Mauritius firms used to hold outbound investments from Thailand
Thai companies are exempt from corporate income tax on foreign dividend income if the income has been paid out of a jurisdiction whose headline tax rate is at least 15 per cent and the income has been "subject to tax" in that country.
This exemption, while generous, has limitations. In essence it requires the Thai investor company to hold a direct investment in a company that pays tax (of at least 15 per cent) or pays dividends that are subject to withholding tax (of at least 15 per cent).
Such direct investment may not always be practical or even possible. For example, it may be necessary for the Thai investor to hold the investment through a holding company in the foreign jurisdiction. This foreign holding company may receive only tax-free dividend income and will not, therefore, have income “subject to tax”. As the exemption rules in Thailand do not “look through” the foreign holding company to the underlying (taxpaying) operating companies, the Thai investor is not entitled to the exemption.
Investors may use offshore holding companies for multiple commercial reasons: to consolidate investments, as part of a joint-venture company, for ease of exit and/or to reduce foreign taxation. If these offshore holding companies do not pay tax on dividend income received, the Thai investor is not entitled to the exemption.
As a result of these limitations, Mauritius has been the holding-company jurisdiction of choice for Thai multinationals seeking to make overseas investments, because of the synergy between Thai and Mauritius corporate-income-tax regimes.
A Mauritius company (“Global Business Company 1”) is subject to 15-per-cent corporate income tax on all foreign dividend and interest income, but is able to take a tax credit for all foreign taxes paid on the income it has received. This foreign tax credit covers both withholding and corporate income tax paid by all entities that are directly and indirectly held by the taxpayer.
Consequently, foreign income repatriated to Thailand via Mauritius should be tax-exempt in Thailand, since it has been “subject to tax” in Mauritius (at 15 per cent). However, because of the tax credits granted, no tax may actually be paid in Mauritius. The Mauritius holding company acts as a place of consolidation of income and tax credits prior to repatriation to Thailand.
Mauritian tax regulations have an additional twist: If the taxpayer does not have the appropriate documentation to claim foreign tax credits, a “deemed tax credit” is available, at 80 per cent of the taxes due on foreign dividend and interest income. This is a tax credit of 12 per cent and, therefore, the Mauritian company pays a maximum tax of 3 per cent on its foreign dividend and interest income.
This deemed tax credit is attractive to multinationals as it eliminates the complex paperwork involved when seeking a credit for foreign taxes actually paid. It should also enable low-tax income streams earned by subsidiaries to be repatriated to Thailand as tax-free dividends, after paying tax at an effective rate of 3 per cent in Mauritius.
This general understanding of the interaction between the tax systems in Thailand and Mauritius has been upset by a recent ruling by the Thai Revenue Department.
The department has opined that dividends paid out of income that has benefited from the deemed tax credit in Mauritius will not qualify for foreign dividend exemption in Thailand. The department’s argument is that the tax credit given (by Mauritius) does not represent tax actually paid in any jurisdiction.
It is interesting that the Revenue Department has, in taxing the foreign dividend, “looked through” the Mauritian holding company to the source and attributes of its dividend income. Would it similarly “look through” and grant the benefit of foreign dividend exemption to a tax-exempt holding company that distributes previously taxed profits from an operating subsidiary?
The ruling appears to impose a condition on granting foreign dividend exemption that is not stated in the law (Royal Decree 442). The Supreme Court has ruled in another case that the Revenue Department is not permitted to act in this manner. Accordingly, it remains to be seen if the position taken by the department is actually sustainable.
Meanwhile, taxpayers may expect challenges on foreign-dividend exemption where the deemed credit mechanism is used.
We would recommend that any immediate plans to repatriate such income to Thailand should be reviewed. If necessary, alternative mechanisms for cash repatriation should be used until this issue is settled.
We also note that the Revenue Department has for some time now been considering amendments of the rules for foreign-dividend exemption. These amendments may include “look through” provisions. However, until any new legislation is passed, investors should continue to explore all options for holding investments outside Thailand.
One new option available is the International Headquarters regime, as foreign dividends of an IHQ may be exempt from Thai taxation without the need to rely on the “subject to tax” test.
Paul Stitt, PWC Partner, contributed this article
