Legal Update - Development of Royalties Tax Interpretation in Thailand
09 November 2015

It is has been a long time since the Supreme Court ruled in 1988 to clarify the interpretation of ‘royalties’ under Thai tax laws. It is different from the ‘royalties’ specifically defined under the tax treaties entered into between Thailand and 58 other countries.


Until now, there has been no specific definition of royalties for income tax purposes under domestic Thai tax laws and no subsequent interpretation on its definition. Under Thai income tax laws, royalties is a type of income from all of the eight types of income. Royalties under such type of income include “value of goodwill, value of copyright or other rights, annuity or income in the same nature deriving from a will, other juristic act or court decision”. The Supreme Court ruled in the past to explain that ‘other rights’ shall be the rights in the same nature of goodwill and copyright and, therefore, leasehold right is not regarded as other rights in terms of royalties.


From this interpretation, development of tax interpretation on royalties in Thailand is in line with the remuneration of intellectual properties, and the Thai Revenue Department (“RD”) has adopted this concept in its practices until now. In practice, the RD considered the royalties from the substances of transactions and activities between the contractual parties in addition to the obligations under the relevant contracts.


At the RD level, we can learn from its certain private tax rulings as to whether or not it shall be regarded as royalties.


For example, in 2004, for payments for standard computer programs (non-customised) and sales in shrink-wrapped packaging, including manuals and CDs; ownership of a program does not transfer to the distributor, while the end-customer has the right to use the program under the end-user licence but has no right to reproduce. Therefore, local sales of shrink-wrapped software in Thailand are required to deduct tax on the payment made by the purchaser at the rate of 3%. This practice is not concurrent with the practices adopted by other countries, e.g. Singapore and South Korea.


In addition, the RD ruled in the same year that non-royalty transactions which embedded software are a part of the system to operate the storage hardware without separation of software and hardware prices. In this case, no separation of purchase orders (contracts) and invoices shall be involved in the transaction. Accordingly, this transaction shall not be regarded as payment of royalties. With this ruling, trigger points are the separation of price and documentation and, therefore, it is a potential tax planning issue for the offshore seller.


Subsequently, the RD ruled in 2006 that debt release of unpaid royalties on trademark licensing made by an offshore party to a Thai corporate debtor is not subject to withholding tax under Thai tax laws. The amount of debt release shall be taxable income for the Thai debtor; however, the Thai debtor is required to self-assess VAT on debt release of unpaid royalties. This ruling is a good example to understand the different positions held by the RD between withholding tax and VAT implications. Please note that the tax point for withholding tax and self-assessed VAT is the payment of a fee from Thailand to an offshore party.


It is arguable that VAT should not be self-assessed due to there being no payment on the debt release made to offshore party.


In other cases, the RD ruled in its many tax rulings that payments for commissioning, installation, test-runs, staff training, localisation, customisation, technical assistance, program and technology updating, hot-line and help-desk services, software rectification and maintenance service in relation to the use of computer software shall be considered the payment of royalties. In addition, the RD considered that any activities which are related to confidential information, secret formula, know-how, intellectual property, market channel(s), customer databases and proprietary rights shall be deemed as royalty transactions.


Again, It is arguable that the above tax position of the RD may not be correct in view of the Supreme Court if the structure of transactions is rearranged and the taxpayer pursues its case into the court level.


In relation to VAT, the RD considered that the above royalty transactions are a provision of service and are thus subject to VAT at the rate of 7%. However, some elements of royalties transactions are in the nature of hire of work (e.g. installation, staff training, maintenance), while some transactions are not (e.g. licensing). In Thailand, a hire of work contract is subject to stamp duty at the rate of 0.1% but a licensing contract is not subject to stamp duty in the view of the RD. Therefore, separation of related royalty contracts should be considered for tax efficiency purposes rather than the use of mixed contracts in the royalty transactions.


Precedent Cases of the Interpretation of Royalties Tax


Scrutiny on cross-border transactions by the RD, particularly related to withholding tax on the payment of royalties, has recently increased. It is worthwhile to understand the major tax cases related to royalties ruled by decision of the court’s in order to foresee future decisions and therefore mitigate future tax risks.


The RD interpretations and Supreme Court decisions in relation to royalty income have significant impacts on the franchise market. For example, as a result of the landslide case in the Pizza Hut case, the franchising parties should review their franchise contract in order to restructure the franchising transactions and amend the terms and condition of franchise in order to avoid further tax investigation on future royalties on cross-border transactions. However, current amendments to franchise agreements cannot adjust the royalties paid in the past and, therefore, a risk of a tax investigation still exists.


It is important for taxpayers to understand the development of this interpretation in order to avoid any tax risk that may arise in the future.


The Supreme Court ruled in the following major tax cases relating to royalties:


Supreme Court Decisions


Facts: issuance of company shares in exchange for receiving the right to use the patent in the manufacturing of tyres.

Held: issuance of shares deemed to be payment of royalties.


Facts: design of the plant and layout as well as construction of the plastic manufacturing factory, including installation of equipment without provision of technology.

Held: activities not regarded to be those that would generate royalties.


Facts: lump sum fee that consisted of royalties and other consulting fees. Tax assessment for the whole amount to be treated as royalties.

Held: consulting fees not deemed as royalty income and tax assessment not accepted by the Supreme Court.


Facts: provision of right to use the information and technology in petroleum exploration with the restriction not to disclose such technology.

Held: activity considered to generate royalty income.


Facts (Nestle case): remuneration for the right to produce coffee using a specific formula, as well as know-how with advice on the processing of production, and the condition to retain the confidential information and return all relevant documents after expiration of the agreement.

Held: remuneration regarded as payment of royalties.


Facts (Carnation case): engineering and technical assistance agreement relating to the trademark licence agreement with a condition to maintain high quality of dairy cream and advising on the process of production. The advice of technical assistance must be kept confidential and all advising documents returned to the service provider after termination of the contract.

Held: remuneration for technical assistance agreement considered as royalties.


Facts: marketing service agreement to provide advice, assist with the general administration and negotiate commercial contracts, select distributors, promote, procure and advertise the sale of products in Thailand. Marketing materials under consultation become the ownership of the service recipient. No provision of sole distributorship to use the brand or trademark for the sale of products. No provision of special information and experience which is not restricted to be disclosed to the public.

Held: remuneration under this agreement not deemed as royalties.


Facts: remuneration for the marketing and commercial channel(s), including database of customers (names, addressed, prices, terms of business).

Held: remuneration regarded as royalties as the information relates to commercial experience.


Facts (Pizza Hut case): under the Franchise Agreement, the Thai franchisee is required to follow the control and sole discretion of the foreign franchisor in relation to promotion and advertising. The franchisee has no independence to do the advertising in terms of form and content.  The franchisee is responsible for the budget of the promotion and advertising in Thailand but does not pay it to the franchisor.

Held: while the budget is not the fee derivable directly by the franchisor, it does benefit the franchisor economically not to pay this budget to promote its franchise in Thailand. The promoting budget is required to be paid at a certain rate of gross sales in exchange for the provision of franchise and, therefore, it shall be deemed that the franchisor derives this assessable income as a part of the franchising fee and be regarded as royalties.


Facts (Philips Electric case): marketing fee paid by Thai subsidiary company to its Dutch parent company is regarded as ‘business profit’ and eligible for tax exemption under the double tax treaty between Thailand and the Netherlands. The RD viewed that the marketing fee is regarded as ‘royalties’ on the basis that the Marketing Service Agreement: (1) required confidentiality conditions; (2) trade secrets were used to provide the service; and (3) the service provider is a veteran marketing service with almost 100 years of service.

Held: marketing fee is regarded as royalties.


Facts (Esso case): cost allocation from the US parent company to the Thai subsidiary company is not subject to withholding tax under the Thai tax laws and the double tax agreement between Thailand and the US. The RD challenged that the source of cost allocation is a payment for the licence fee of SAP Accounting Software and is therefore subject to withholding tax.

Held: cost allocation in connection with the licence fee is regarded as royalties and thus subject to withholding tax.


Facts (Thai Tank Terminal case): remuneration for the management services provided by the Dutch parent company to its Thai subsidiary company with a high percentage and low percentage of royalty payments for the licence of the parent company. Management fee is deemed as royalty payment in view of the RD.

Held: management fee is not regarded as royalties as the management service was paid to reflect the real transaction of management activities provided by the parent company.

As above, we can see from the development of royalties tax interpretation that the Supreme Court decisions rely on ‘substance over form’, with the following key factors:


1.   Provision of specific information arisen from the experience;

2.   Provision of the right to use the intellectual property or trade secret(s); and

3.   Confidentiality conditions.


In practice, there are many tax rulings issued by the RD on cross-border royalties but, unfortunately, many cases have not been brought to the high court to conclude the final interpretation as to the legal or non legal status of royalties.


Care should be taken for cross-border transactions to ensure that you are in compliance with the relevant tax laws and practices in Thailand.






SCL Law Group