Setting up a branch office in Thailand allows a foreign company to conduct business activities in the country while maintaining its legal status as an extension of the parent company abroad. Unlike a Thai subsidiary, a branch office is fully dependent on the foreign parent entity. It must comply with the Foreign Business Act (FBA) and other legal requirements, particularly in sectors where foreign ownership and control are restricted.
1. Legal Framework for Branch Offices
Under Thailand’s Foreign Business Act (FBA) B.E. 2542 (1999), foreign entities operating branch offices must adhere to various regulations depending on the type of business activities they wish to pursue. A branch office can engage in certain business activities that are otherwise restricted to foreign investors, provided it secures a Foreign Business License (FBL). However, not all activities require an FBL; this depends on the nature of the business and the sector.
Key distinctions between a branch office and other forms of foreign investment:
- A branch office cannot issue shares or raise capital in Thailand.
- It is considered a non-resident for tax purposes, meaning it pays taxes only on income derived from Thailand.
2. Permissible Activities
The branch office is allowed to carry out activities similar to those of its parent company, provided they fall within the scope of its FBL. Common activities for branch offices include:
- Service provision: Consulting, professional services, and engineering.
- Research and development: For technology, pharmaceuticals, and other industries.
- Export and import of goods: However, selling goods to the domestic market may require additional licenses.
Certain sectors remain restricted, especially those listed under List 1 and List 2 of the Foreign Business Act, such as agriculture and media.
3. Capital Requirements
To set up a branch office in Thailand, the foreign parent company must commit a minimum capital of THB 3 million. This capital must be brought into Thailand according to the following schedule:
- 25% upon starting business operations.
- The remaining capital within three years.
This capital is required to ensure the branch office can sustain its operations and meet its financial obligations.
4. Application Process
The process for establishing a branch office involves several steps:
a) Foreign Business License Application
Before operating in Thailand, the branch office must apply for a Foreign Business License through the Department of Business Development (DBD) under the Ministry of Commerce. The application requires:
- The parent company’s registration documents.
- A detailed business plan and a description of the activities the branch will undertake.
- Financial records showing the parent company’s stability.
b) Tax Registration
Once the branch office is established, it must register with the Revenue Department for a tax ID. The branch office is subject to corporate income tax, currently set at 20% of its profits derived from Thai sources. It must also comply with VAT registration if applicable.
c) Hiring of Local Employees
While there is no formal requirement for the number of Thai employees in a branch office, Thai labor law encourages foreign businesses to employ Thai nationals. Hiring local employees can also help the branch office avoid unnecessary scrutiny.
5. Taxation and Accounting Requirements
The taxation of a branch office differs from that of a Thai subsidiary or representative office. Key considerations include:
a) Corporate Income Tax
A branch office is only taxed on income derived from activities in Thailand. Profits earned outside the country are not taxable in Thailand.
b) Withholding Tax
Payments made by the branch office to the foreign parent company may be subject to withholding tax, typically around 15% for certain services, unless a double tax agreement (DTA) applies. Thailand has tax treaties with several countries, which may reduce or eliminate withholding tax rates.
c) Annual Audit
Branch offices are required to submit annual audited financial statements to the Thai authorities. The statements must be prepared by a licensed Thai accountant and audited by a qualified auditor.
6. Branch Office vs. Other Business Entities
a) Branch Office vs. Thai Subsidiary
- A branch office is considered an extension of the foreign parent company, while a Thai subsidiary is a separate legal entity.
- The parent company bears full legal liability for the branch office’s activities in Thailand, unlike a subsidiary where liability is limited to the subsidiary itself.
- Subsidiaries can own land and raise capital in Thailand, which branch offices cannot.
b) Branch Office vs. Representative Office
A representative office is limited to performing non-revenue-generating activities such as market research or sourcing products. In contrast, a branch office can engage in profit-making activities.
7. Compliance and Ongoing Responsibilities
Once the branch office is established, it must continue to comply with several legal and regulatory requirements:
- Annual audits: Financial statements must be submitted to the Ministry of Commerce and the Revenue Department.
- Foreign Business License renewal: While the FBL typically does not need to be renewed annually, the business may be subject to periodic reviews.
- Work permits: Foreign staff employed by the branch office must have proper work permits. There are usually ratios that need to be maintained between foreign and Thai employees when applying for work permits.
Conclusion
Setting up a branch office in Thailand is an effective way for foreign companies to enter the Thai market while maintaining direct control over operations. While the process requires obtaining a Foreign Business License and adhering to capital requirements, a branch office allows for profit-making activities and greater business flexibility compared to a representative office. However, businesses must carefully consider their long-term strategy and compliance obligations, including taxation, employment, and corporate governance, to ensure a smooth operation in Thailand’s dynamic business environment.