The existing double taxation treaty (“DTA”) between India and Thailand was successfully renegotiated and agreed to by both contracting states and will come into force in January 2017. The key highlights include a reduction of withholding tax on dividends, interest and royalties. Article 10 reduces the dividend withholding tax to 10%, where previously it had been 15% or 20%, depending on the circumstances. Because Thailand’s domestic dividend withholding tax rate is only 10%, the reduction in the DTA makes no practical difference. The new DTA is more favorable in its reduction of withholding tax on interest and royalty payments. Article 11 of the new DTA reduces withholding tax on interest to 10% in all cases except where the interest is beneficially owned by the government, a political subdivision, local authority, the Reserve Bank of India, the Export Import Bank of India, the Bank of Thailand, the Export Import Bank of Thailand or any other institution as may be agreed, in which case the rate is 0%. Because Thailand’s domestic interest withholding tax rate is 15% in the case of Indian non-financial institutions, the reduction in the DTA will be more favorable. In addition, withholding tax on royalties has been reduced from 15% to 10%. This should be beneficial to many software companies located in India which provide software-related services which are subject to Thai withholding tax prior to remission to India.

 

Unfavorable features compared to the existing DTA include a tax on capital gains.  Under the existing DTA, the capital gains is taxable in the country of the transferor.  Article 13 of the new DTA has been updated to allow capital gains on disposal of shares in a property rich company to be taxed in the state in which the property is located.  In other words, a capital gain derived by an Indian tax resident from the disposal of shares in a company, the property of which consists predominantly of immovable property situated in Thailand, whether directly or indirectly, thereby considered property rich, will be taxed in Thailand. In addition, under this new DTA, share disposals by Thai companies that are not property rich will also be taxable in Thailand.

 

It should be noted that the benefits of the new DTA in respect of interest and royalties will be limited to the “beneficial owner” of such interest or royalties. While the meaning of “beneficial ownership” is not defined in the new DTA or prevailing Thai tax law, a “beneficial owner” generally means a person who is entitled to the benefits of the income, even if the person does not hold the legal title to, or is the recipient of such income.   

 

Further noted that India requires a party seeking to receive DTA benefits to obtain an Indian Permanent Account Number (“PAN“). In this regard, if a Thai company applies for tax relief under the DTA between Thailand and India to exempt withholding tax in India, said Thai company must first obtain a PAN from the Indian Income-Tax Department.