Tax notes

Hong Kong's Double Tax Agreement with Thailand

Issue 14.1 - April 2008
Tax notes

On 7 September 2005 the Government of the Hong Kong Special Administrative Region (HKSAR) and the Government of the Kingdom of Thailand signed an Agreement for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (DTA). The DTA is effective from 1 January 2006 in Thailand and 1 April 2006 in Hong Kong.

Branch Profits – after the DTA became effective, there was some doubt whether the profits remitted to a Hong Kong head office by a branch office in Thailand are subject to tax in Thailand. On 21 February 2008 the Governments of the HKSAR and Thailand confirmed by an exchange of letters that neither party to the DTA will impose a tax on profits remitted by a branch of an enterprise in the other jurisdiction, thus confirming that the remittance of profits by a Thai branch to its Hong Kong head office will not attract taxation in Thailand.

The main provisions of the DTA are set out below.

In the Kingdom of Thailand the DTA applies to Income Tax and Petroleum Income Tax.

In the HKSAR the DTA applies to Profits Tax, Property Tax and Salaries Tax.

The DTA applies to persons who are residents in either or both of Hong Kong and Thailand. For Hong Kong this means that it applies to any person who is resident in Hong Kong for the purpose of Hong Kong taxation. A “person” for this purpose includes a company. The importance of residence in the DTA is that it adds another dimension to Hong Kong taxation as the concept of residence has in the past played little part in determining tax liabilities in Hong Kong due to Hong Kong’s territorial system of taxation, and the residence of a person or a company has previously been derived from case law.

Article 4 of the DTA contains the following definitions of a Hong Kong resident.

Individual – (a) any individual who ordinarily resides in the HKSAR in any year of assessment; or (b) any individual who stays in the HKSAR for more than 180 days in a year of assessment or more than 300 days in two consecutive years of assessment, one of which is the relevant year of assessment.

Company – a company incorporated in the HKSAR or, if incorporated outside the HKSAR, is “normally managed or controlled” in the HKSAR.

The main provisions regarding the taxation of income under the DTA are:

•	Income from immovable property will be taxed in the jurisdiction in which the property is situated.
•	Shipping and Air Transport – Income or profits derived by a Hong Kong enterprise from the operation of aircraft in international traffic will be taxable only in the HKSAR. Income or profits of a Hong Kong enterprise derived from Thailand from the operation of ships in international traffic may be taxed in Thailand but the Thai tax will be reduced by 50%.
•	Business profits – A Hong Kong company which derives profits in Thailand will be subject to tax only in the HKSAR unless it carries on business in Thailand through a permanent establishment in Thailand, in which case it may be subject to tax in Thailand on the profits attributable to the permanent establishment. Profits remitted by a branch office in Thailand to a Hong Kong head office will not be taxed by the Thai Government. Such remittances were previously subject to a 10% withholding tax.
•	Interest income will be taxable in the country in which it is received. Under Hong Kong’s territorial system interest income with a Thai source will not be subject to tax in Hong Kong. However, such income suffers Thai withholding tax on the payment by the Thai payer. Under the DTA this withholding tax will be reduced from 15% to 10% of the gross interest if the interest is beneficially owned by a financial institution or insurance company, or is beneficially owned by a HKSAR resident and is paid in respect of a debt arising as a consequence of a sale on credit on an arms length basis. The rate of 15% will continue to apply in all other cases except that interest arising in Thailand paid to the Government of the HKSAR or the Hong Kong Monetary Authority will be exempt from Thai tax.
•	Royalties are taxed in the recipient country. Under the DTA the rate of Thai withholding tax on royalties paid from Thailand to a Hong Kong recipient will be amended from the current single rate of 15% of gross royalties to 5%, 10% or 15% of gross royalties depending on the category of royalty involved. Under the DTA the maximum rates of withholding tax on royalties paid by a Hong Kong company to a Thai recipient will be 5%, 10% or 15% depending on the category of the royalty involved.
•	Dividends – the DTA does not impact the withholding tax of 10% on dividends paid by a Thai company to a Hong Kong resident.
•	Employment income received by a HKSAR resident may be subject to tax in Thailand if the employment is exercised in Thailand unless the employee is not present in Thailand for periods of more than 183 days in a twelve month period and the remuneration is paid by or on behalf of an employer who is not a Thai resident and the remuneration is not borne by a permanent establishment or fixed base of the employer in Thailand.
•	Income from professional services or other similar independent activities rendered by a HKSAR resident in Thailand shall be taxable only in the HKSAR unless he has a fixed base regularly available to him in Thailand or if his stays in Thailand exceed an aggregate of 183 days in any twelve month period, in which case part of the income may be taxed in Thailand. There are exceptions including payments to artistes and sportsmen.
•	Director’s fees will be taxed in the jurisdiction in which the company paying the director’s fees is resident. Income received by directors which does not fall within the definition of director’s fees will be considered to be for personal services and will be taxed accordingly.
•	Elimination of Double Taxation – where income is subject to tax in both Thailand and the HKSAR, the DTA provides for relief to reduce or eliminate the double taxation. Hong Kong residents may use any Thai tax paid on income as a credit to offset their Hong Kong tax liabilities on the same income. However the tax credit may not exceed the Hong Kong tax on that income.

There are exchange of information provisions in the DTA. However any information provided to the Authorities in Thailand by the HKSAR Authorities under Article 25 of the DTA can only be used by the Thai Authorities and cannot be disclosed to any other jurisdiction without the prior approval of the HKSAR Authorities.

The DTA offers a number of tax savings as well as a greater degree of certainty for Hong Kong residents doing business in Thailand and will therefore be an important factor in considering investments in Thailand by Hong Kong residents.

Contact Information

Paul Chow
T +852 2218 3188
E paul.chow@gthk.com.hk

Gary James
T +852 2218 3137
E gary.james@gthk.com.hk

David Southwood
T +852 2218 3103
E david.southwood@gthk.com.hk

Brenda Cheung
T +852 2218 3136
E brenda.cheung@gthk.com.hk

Mary Ho
T +852 2218 3040
E mary.ho@gthk.com.hk

Daisy Ip
T +852 2218 3168
E daisy.ip@gthk.com.hk

Winnie Tsui
T +852 2218 3280
E winnie.wy.tsui@gthk.com.hk

About Tax notes
Tax notes are issued in summary form exclusively for the information of clients and staff of Grant Thornton and should not be used or relied upon as a substitute for detailed advice. Accordingly Grant Thornton accepts no responsibility for any loss that occurs to any party who acts on the information contained herein without further consultation with ourselves.

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