How to set up a Tax Free Company in Paradise
2016 Update: The Thailand Board of Investment (BOI) still offers a 0% corporate income tax for up to eight years. This article shows how to structure this as a US person. More information on starting a business in Thailand can be found on SiamStartup.com.
Ever dream of having your business legally accrue profits offshore as you hang out in paradise? Thailand is a great country to plant a residency flag in, as doing this will get you a 0% effective personal tax rate and a tax free company in paradise.
American caveat: though Americans have a worldwide tax obligation, taxes here can get as low as 20% (0% corporate and 20% personal), through the use of qualified dividends, and with the help and advice of a CPA who understands international structuring.
How to get a tax free company in paradise? By establishing tax residency in Thailand (which doesn’t tax income earned abroad), and through the proper utilization of transfer pricing of intellectual property, combined with the use of an offshore company and a Thai company limited by shares.
Flag 1: Citizenship
You must already have citizenship in a country that doesn’t tax its citizens on a worldwide basis. Most countries don’t impose worldwide tax obligation on their citizens. The exception is the United States and Eritrea, which tax the foreign income of non-resident citizens. (See footnote on Americans doing business in Thailand.)
Flag 2: Residency
Jurisdictional Tax Regime
I’ve written specifically on Residency, the 2nd flag of Flag Theory, at length in the past. For Flag Theory to function properly and fully above board, you must establish tax residency in a country that has low tax, no tax, or a territorial tax regime.
Thailand taxes its residents and citizens on a territorial basis, meaning that income derived from outside The Kingdom is not taxed, provided that they are not remitted to the country the first year since they are earned. (This is not tax advice, just a layperson’s understanding of the law.)
Any profits derived from within Thailand, with a Thai company, will be taxed. However, certain businesses are eligible to receive tax breaks if they are established within certain sectors.
This makes offshore companies a powerful tool as a headquarters and IP-holding company.
Flag 3: Company
BVI companies tend to be the weapon of choice for entrepreneurs doing business in Asia or setting up a corporate bank account with an offshore account in Asia. More information on BVI companies can be found in this article.
If you choose not to use the BVI, you could look at a number of other offshore jurisdictions, or a…
An alternative to a BVI company involves the proper utilization of the tax treaty between Thailand and Malaysia. Furthermore, a Labuan company run from within Malaysia faces an almost 0% tax rate, as long as transactions are cleared in a foreign currency and no customers or business is done in the country. See this article about my trip to Malaysia.
The idea behind this type of headquarters/regional office setup is to keep as much profit as possible in the offshore company in a low-tax jurisdiction. Obviously, you’ll need to cover operating costs in Thailand, but taxes within the country can be kept to a minimum while satisfying the authorities that everything is properly reported and accounted for.
Flag 4: Banking
You can easily open a Malaysian bank account with a Labuan company.
(Flags 5 and 6 are not covered here, as they have little to do with the strategic imperative of minimizing taxes.)
Thai Company Capitalization
An integral component of this setup involves setting up a Thai company, obtaining a visa and work permit, and then legally establishing tax residency in Thailand.
One important/difficult aspect of forming the company is capitalization, as the company needs to reflect an initial capitalization of 2 million baht (about $57,000) for a work permit for a foreigner, or 1 million baht for a BOI company, which allows work permit for foreigners at a slightly lower capitalization, but is costlier in terms of setup.
What to Do?
One could, hypothetically, record the 2 million baht as paid up in cash, and then loaned back out, in cash, to a “related party,” commonly referred to as a “loan to director.”
If you want to learn more about this, consider becoming a PT member.
Permanent Residency in Thailand
Thai residency for tax purposes (as identified or defined by a foreign government) and Thai permanent residency are two separate and distinct things.
You must have been a taxpaying resident for several years in order to be eligible for permanent residency in Thailand. This means you:
- Have a work permit,
- Have a business visa,
- Have a bank account,
- Make regular tax payments to Thai authorities, and
- Have lived and worked full-time in Thailand for at least three to four years.
The time taken to process a permanent residency application ranges from five to 10 years. It can help if you can speak Thai, have a Thai spouse, or are a respected member of the community. In general, establishing permanent residency in Thailand (and obtaining a green book) is a difficult process that can take years. I once spoke with a gentleman who said it took him seven full years to become a permanent resident – and this was after 11 years of living and doing business in the country.
Getting Thai citizenship is borderline impossible, unless one of your parents is already a citizen, since citizenship is based on jus sanguinis. Simply being born in the country would not make one a citizen, as Thailand does not grant citizenship based on jus soli.
How to Start a Company in Thailand
I’ve written at length on:
If, after reading those articles, you are serious about starting a Thai company, I can connect you to a lawyer there.
Once you have established a company in Thailand, you can trade between the company and your offshore company, where the offshore company will own the IP, and the Thai company can pay a licensing fee. You must abide by Thai transfer pricing laws. I recommend hiring an accountant who is familiar with Thailand’s laws. This is probably not a do-it-yourself job. All legal documents and accounts must be kept and maintained in the Thai language.
Personal Bank Accounts
You can easily get a bank account in Thailand. Though some banks may turn you away if you don’t have a work permit, with a proof of residence (rental contract) or a recommendation letter from a Thai resident, others may open you an account (hint: try Bangkok Bank, Krungsri, UOB or Siam Commercial Bank). Foreign currency accounts are available in most banks and can be opened easily.
What’s Great about This Setup
There is no perfect setup in this imperfect world, but this is damn close. For starters, it is completely legal, and if you are truly looking to establish a corporate structure and solid foundation for your business, this setup is ideal.
Virtually Tax Free Company
Any earnings retained in the offshore company are tax-free. Just be sure to abide by Thailand’s transfer pricing laws, and make sure you file the right forms in the country where you were previously domiciled to establish a new tax residency in Thailand.
You will have to hire some Thai nationals, so why not make the best of it. Start to grow a team. Thai people have a particular way of working. I’ll let you figure that one out for yourself!
If things don’t go well in Thailand, the valuable parts of your business, such as the intellectual property, are held safely offshore.
What to Be Careful With
You should only work in Thailand if you have an authorized work permit. The law interprets “work” very broadly, and if you are caught without a work permit, you could be thrown out of the country and banned from future entry into the kingdom. Work permits are typically granted only to specialized foreign labor employed in work that most Thai nationals could not do.
Furthermore, there are minimum hiring requirements to abide by:
- 4 Thai employees: to obtain a work permit, it is necessary to hire four Thai employees, get an office and register for tax, in addition to taking other smaller steps, which a lawyer can help you with.
- If you have a foreign business partner, you will need to hire eight Thai employees, as the company must maintain a ratio of four Thai nationals to one foreigner when hiring.
An exception to this rule is possible with certain permission from the BOI. See SiamStartup.com/infographics for more on the process of setting up a BOI company.
Is complicated. Period. In broad strokes, transfer pricing refers to the setting of prices for the sale of goods and services between companies that are owned/controlled by the same person/party (also known as trading at arm’s length).
To discuss the intricacies of transfer pricing would require an entire article (or even a whole book). The laws on this vary in complexity and enforcement from country to country, but it is well known that certain countries are laxer than others.
2016 update: transfer pricing is now, more than ever, important to get right.
Doing Business in Thailand
Doing business in Siam is not as difficult as other places in Asia, but it’s still not as simple as setting up a company in Singapore or Hong Kong. The government here is more restrictive of foreign investment, and they tend not to be the most forward thinking on certain areas, such as information technology or startup companies.
The Startup Scene
2013: The scene in Thailand is very, very young – and there isn’t a lot of venture capital roaming around. I would estimate there are only about two serious technology capital firms deploying resources in Bangkok. They are cleaning up. The Thai market is ridiculously social, and mobile applications have the potential to catch on like wildfire. Disposable income is higher than in neighboring countries of Cambodia, Laos and Vietnam where have struggled even with business models as as simple as e-commerce. Challenging aspects of Thailand as an emerging market: Government regulations Venture capital is rare (only a handful of VC’s) Credit cards not widely used (15 percent of adults)
June 2016 Update:
The startup scene in Bangkok has changed dramatically since this article was first published.
- Venture capital is rare – only a very rare few VCs actually deploy capital.
- Several startups have had some success.
- There seems to be more support from government.
- Use of credit cards is more prevalent.
- Alibaba Group has just bought Lazada.
*Note for Americans
If you are American, you should make sure to properly report the above corporate structure, as the US imposes a worldwide tax obligation on its citizens and residents.
Also, if you want to have an offshore company, you should read up on Subpart F of the US tax code (which is a lot of reading!) to get an understanding of what is and isn’t possible with regard to retaining profits within an organization tax-free.
CFCs (controlled foreign corporations) and PFICs (passive foreign investment companies) are subject to special rules which, in very broad strokes and completely layman terms, prevent them from retaining profits within the company tax-free, and the income falling within Subpart F would be taxed at a normal rate.
A CFC is a foreign company that has over 50% American ownership. Your Thai company would most likely be a CFC, particularly if you made the company an Amity Company, which is a special type of company available only to Americans, under the Amity Treaty. This treaty between the US and Thailand allows Americans to fully own a Thai company, as opposed to regular foreign ownership, which is restricted to 49%.
There are fewer restrictions on the types of businesses that can be conducted by Amity companies, but the capitalization requirements are higher and the shareholding rules can get complicated. If you need assistance with this, I can connect you to a Thai lawyer and an American tax lawyer, or to Thai incorporation service providers.
If you want to learn more about how to set up a tax free company in paradise, you should consider joining our PT Society. If you want to compare other jurisdictions to incorporate your company, get tax residency, obtain a second passport or open a bank account, you can check our free comparison tools: passports.io / incorporations.io / bankaccounts.io. If you need customized advice to get an optimal internationalization solution to improve your privacy, freedom and wealth, contact us or check how we can help you.