Board of Investment: Cross-border tax planning
Tax incentives provided by the Board of Investment in Thailand can get lost if the corporate and group structure is not tax efficient. To trust on the international “no taxation on foreign dividends”-principle is false and deceptive. In many tax jurisdictions the headquarters of a BOI promoted Thai affiliate is unaware of the fact that hidden tax liabilities exist and even tax crime risks are possible, if a sophisticated cross-border tax planning had been forgotten or neglected.
Example Germany: Generally 95% of the dividend payments by a Thai Co., Ltd. to its German corporate shareholder (AG, GmbH) are generally exempted from German corporate income taxation (Section 8b (1) and (5) KStG). Therefore, roughly calculated, German holding companies are effectively taxed with approximately 2% on dividends received from Thailand.
However, Section 10 para 2 sentence 3 German Foreign Tax Act restricts the affiliation privilege in case the foreign dividends are subject to a low taxation. The qualification as “low” does not depend on the ordinary Thai corporate tax rates, but has to be calculated on a case-by-case basis. Thai dividends, fully tax exempted under BOI privileges obviously qualify as “low taxed”. Zero is low under each and every viewpoint. Therefore, these dividend payments are subject to full corporate income taxes at the level of the German holding company and all the BOI tax privileges are overcompensated by higher taxes in Germany.
This section of the Foreign Tax Act is applicable under certain conditions for German controlled foreign companies (CFC), which can’t be discussed here in all details. Only “bad income” is caught by the CFC rules. Good income results from good activities. The general rule is that all low-taxed income is bad. By way of an exception to this rule, the law specifically designates certain types of activities as a good activity. A good activity turns low-taxed income into good income. There are exceptions of this exception as well. (An official English translation of the German Foreign Tax Act is not available.)
It should be noted that Section 10 para 1 of the German Thai tax treaty gives Germany unlimited taxation rights for Thai dividends. Any incorrect declaration of zero taxed foreign dividends and non-compliance with complex reporting requirements under, above all, the German General tax Act will typically result in a tax fraud for the German shareholder and a high tax penalty within the ten-year statutory period of limitation under German laws.