Last month, the government issued Royal Decree No. 666 B.E. 2561 (2018) (Royal Decree No. 666) introducing additional conditions that need to be met by International Headquarters (IHQ) in order to apply corporate income tax reduction or exemption on royalty income.

This came a month after the government announced suspension of the IHQ regime, along with two other corporate tax regimes, Regional Operating Headquarter (ROH) and International Trade Center (ITC).  These regimes are no longer available to new applicants. Existing beneficiaries of the regimes can continue to operate under these schemes.

Prior to Royal Decree No. 666, beneficiaries of the IHQ regime were entitled (up to a certain limit) to a reduced corporate income tax rate of 10% on royalty income received from associated companies in Thailand, and corporate income tax exemption on royalty income received from associated companies overseas. Royal Decree No. 666 now requires that, in order to qualify for the tax rate reduction or exemption, IHQ’s royalty income must be derived from Research and Development (R&D) activities that have been performed in Thailand only. The eligible R&D activities can be carried out by either IHQ itself or by an R&D service provider in Thailand that meets certain conditions prescribed by the Director-General (not yet available).

Royal Decree No. 666 came into effect on 23 November 2018 with the new requirement to be applicable to royalty income earned by IHQ from 1 July 2018.

This legislative amendment appears to be aiming to address concern expressed by the OECD and EU about a number of Thai tax regimes, including the IHQ regime, which Thailand had committed to amend. In particular, the OECD’s Forum on Harmful Tax Practices had criticized tax regimes that provide preferential tax treatment for royalty income without requiring that income to be derived from substantial R&D activities undertaken in the same country. The OECD’s comments were made as part of Action 5 (Harmful Tax Practices) of its Inclusive Framework on Base Erosion and Profit Shifting (BEPS). Thailand joined the Inclusive Framework in 2017, therefore committing to follow the minimum BEPS standards, including Action 5.

Following the suspension of the ROH, IHQ and ITC regimes, the Thai Revenue Department (TRD) announced that a new scheme, International Business Centre (IBC), will soon be introduced to replace the abolished regimes. Whilst the TRD confirmed that existing beneficiaries of the ROH, IHQ and ITC regimes will be able to continue benefiting from the associated incentives in normal circumstances until the expiry date, the issuance of Royal Decree No. 666 has demonstrated that amendments to these regimes may be coming.

Earlier this month, the Board of Investment (BOI) made an announcement that it will also suspend the existing ROH, IHQ and ITC incentive schemes and introduce a new scheme corresponding to the TRD’s IBC.