New Thai-Taiwan treat delivers unexpected tax benefits

What is a DTA?

A DTA is an agreement between countries for the purposes of reducing double taxation that can occur when a company or individual resident in one territory decides to invest in due business |in another territory and that |business generates profits subject to taxation in both territories. Double taxation can occur when income is derived from activities or investment in one territory by a resident of another territory, thus creating a conflict between the two countries as both will normally assert a right to tax the same income.

Such conflict, if not addressed, will make such investments uneconomical due to the additional taxes incurred and thereby discourage cross-border investment. Thus, in order to remove the disincentive to invest, many countries enter into treaties or agreements to help mitigate or in some cases completely eliminate double taxation.

The types of income normally covered by most DTA’s include among others, dividend income, interest income, royalties and capital gains.

Each of these types of income is normally subject to taxation by both the territory that serves as the source of the income and the territory of the investor’s residence.

A DTA normally reduces or eliminates double taxation through a combination of reduced withholding against the income being paid out of the source territory and the granting of a credit against taxes in the territory of residence.

The Thai-Taiwan DTA follows this typical pattern, in that it provides that the source territory should forgo some of the taxes it has a right to collect by reducing the withholding rate on payments of these types of income to foreign residents, while at the same time allowing the investor a credit against any tax liability imposed by the territory of residence. The general effect of the DTA is to make cross-border investment tax neutral to the investor, thereby removing what could potentially be a fundamental economic barrier to investment.

Special dividends |withholding rate

As with most DTAs, the taxation of dividends paid from one jurisdiction to a resident of another jurisdiction is covered by Article 10 of the Thai-Taiwan DTA.

This |article limits the amount of withholding tax a source jurisdiction can collect on dividends being |paid out of the source jurisdiction. Under this DTA, there is, however, an unusually low rate of with-holding on dividends paid by a company to a foreign resident shareholder holding at least |25 per cent of the company’s shares.

While most Thai DTAs limit this amount of withholding to 10 per cent, the Thai-Taiwan DTA limits withholding on such dividends to 5 per cent.

This unusually low rate on |dividend withholding taxes has |an unexpected spill-over effect |and raises some interesting questions.

In a protocol to the DTA which Thailand has signed with Mauritius, there is a special provision that asserts that any new agreement Thailand makes where the withholding rate on dividends is less than that provided for in the Thai-Mauritius DTA, this lower rate should be applied in cases where dividends are paid by a Thai resident company to a Mauritius resident owning the shares of the Thai company paying the dividends.

This unique provision makes foreign investment into Thailand via Mauritius an attractive alternative to other jurisdictions.

A similar provision also appears in a protocol to the Thai-United Arab Emirates (UAE) DTA and thus, some may assert that this will also make investment from the UAE more attractive by reducing the withholding rate on dividends paid from a Thai resident company to a UAE shareholder subject to the 5-per-cent rate.

But a closer reading of this provision demonstrates that the application of the reduced 5-per-cent rate on dividends paid from Thailand to a UAE shareholder could potentially be problematic. The provision of the protocol |that appears to provide for the application of the rate under the Thai-Taiwan DTA is limited to lower dividend rates under DTAs that Thailand signs with other "States".

As Taiwan is referred to as a "territory" in the Thai-Taiwan DTA, the Thai Revenue could argue that the 5 per cent dividend withholding tax rate, while applicable in the Mauritius context, cannot be applied to dividends paid to UAE shareholders of a Thai company as the DTA with Taiwan is an agreement with a territory and not necessarily a "State".

As can be seen, the application of a DTA to certain investments can significantly reduce or even eliminate the problem of double taxation but care should be taken in determining whether such benefits actually apply to a particular investment.

This information is intended as a general guide only. Tax law is complex and professional advice should be taken before acting on the information provided.