Thailand currently imposes a 5% withholding tax on all rental payments, except where the rental payment is in respect of a finance lease, in which case, no withholding tax is imposed.

On 10 May 2016, the Revenue Department issued new law amending the withholding tax rules on finance lease payments.

With effect from 1 June 2016, all rental payments, including in respect of a finance lease, will be subject to 5% withholding tax. Therefore, regardless of whether a lease arrangement is classified as a finance lease or an operating lease for commercial, legal and accounting purposes, the rental payment will be subject to Thai withholding tax. This WHT will be applicable on the entire amount of the lease payment and not just on the notional interest component.

The change in the withholding tax law does not impact on the corporate income tax treatment of finance leases in Thailand. Whilst the accounting treatment may differ depending on the classification of the lease, for corporate income tax purposes, there is no distinction between an operating lease and a finance lease. The lessee will claim the rental payments as a deduction, whereas the lessor will include the rental as income in computing their respective net taxable profits. The lessor can claim the depreciation on the leased asset for tax purposes.

While this withholding tax is a prepayment of the annual corporate income tax liability and is intended to serve as a tax collection mechanism, the new law may have several ramifications.  One such ramification is that it will have an unanticipated cash flow impact on the current leasing arrangements with corporate customers. Another ramification is that with the effective date being less than two weeks ago, it does not give companies conducting a leasing business sufficient time to put systems in place to administer the changes in the tax law.  In addition, as the corporate tax rate has been permanently reduced to 20%, the 5% withholding tax rate presumes a profit margin of at least 25%, or else the taxpayer will find themselves in a tax refund position.

Should you require any specific advice on the above changes, please contact us for assistance.