As a matter of international tax principle, a country may tax the business profits of a foreign enterprise only when that enterprise has a sufficient degree of connection with the country. The test used to measure that degree of connection is the “permanent establishment,” usually abbreviated to PE.
The PE concept lies at the heart of every double tax agreement, and it is a point that multinational businesses often overlook until an unexpected tax liability arises. This guide explains what a PE is, how many types there are, and why it matters for the tax position in Thailand.
Contents
What Is a Permanent Establishment?
A permanent establishment (PE) is the test under a double tax agreement1 that determines whether a foreign enterprise has a sufficient connection with a country for that country to have the right to tax the enterprise’s business profits. It generally means a “fixed place of business” through which the enterprise carries on all or part of its business.
The key principle is that, under a double tax agreement, the source country may tax the business profits of a foreign enterprise only if the enterprise has a PE in that country. Without a PE, those business profits are taxable only in the enterprise’s country of residence. The PE concept is therefore the “dividing line” that marks when Thailand has the right to tax a foreign business.
The 4 Types of Permanent Establishment
Although the details vary from treaty to treaty, a PE generally takes one of four forms.
| Type | In brief |
|---|---|
| Fixed place of business (Fixed Place PE) | A fixed place through which the business is carried on, such as an office, a branch, a factory, a warehouse or a place of management |
| Construction project (Construction PE) | A building, installation or assembly project carried out in the country for longer than the period specified in the treaty |
| Provision of services (Service PE) | Services performed in the country by employees or other personnel for more than the number of days specified in the treaty within a given period |
| Dependent agent (Agency PE) | A dependent agent who has authority to conclude contracts in the name of the enterprise and habitually exercises that authority in the country |
The specific periods and conditions, such as the number of months for a construction project or the number of days for services, depend on the treaty concerned, so the treaty between Thailand and the enterprise’s home country must be examined specifically. Examples of the service day-count thresholds in Thailand’s treaties with the United States, Singapore, Japan and Hong Kong are given in Service PE: day-count thresholds under double tax agreements (Thai)
Tax Consequences of Having a PE in Thailand
Once a foreign enterprise is treated as having a permanent establishment in Thailand, the profits attributable to that PE, and only those profits, fall within the scope of Thai corporate income tax. Under domestic law, the Revenue Code provides that a company or juristic partnership incorporated under foreign laws and carrying on business in Thailand must pay tax on the net profits arising from the business carried on in Thailand2
As a result, the foreign enterprise must register, file returns and pay tax on its Thai operations, and must keep accounts and documentation that properly support the attribution of profits to the PE. This work calls for an understanding of both the treaty and domestic law.
Common Examples of an Unintended PE
In practice, many foreign businesses create a PE in Thailand without intending to, for example:
- Sending employees to provide services or oversee a project in Thailand for longer than the threshold set by the treaty
- Having an employee or agent in Thailand who habitually negotiates and concludes contracts in the name of the parent company
- Having an office or premises in Thailand whose functions go beyond preparatory or auxiliary activities
- A construction or installation project whose work in Thailand exceeds the prescribed period
Each of these situations can lead to an assessment for back taxes on the related profits, together with penalties and surcharges. Assessing PE risk before activities in Thailand begin is therefore essential.
Managing PE Risk
Managing permanent establishment risk begins with an analysis of the facts of the activities to be carried on in Thailand against the tests in the applicable treaty, to assess whether those activities will give rise to a PE and, if so, how the operating structure, contracting arrangements and allocation of functions should be designed to comply with the law and reduce unnecessary risk. This is specialized work that should be carried out with the guidance of an international tax specialist.
Key points
- A permanent establishment (PE) is the treaty test that determines when the source country has the right to tax the business profits of a foreign enterprise
- There are generally 4 types: fixed place, construction, service and agency PE
- Once there is a PE in Thailand, the profits attributable to it are subject to Thai corporate income tax
- Foreign businesses often create a PE unintentionally by sending employees to Thailand or having an agent conclude contracts there
- Assessing PE risk in advance helps prevent an assessment for back taxes
Frequently Asked Questions
What is a permanent establishment (PE)?
A permanent establishment (PE) is the test under a double tax agreement that determines whether a foreign enterprise has a sufficient connection with a country for that country to have the right to tax the enterprise’s business profits. It generally means a fixed place of business through which the enterprise carries on all or part of its business. Without a PE, the business profits are taxable only in the enterprise’s country of residence.
How many types of PE are there?
There are generally 4 forms: a fixed place of business (fixed place PE), a construction site (construction PE), the provision of services (service PE), and a dependent agent who habitually concludes contracts in the name of the enterprise (agency PE). The periods and conditions for each form are set by the double tax agreement between Thailand and the enterprise’s home country.
What happens if a foreign business has a PE in Thailand?
The profits attributable to the PE in Thailand, and only those profits, are subject to Thai corporate income tax under the double tax agreement and Section 66, paragraph two, of the Revenue Code. The enterprise must file returns, pay tax and keep accounts showing the profits of its business in Thailand. If net profits cannot be calculated, the assessment method under Section 71 (1) applies mutatis mutandis.
When does a foreign company have to pay tax in Thailand?
Section 66 of the Revenue Code requires a company incorporated under foreign laws and carrying on business in Thailand to pay tax on the net profits from, or related to, the business carried on in Thailand, and Section 76 bis deems a foreign company that has an employee, an agent or a go-between in Thailand, and as a result receives income or profits in Thailand, to be carrying on business in Thailand. If the company’s home country has a double tax agreement with Thailand, Thailand may tax its business profits only when the company has a permanent establishment in Thailand. When a branch remits its after-tax profits to its head office, a further 10 percent tax on the disposal of profits (profit remittance tax) applies under Section 70 bis, as explained in What is Section 70 bis? (Thai)