Although Lorenz & Partners always pays greatest attention on updating the information provided in this brochure we cannot take responsibility for the topicality, completeness or quality of the information provided. None of the information contained in this brochure is meant to replace a personal consultation. Liability claims regarding damage caused by the use or disuse of any information provided, including any kind of information which is incomplete or incorrect, will therefore be rejected, if not generated deliberately or grossly negligent.
A foreign company carrying on business in Thailand or setting up a business in Thailand usually sends employees from abroad to work in Thailand at least for a certain period of time. When the employer pays remuneration to the employee, the employer is required to withhold personal income tax (“PIT”) from the employee’s salary and to remit the withheld amount to the Revenue Department (“RD”). The same applies to other benefits the employee might receive, such as transportation allowances, bonuses or housing allowance.
In order to determine whether income is subject to PIT in Thailand, there are two rules under the Thai Revenue Code (“RC”): the source rule and the residence rule.
In the case an employee is a resident of another state and seconded to Thailand to work for a certain period of time or continues to receive income in such state, a Double Taxation Agreement (“DTA”) which might be in place between the other state and Thailand would become relevant.
This publication will focus in particular on the tax privileges granted to expatriates working for an International Business Centre (“IBC”).
The source rule is stated in Sec. 41 (1) RC and stipulates that assessable income derived from a post or office held in Thailand or business carried on in Thailand or of an employer in Thailand or property situated in Thailand shall be taxable in Thailand.
It is thereby irrelevant, whether such income is paid within or outside of Thailand and whether or not such income is brought into Thailand.
- A post or office held in Thailand
The significant criteria for deciding whether the employment income of non-residents should be subject to PIT in Thailand is the “place where the work is performed”.
A Thai company employs a German employee to develop the German market for the Thai product. The employee will render his work in Germany. As a result, the “place where the work is performed” is Germany. Therefore, he does not have a post or office held in Thailand under Sec. 41 (1) RC. However, since he is employed by a Thai company, he is nevertheless subject to PIT under domestic Thai tax law, since he receives his salary from an employer in Thailand (see below re. exemptions under the German-Thai DTA).
- A business carried on in Thailand
Carrying on business means deriving income from independent work, which means that the work is not carried out in an employment relationship, but instead e.g. as a freelance contractor.
- Business of an employer in Thailand
Concerning the interpretation of the wording “business of an employer in Thailand” it is still not fully clear whether the wording “in Thailand” refers to “business” or to “employer” or both “business and employer”.
The RD follows the interpretation that the wording refers to “employer”. The employer has to reside or be registered in Thailand but may assign an employee to work abroad.
- A company established under Thai law is the employer of Mr. A and sends him to work in the branch office in Brunei (which does not have a DTA with Thailand) for four years. In this case, Thailand is the source country for Mr. A’s salary.
- A Thai company sends its employees to work abroad and pays their salary or wages to a bank account in Thailand. It shall be deemed an income derived from the business of an employer in Thailand. Such employees have to pay PIT under Sec. 41 (1) RC.
- A property situated in Thailand
An example for this case would be a foreigner holding real estate or shares in a Thai company and selling such property.
The residence rule is stipulated in Sec. 41 (2) RC. A resident of Thailand who derives assessable income from a post or office held outside of Thailand, a business carried on outside of Thailand or a property situated abroad shall pay PIT in Thailand if such income is brought into Thailand in the same tax year (= calendar year).
In addition, Sec. 41 (3) RC stipulates that a person residing in Thailand for a period of a total of 180 days in any tax year shall be deemed a resident of Thailand.
Income under Sec. 40 (1) RC includes income derived by virtue of hire of service, whether in the form of salary, wage, per diem, bonus, bounty, gratuity, pension, house rent allowance, monetary value of rent-free residence provided by an employer, payment made by an employer for settlement of any obligation due from an employee, or any money, property or benefits derived by virtue of hire of service. Therefore, income under Sec.40 (1) RC shall be income from employment.
Income under Sec. 40 (2) RC includes income derived by virtue of a post, office of employment or of a service rendered, whether in the form of a fee, brokerage, discount, subsidy, meeting fee, gratuity, bonus, house rent allowance, monetary value of rent-free residence provided by a payer of income, payment made by a payer of income for settlement of any obligation due from a person having income, or any money, property or benefits derived by virtue of a post or office of employment or of service rendered, whether such post or office of service is of a permanent or temporary nature.
As the incomes mentioned above are quite similar, the following main criteria are to be looked at to distinguish income under Sec. 40 (1) and Sec. 40 (2) RC.
Income is rather subject to Sec.40 (1) in the following cases:
- Only natural persons can receive such kind of payment.
- Hire of services does not take the accomplishment of work into account. Even if the employee is not able to complete his work within a due date, he still receives remuneration for the service. With respect to hire of services, an employee is in dependency to his employer.
- An employer is jointly liable with his employee for the consequence of a wrongful act committed by such employee in the course of his employment.
With respect to withholding tax, any person paying out income under Sec.40 (1) RC (salary and any benefits) to an employee shall be liable to withhold tax at the progressive rates, mentioned in 2.5 below, and to issue a withholding tax certificate to the employee concerned. Moreover, this duty is extended to an employer being a company established under foreign law. When a foreign company pays remuneration to a person that performs employment services in Thailand, such foreign company is also liable to withhold tax
As of 2022, the following personal income tax rates apply:
 Revenue Department’s Ruling No. KhorKor.0802/26915 dated on 18 December B.E. 2538.
 Sec. 425 of Thai Civil and Commercial Code
The following incomes are exempted from computing PIT:
The employee has to spend these expenses in good faith. Only the necessary amount shall be spent and this exclusively and wholly for carrying out the employee’s duties. Additionally, the Revenue Department issued internal guidelines to clarify the features of per diem which is bona fide spent by such person necessarily and exclusively in performing his duties.
If a foreign employee receives per diem at the rate not higher than the top per diem rate the government pays to its officials under the Royal Decree governing per diem, such per diem (also in the nature of a lump-sum payment) shall be treated as bona fide spent by the employee necessarily and exclusively in performing his duties. A record to prove the payment is not necessary. The per diem is not taxable.
For more details, please see our Newsletter No. 18 “Income Tax Free Travel Allowance” available on our website www.lorenz-partners.com.
Transportation expenses and travelling per diem at the rates fixed by the Government in the Royal Decree governing the rates of transport expenses and travelling per diem.
Medical expenses paid by an employer to the employee for the following purpose are exempt from PIT:
- Necessary medical treatment of the employee, the employee’s spouse, relatives or descendants under the employee’s care, however only in respect of the medical treatments performed in Thailand;
- Necessary medical treatment of the employee in a foreign country, where the employee occasionally performs his duties.
Income from sale of securities in the Stock Exchange of Thailand is not assessed for tax purposes. Income from the sale of debentures and/or bonds is, however, subject to tax.
Under Thai labour law, severance payment is a compensation that an employer is obligated to pay to an employee whose employment contract is terminated without due cause. The amount of severance payment depends on the period of time the employee worked for the employer.
Ministerial Regulation No. 126 clause 2 (51) provides that severance payment paid to an employee is exempt from PIT. However, this shall apply only to that portion of the compensation which does not exceed an amount equal to the employee’s salary for the last three hundred days of employment, in any case not exceeding THB 300,000. This means that if the severance payment exceeds THB 300,000, the employee is subject to tax for the amount in excess.
According to Art. 14 (1) Thai-German DTA as a general rule, the employee’s state of residence (Art. 4 German-Thai DTA) has the right to tax the income derived from such employment. However, if the employment is exercised in another state, such state also has the right to tax.
The so-called “183 days rule” which is stated in Art 14 (2) of the German-Thai DTA stipulates that the taxation right remains with the state of residence, even if the employment is rendered in another state if the following three conditions are cumulatively fulfilled:
- The employee is present in the other state not more than 183 days in any twelve-month period; and
- the remuneration was not paid by or on behalf of an employer being a resident of the other state; and
- the remuneration was not borne by a PE which the person paying the remuneration has in the other state.
The concept of “resident of a Contracting State” has various functions and is of importance for the following:
- in determining the DTA’s personal scope of application;
- in solving cases where double taxation arises in consequence of double residence;
- in solving cases where double taxation arises as a consequence of taxation in the state of residence and in the state of source.
Therefore, the first step is to decide whether the employee is a resident of Thailand or the other Contracting State.
Provided the employee is deemed to be a resident of Thailand under the DTA, and the income concerned is deemed to arise from or in Thailand, the provisions of the DTA do not apply to the employee. That case would be governed by Thai domestic tax law only.
Under the DTA, an individual is considered to be a resident of a country if he is liable to tax therein by reason of domicile, residence or any other criterion of a similar nature. With respect to Thailand, this means that only an employee who stays in Thailand for at least 180 days in one tax year is deemed to be tax resident in Thailand.
A tax residency of natural persons in Germany exists a soon as the person has its domicile or habitual abode in Germany. The domicile of a person is where such person maintains a dwelling under circumstances that lead to the assumption that the person will keep and use such dwelling (even if it is only occasionally). The habitual abode requires a stay of more than 183 days in a tax year.
It should be noted that the RD may request a German employee who wants to benefit from the DTA to demonstrate a “Certificate of Residence”. A Certificate of Residence must be granted from a German Authority and the authenticity of the document must be certified by the Royal Thai Embassy in Germany.
There are cases in which a person is a resident of both Germany and Thailand, for example because such person has a domicile in Germany and stays in Thailand for more than 180 days in a calendar year. In case of an individual person, such conflicts are decided by applying Art. 4 (2) of the DTA:
- Permanent Home
The first alternative to test the residence country of a natural person is to determine where the individual has its permanent home. A permanent home is defined as the place where the individual owns or possesses a home and this home must have been arranged and retained for a longer stay. In practice, problems can arise when interpreting the permanent home.
A German employee was sent to work for a construction project in Thailand. The German company provides the employee with a condominium located in Bangkok rented for a period of six months. Is six months deemed to be permanent?
As the Revenue Department does not define the term “permanent” and there is no ultimate court case regarding this matter, another source of interpretation is to look at international court cases. Courts decided that for example the possession of a holiday home for a period of some five or six weeks would not be sufficient for having a permanent home. Permanent shall be beyond a six weeks period. A permanent home shall exist in cases where the stay was from the outset limited to a maximum of 12 months. The French Supreme Court denied the existence of a permanent home in a case where a friend of the taxpayer had given the taxpayer his house “for part of the year”.
In addition, the French Ministry of Foreign Affairs has interpreted “permanent home” as meaning the place where the taxpayer has his closest personal bonds or relations, and that financial and economic bonds are not relevant. The German Bundesfinanzhof has also held that a permanent home means a special type of domicile where a person stays more than occasionally and for more than a short time.
- Close economic relations
If the taxpayer has a permanent home in both countries, the deciding criterion is in which country he has his closest personal and economic relations, Art. 14 (2) German-Thai DTA.
The Thai-German DTA does not provide a definition of the term “remuneration” stated in Art. 14 (1) DTA. However, it is widely agreed that the term should include benefits of any kind received in respect of an employment. In addition, the OECD Commentary gives some examples of remuneration such as stock-options, the use of an apartment or other residence or an automobile, health or life insurance coverage and club memberships.
It should be noted that the wording “in the fiscal year concerned” is in accordance with the 1963 Draft Convention and the 1977 Model Convention but is in contrast with the current OECD Model. In the current model, it is stipulated that the time period may not be exceeded “in any twelve month period commencing or ending in the fiscal year concerned”. The wording of the DTA in use may provide opportunities for tax planning in favour of the employee.
The exemption does not apply to an employee who is present in the state where the employment is performed (in our case: Thailand) for a period exceeding 183 days. Please note that any presence will be taken into account, including presence in Thailand for holiday. The OECD has specified in its Report on the 183 days rule that the following days shall be included in this period:
Part of a day, day of arrival, day of departure and all other days spent inside the State of activity such as Saturdays and Sundays, national holidays, holidays before, during and after the activity, short breaks (training, strikes, lock-out, delays in supplies), days of sickness (unless they prevent the individual from leaving and he would have otherwise qualified for the exemption) and death or sickness in the family. However, days spent in the State of activity in transit in the course of a trip between two points outside the State of activity should be excluded from the computation. It follows from these principles that any entire day spent outside the State of activity, whether for holidays, business trips, or any other reason, should not be taken into account. A day during any part of which, however, the taxpayer is present in a State counts as a day of presence in that State for purposes of computing the 183 days period.
This wording is different from the OECD Model and the UN Model. The OECD Model and the UN Model use the wording “employer” instead of “person”. However, the result is the same because the income is derived from an employment. Therefore, a “person” in this case has the same meaning as “employer”.
If the remuneration is paid by a person (either a natural person or a juristic person) in Thailand, the employee does not fall under the 183 days rule unless the Thai person merely pays the salary on behalf of a non-resident employer by charging back all the cost paid in connection with the employment.
The 183 days rule can only be applied if the remuneration is not borne by a PE which the person who is paying the remuneration has in Thailand.
It therefore needs to be carefully examined whether any activity of the foreign company rendered in Thailand might lead to the establishment of a PE in accordance with Art. 5 of the DTA.
Under the German-Thai DTA, remuneration in respect of an employment exercised aboard a ship or aircraft in international traffic operated by an enterprise of a German company may be taxed in Germany, while under the OECD Model, such income may be taxed in the State in which the “place of effective management” of the enterprise is situated.
Concerning remuneration of crew members working on ships, the RD ruled as follows:
“Mr. A, who is an expatriate, performs his work on a Thai ship. Even though the ship has passed many countries, Mr. A shall be deemed working in Thailand. According to international law principles, a ship sailing in the ‘high seas’ area shall generally have the nationality of the flag under which the ship is sailing.”
Art. 14 DTA is not applicable for special employment income such as directors fee (Art. 16), income of artists and athletes (Art. 15), income paid by a treaty state or a public corporation erected in this state (Art. 17). The reason why the DTA does not determine the 183 days rule, for instance, for artists is the nature of their work. Usually artists appear or work in the source state for only a short time. Therefore, the 183 days rule is not suitable in this case.
An IBC is a company registered in Thailand providing management, technical, financial and support services to its associated enterprises or branches (hereinafter collectively referred to as “affiliates”), or performing international trade businesses and services to overseas customers.
The IBC scheme has superseded the Regional Operating Headquarters (ROH), International Headquarters (IHQ) and International Trade Centre (ITC) schemes.
In order to qualify for tax privileges, an IBC must fulfil the following criteria:
- registered and fully paid-up capital of at least THB 10 million,
- Employment of at least 10 skilled employees (or at least 5 skilled employees in case of an IBC providing only financial management services);
- In case of performing international trade business, the IBC must perform at least one of the other permitted activities as well;
- Annual expenses in Thailand of at least THB 60 million.
An IBC that meets the aforementioned criteria will be granted the following tax privileges for up to 15 years:
 Sec. 42 RC.
 Departmental Instruction Paw. No.59/2538.
 Art. 4 (1) German-Thai DTA.
 Sec. 41 (3) RC.
 BFH BStB1. II 439 (1968).
 FG Düsseldorf, 29 RIW 383 (1983).
 Germany’s DTA with Spain.
 Conseil d’ Etat, req. n. 59.667-61.300, 41 Dr. Fisc. Comm. 1289 (1989).
 Conseil d’Etat of December 4, 1974, reported in (1975) 27 Droit Fiscal 116.
 Decision of October 23, 1985, I.R. 244/82, (1985) BStB1.
 OECD Commentary art.15 par.5.
 Art. 14 (3)
 Art. 15 para 9 of the OECD Commentary 2010
Personal income tax benefits for employees of an IBC
Every individual not holding Thai nationality can enjoy tax privileges from working permanently for an IBC. The tax privilege will apply only for income in the category of “Dependent Personal Service” employment. Liberal professions are excluded, since the law states clearly that the tax privilege shall apply only for income which “a foreigner receives from his employment in an IBC”.
In order to qualify for the reduced PIT rate, the expatriate must meet the following criteria:
- Being a permanent employee of a qualified IBC and working for the IBC or international trade business;
- In case the foreign employee works for another business of the company as well as IBC and/or international trade business, the company’s income generated from IBC and/or international trade business must be not less than 70% of total income;
- Being registered with the Revenue Department;
- Residing in Thailand for not less than 180 days in the fiscal year that such foreign employee wishes to apply for the tax benefit, except for the first fiscal year and the last fiscal year, where such foreign employee can reside in Thailand for less than 180 days during such fiscal year;
- Having obtained a work permit under the qualified IBC as a skilled/expert employee from the Department of Employment, Ministry of Labour, under Board of Investment Promotion Law or other laws from the first working day;
- Being taxpayer who has assessable income under the Revenue Code of minimum THB 200,000 per month on average (calculated based on the number of months being in Thailand) from the qualified
In case the IBC business is not qualified in any fiscal year, the foreign employee will not be able to use the tax benefit for such fiscal year.
Comparison table regarding income tax from employment:
For further information, please refer to our Newsletter No. 219 “Investment Promotion for International Business Centers (IBC)”.
6. Case Studies and Practical Problems of Expatriate Taxation
6.1 International Hiring-out of labour
The use of “employment companies” or “hiring-out of labour” is quite well-known in international business. Multinational enterprises (“MNE”) often use this structure for tax purposes in case expatriates are performing work in several countries in the region.
In such a structure, a group company (“user”) who wishes to employ non-resident labour for a period of less than 183 days recruits through an intermediary company which is generally located in a low tax country or a country which does not impose PIT. This intermediary company purports to be the employer and usually enters into a formal employment agreement with the employee. The intermediary company pays salary to the employee and hires the labour out to the user for consideration.
As the Thai RD did not yet consider international hiring-out of labour in its rulings, international points of view have to be considered when interpreting international hiring-out of labour in practice:
The OECD Commentary applies the “substance over form doctrine” to an international hiring of labour case, i.e. each case should be examined to determine whether the functions of the employer were exercised mainly by the intermediary company or by the user. Moreover, the OECD Commentary indicates a number of tests to determine the “real employer”:
- Who bears the responsibility or risk for the results produced by the individual’s work?
- Who has the authority to instruct the individual?
- Who controls and has responsibility for the place where the work is performed?
- Who bears, in an economic sense, the cost of the remuneration paid to the individual?
- Who puts the tools and materials necessary for the work at the individual’s disposal?
- Who determines the number and qualifications of the individuals performing the work?
6.2 Splitting of salary
Another possibility to reduce the tax burden of expatriates working in Thailand is to split the employee’s salary into an onshore and an offshore portion. The onshore portion is paid for work in Thailand, while the offshore portion is paid for work rendered in other countries in the region, e.g. Indonesia, Vietnam or Malaysia.
The onshore portion is paid by the Thai employer and the employee is subject to personal income tax in Thailand in this respect. The offshore portion is paid e.g. by the employee’s foreign employer who seconded the employee to Thailand. The employee enters into a service contract with the foreign employer in this respect and the remuneration paid to a bank account outside of Thailand. According to Thai law, the offshore portion is not subject to Thai tax, as long as it is not brought into Thailand within the same tax year and it is not related to the work performed in Thailand.
However, it has to be ensured that the employee in fact renders services outside of Thailand which justify the amount paid under the service contract. Further, the remuneration received in Thailand needs to be reasonable and sufficient for the work provided by the employee. Otherwise, inspections by the Revenue Department might lead to severe consequences.
In case of adequate remuneration under the service agreement and the employment agreement, the income under the service agreement might be tax free. However, anti avoidance tax law needs to be considered. If the employee would e.g. be considered a resident of Germany and therefore be subject to tax in Germany without limitation, he would have to tax such income in Germany, even in the case that under the Thai-German DTA Thailand had the sole taxation right. German tax law contains a provision which allows Germany to tax income which normally is not taxable in Germany due to a DTA if the earner of the income cannot prove that tax was actually paid in the other contracting state. Such proof could in our case not be produced since Thailand does not impose tax on the income under the service agreement. The employee would remain subject to tax in Germany.
It is therefore of paramount importance to accurately plan and structure a splitting of salary and to also consider anti tax avoidance rules before its implementation.
The PIT burden in Thailand is already relatively low, when compared e.g. with Germany where the progression is steeper. In case of employees with regional responsibility and a scope of work beyond Thailand, the taxation can be further optimized, e.g. by splitting the salary into an onshore and offshore part. In addition, the new IBC scheme offers attractive tax incentives not only for the IBC itself but also for its foreign employees.
By introducing the new IBC rules, Thailand has further developed towards a hub for regionally active companies and offers tax rates similar to e.g. Singapore or Hong Kong, but at far lower cost of living. This will help to further develop Thailand as a regional hub.
 Art. 15 para. 8 of the OECD Commentary 2010.
We hope that this information brochure can be of any help to you. Please do not hesitate to contact us in case you have further questions.
Although Lorenz & Partners always pays greatest attention on updating the information provided in this newsletter we cannot take responsibility for the topicality, completeness or quality of the information provided. None of the information contained in this newsletter is meant to replace a personal consultation. Liability claims regarding damage caused by the use or disuse of any information provided, including any kind of information which is in-complete or incorrect, will therefore be rejected, if not generated deliberately or grossly negligent.