For payments to Company A, the TRD determined that the arrangement provided only restricted access to hosted software and infrastructure, without any rights to reproduce, distribute, adapt, or commercialize the software. As no copyright exploitation rights were granted, these payments were classified as “business profits” under Article 7 of the Thailand–US tax treaty, not as “royalties” under Article 12. In the absence of a permanent establishment (PE) in Thailand, no Thai corporate income tax or withholding obligation arises.

b)Custom Software Development

• Scenario 1: IP Transferred to Thai Company

Payments for customized software where the ownership of the intellectual property is transferred are treated as service income under Section 40 (8) of the Revenue Code. Under the tax treaties with Ireland and Hungary (and most others), such income is considered “business profits” and is not taxable in

Thailand unless prided through a permanent establishment of the foreign vendor in Thailand.

• Scenario 2: IP Retained by Developer

In cases where the developer retains the ownership of the intellectual property  and the Thai company receives only limited user rights (without rights to reproduce, distribute, or modify), payments are also not considered royalties. Instead, they are classified as “business profits” under Article 7 of the relevant tax treaties, with no Thai tax liability in the absence of a permanent establishment.

4. Core Principles Established

a) Contractual Terms Are Critical

The specific rights, limitations, and ownership provisions in each agreement determine the tax treatment. The distinction between a limited “right to use” and broader licensing rights is decisive.

b) Custom Software as a Service

Payments for bespoke software development, especially under work-for-hire arrangements where ownership is transferred, are classified as service income, not royalties, and thus treated as business profits under tax treaties.

5. Implications and Recommendations

This ruling marks a clear departure from previous TRD practice, where software-related payments – especially for Software as a Service (SaaS) – were often automatically treated as royalties. The new approach narrows the definition of royalties to payments involving copyright exploitation rights, reducing uncertainty and aligning with international norms. Software-related payments that do not fall under the above scenarios are treated as royalties and therefore subject to withholding tax.

Businesses should:

• Review and, if necessary, revise existing and future contracts for outbound software and IT service payments to ensure contractual terms accurately reflect the substance of the transaction.
• Assess the impact of this ruling on current tax positions and maintain clear documentation to support the intended tax treatment.
• Seek professional advice before making contractual or structural changes, as tax rulings are not legally binding and may be subject to varying interpretations by local tax authorities.

6.Treatment of Standard Software

For standard, off-the-shelf software such as Microsoft Office, the tax treatment under the new rights-based approach depends on the nature of the rights granted to the user. Typically, standard software licenses provide only a limited, non-exclusive, non-transferable right to use the software for internal business purposes, without granting rights to reproduce, modify, distribute, or commercially exploit the underlying copyright. In such cases, payments for standard software are generally not considered royalties but are classified as “business profits” under the relevant tax treaties. As a result, if the foreign software provider does not have a permanent establishment in Thailand, no Thai withholding tax obligation arises on these payments. However, if the license grants broader rights, such as the right to reproduce or distribute the software, the payment may be treated as a royalty and subject to withholding tax. Careful review of the license terms is essential to determine the correct tax treatment

7. Conclusion

Thailand’s latest tax ruling on outbound software and technology payments represents a significant shift toward a rights-based, substance-over-form approach. By focusing on the actual rights granted, the TRD has

clarified the distinction between royalties and business profits, offering greater certainty for cross-border technology transactions. Businesses should act promptly to align their agreements and practices with this new interpretation to optimize tax outcomes and ensure compliance.