International Turnkey Contracting in ASEAN: EPC-Projects in Thailand

WHEN IS A PERMANENT ESTABLISHMENT (PE) GENERALLY ESTABLISHED FOR ON-SITE WORKS? DOES A DOUBLE TAXATION AGREEMENT (DTA) BETWEEN THAILAND AND GERMANY AFFECT THIS ASPECT?

The Thai Revenue Code assumes a Permanent Establishment  if:

Under the DTA, a company has a PE in Thailand in case of construction after:

The Thai Revenue Department takes a wide approach to assessing the time of the construction, including time spent setting up the construction site. Thus, most projects would lead to a taxable PE in Thailand.

IS IT A COMMON APPROACH IN THAILAND TO SPLIT EPC-CONTRACTS IN ON- AND OFFSHORE PARTS TO MITIGATE TAX RISKS?

Yes, in general companies should consider a contract split to minimize Withholding Tax (WHT) in Thailand. The offshore part typically covers delivery of goods and materials, and the onshore part covers services and works. In this case, only the onshore part would be subject to a Withholding Tax of 3 per cent; the offshore part would not be taxed in Thailand.

In contrast: If a foreign company establishes a PE in Thailand and does not split the contract, the entire contract value would be subject to 5 per cent Withholding Tax. The rate could be lowered to 3 per cent in case a permanent establishment has a permanently established branch office in Thailand.

ARE THERE ANY SPECIFIC TAXES TO BE OBSERVED FOR EPC-CONTRACTS IN THAILAND?

The main relevant taxes are Withholding Tax (WHT), Value Added Tax (VAT) and Stamp Duty. Regulations concerning WHT are outlined in No. 2 above.  Additionally, the PE will be subject to  Corporate Income Tax at a rate of 20 per cent. The importation of goods as well as any services rendered or used in Thailand is subject to VAT at a rate of 7 per cent. Stamp Duty is applicable in many cases at the rate of 0.1 per cent on the contract value.

ARE THERE SPECIFIC INVESTMENT CONDITIONS OR PERMITS/LICENCES REQUIRED FOR EPC-WORKS IN THAILAND?

A foreigner requires a Foreign Business License prior to engaging into construction works or services in Thailand. Each activity rendered in Thailand is usually assessed individually. Thus, multiple licenses might be necessary. For example, if a license is issued for the performance of services under a single contract, each amendment or further stage in the project (e.g., plant extension, change of machinery, etc.) will require an additional license. 

Providing engineering services in Thailand is practically almost impossible for foreigners. Prior to be recognized as engineer, the applicant must pass a test and obtain a license from the Thai Council of Engineers. While the subjects might not differ too much from other jurisdictions, the test will be fully in Thai language.

WOULD A MERE TAX REGISTRATION OF A PE BE SUFFICIENT OR IS A CERTAIN INVESTMENT VEHICLE REQUIRED IN THAILAND? 

A tax registration is not sufficient. The foreign company has to apply for a Foreign Business License in Thailand prior to rendering services or works. Engaging in business activities without a license is a crime and can be punished by imprisonment. The authorities can issue an order banning the permanent establishment from engaging in any further business activities. Violations will usually be sanctioned with daily fines.

CAN THE PE GET OWN BANK ACCOUNTS AND HANDLE LOCAL CURRENCY PAYMENTS AS WELL AS FOREX TRANSACTIONS FOR THE PROJECT?

Yes.

WHICH IMMIGRATION REQUIREMENTS COMMONLY APPLY FOR FOREIGN STAFF TEMPORARILY DEPLOYED TO WORK ON-SITE IN THAILAND?

Foreign employees need a business visa and a work permit in Thailand. If the stay exceeds 90 days, a long-stay visa (i.e. visa extension in Thailand) is required (usually, embassies will issue only 90 day visa). In this case, the employer in Thailand has to have a ratio of Thais to Foreigners, generally 4 to 1, but in case of a PE, the ratio is lowered to 1 to 1. Should the employer be promoted by the BOI, an exemption from the ratio can apply in case of foreign experts (does not apply to PEs).

Any foreigner requires a work permit when working in Thailand. The definition of work is wide, and any type of activity can be considered work unless it is explicitly exempted (for example: business meetings or attending lectures are not considered work). Thus, in general, a work permit is required.

Issuance a work permit requires a registered capital of not less than THB 2 million per work permit for a locally registered company as employer, or THB 3 million per work permit in case of a PE. Furthermore, the foreign employee has to receive a certain minimum salary. The exact amount depends on the nationality. For Germans, the current rate is not less than THB 50,000. Such income is taxable in Thailand. There are possibilities to lower the capital requirement. In this case, a special permission for a projected with a limited and clearly defined timeline can be issued (e.g., installation of machines at the plant in Bangkok from 1 January to 31 August). 

Should a worker stay in Thailand for only two weeks, an urgent duty work permit can be considered. While the process and requirements for such UDWP are lowered, it can only be obtained for certain types of works. While an UDWP can be extended, it usually requires leaving Thailand for a certain period of time, between stays. Overall working time on an UDWP per year is limited to 45 days. The specifics should be checked with the issuing Labor Department in advance and might differ from province to province.

CAN WORK PERMITS, IF REQUIRED, BE APPLIED FOR BY AN OVERSEAS COMPANY OR THE FOREIGN INDIVIDUALS DIRECTLY OR IS THE INVOLVEMENT OF A LOCAL ENTITY REQUIRED?

A work permit requires an employer in Thailand, for example a Thai company or a PE. There are also certain service providers that provide outsourcing services. Overseas companies cannot apply for a work permit.

ARE THERE TAXES OR SOCIAL SECURITY CONTRIBUTIONS APPLICABLE FOR FOREIGN STAFF TEMPORARILY WORKING ON-SITE IN THAILAND? UNDER WHICH CONDITIONS ARE FOREIGNERS REQUIRED TO PAY INCOME TAX?

The income received for work in Thailand (or for a Thai employer) is taxable in Thailand. The personal income tax in Thailand is calculated based on progressive rates from 0-35 per cent; thus, the final taxation depends on the overall income earned in Thailand.

Furthermore, employees in Thailand are required to make contributions to the social security. In general, the rate is 5 per cent; however, the maximum contribution is THB 750 (approx. 20 Euro per months). Should the foreigner leave Thailand, paid contributions can be refunded in certain cases. However, in practice, the trouble and related costs might outweigh the benefits of the refund.​