In an effort to stimulate investment and economic development in Southern Economic Zones (SEZs) of Thailand, the Royal Decree No. 783 (issued on June 5, 2024) and the accompanying Notification from the Director-General of the Thai Revenue Department (No. 446, dated July 24, 2024) introduce significant tax rate reductions for both corporate and personal income derived from business operations within designated SEZs. This initiative, which applies to certain provinces in Southern Thailand, seeks to incentivize business operations in these areas, including Narathiwat, Pattani, Yala, Satun, and certain districts of Songkhla.
The tax incentives, effective from January 1, 2024, through December 31, 2026, provide attractive conditions for companies and individuals conducting business within SEZs, allowing for reduced tax liabilities. In particular, companies and partnerships operating in SEZs benefit from reduced corporate income tax rates, while individuals operating businesses in SEZs enjoy reduced personal income tax rates. This overview offers a comprehensive analysis of the tax reductions under these regulations, delves into the methods and criteria for claiming these reductions, and provides insights into the broader economic context of these policies.
Corporate Income Tax Rate Reductions for Businesses in SEZs
The Royal Decree No. 783 grants corporate income tax relief for businesses operating in the SEZs, aimed at boosting industrial and service sectors in the underdeveloped southern provinces. Eligible companies and partnerships can benefit from a reduced corporate income tax rate of 3% of net profits. This rate reduction is a significant incentive for businesses involved in manufacturing, sales, or service provision within SEZs.
Key eligibility criteria include:
✓ The business must be conducted within an SEZ.
✓ The income eligible for the reduced rate must be derived from manufacturing, the sale of goods, or the provision of services within the SEZ.
✓ Companies or partnerships with income streams from both SEZ and non-SEZ operations must calculate net profits separately for each activity. This includes ensuring expenses are allocated proportionally to the SEZ business operations.
In cases where the expenses related to SEZ and non-SEZ business activities cannot be distinctly separated, they must be allocated proportionally based on the average income ratio between SEZ and non-SEZ activities. This prevents businesses from allocating excessive expenses to SEZ operations in order to reduce taxable profits outside the SEZ.
Documentation Requirements: Businesses must submit detailed working papers that clearly identify profit and loss statements for SEZ operations and non-SEZ operations separately. Although the taxpayer identification number remains the same, distinct profit and loss accounts for each business segment must be attached when filing tax returns.
Personal Income Tax Rate Reductions for Individuals in SEZs
In addition to corporate tax relief, Royal Decree No. 783 provides for a substantially reduced personal income tax rate of 0.1% for individuals operating businesses in SEZs. This is a final tax on assessable income, which exempts the individual from including this income in their annual tax return.
This tax reduction applies to income derived from the manufacturing or sale of goods, or from providing services within SEZs. Importantly, individuals availing of this reduced tax rate must not claim a refund or credit for the tax withheld, ensuring that the final tax rate remains at 0.1%.
For sales of immovable property located in SEZs, the withholding tax rate is similarly reduced to 0.1% of gross proceeds. This applies when the income from the sale is ordinarily subject to a higher withholding tax rate under the Thai Revenue Code. Individuals who have tax withheld at this reduced rate are not required to include the proceeds from the sale of immovable property in their annual personal income tax return, provided they do not seek a refund or credit for the withheld tax.
Tax Rate Reductions for Skilled Employees and Experts in SEZs
The Royal Decree No. 784, also issued on June 5, 2024, alongside Notification No. 447, extends tax benefits to skilled employees and experts working in SEZs. This includes a reduced withholding tax rate of 3% on assessable income for eligible employees or experts hired to work in SEZ operations during the period from January 1, 2024, to December 31, 2026.
Eligibility criteria for skilled employees include:
✓ A minimum educational qualification of a bachelor’s degree, Higher Vocational Certificate, Technical Vocational Certificate, or equivalent.
✓ Certification under the National Skill Standard Test Level 2, as stipulated in the Skill Development Promotion Act.
✓ A minimum of five years of relevant work experience, evidenced by employment certificates or other documentation.
Eligibility criteria for experts include:
✓ A minimum educational qualification of a bachelor’s degree or equivalent.
✓ At least eight years of relevant work experience, supported by documentation such as employment certificates.
Importantly, the income subject to the 3% withholding tax is excluded from the individual’s annual income tax return, provided there is no request for a refund or credit for the tax withheld. This policy aims to attract highly skilled professionals and experts to contribute to the economic growth and development of SEZs.
Corporate Income Tax Deductions for Investments in SEZs
The Royal Decree No. 784 further introduces an additional corporate income tax deduction for investments made in companies or partnerships operating in SEZs between January 1, 2024, and December 31, 2026.
Eligibility criteria for companies and partnerships seeking additional deductions include:
✓ The company or partnership must not have had an establishment in the SEZ for at least one year prior to the investment.
✓ Shares or partnership interests in SEZ businesses must not be sold or transferred unless there are justifiable reasons, such as a capital increase.
These deductions are designed to encourage new investment in SEZs, promoting both local development and increased employment opportunities.
Economic and Policy Context of SEZ Tax Reductions
The introduction of tax incentives for SEZs in Southern Thailand aligns with the broader economic objectives of the Thai government to stimulate growth in economically disadvantaged regions. The southern provinces, particularly Narathiwat, Pattani, and Yala, have historically faced economic challenges, compounded by ongoing social unrest.
By offering reduced tax rates and additional deductions for businesses and individuals operating in these SEZs, the government hopes to attract investment that can spur industrialization, job creation, and infrastructure development in these areas. Moreover, the focus on high-skilled labor through tax reductions for skilled employees and experts emphasizes the importance of developing human capital alongside physical capital investments in SEZs.
Compliance and Considerations for Businesses and Individuals
While these tax reductions offer significant financial advantages, businesses and individuals must navigate complex compliance requirements to ensure they meet eligibility criteria and maximize tax benefits. Key considerations include:
✓ Accurate Documentation: Businesses must maintain accurate and detailed records, especially when operating both inside and outside SEZs. Profit and loss statements, along with working papers, should clearly distinguish between SEZ and non-SEZ activities.
✓ Educational and Experience Requirements for Employees: Skilled employees and experts seeking to benefit from the reduced withholding tax rate must ensure they meet the strict educational and experience requirements, and must retain the necessary documentation to support their claims.
✓ Investment Retention: Companies or partnerships seeking additional tax deductions for investments in SEZs must be mindful of restrictions on selling or transferring shares or partnership interests. Exemptions may apply, but justifiable reasons must be provided to avoid losing the deduction.
Commentary
The tax rate reductions introduced by Royal Decrees No. 783 and No. 784 represent a concerted effort by the Thai government to attract investment, foster industrial development, and create jobs in Southern Thailand’s SEZs. These tax incentives, which include reduced corporate and personal income tax rates, additional deductions for SEZ investments, and reduced withholding tax for skilled employees and experts, provide significant opportunities for businesses and individuals looking to establish or expand operations in these areas.
However, navigating the criteria, methods, and compliance requirements necessitates a thorough understanding of Thai tax law and the specific regulations governing SEZs. Businesses and individuals must ensure that they maintain proper documentation, meet eligibility requirements, and fulfill their obligations under Thai law to fully benefit from these tax incentives.
For companies considering expansion into Thailand’s SEZs, partnering with legal and tax professionals experienced in SEZ regulations can provide the guidance needed to take full advantage of the available tax incentives while remaining compliant with the regulatory framework.