New Thai tax ruling redefines treatment of foreign technology payments

This ruling addresses long-standing ambiguities by clearly distinguishing between “business profits” and “royalties,” thereby aligning Thailand’s tax framework more closely with OECD principles.  

The ruling stems from an inquiry submitted by a Thai software developer (“Company G”) regarding payments made to vendors based in the United States, Ireland, and Hungary. Its conclusions have significant implications for structuring cross-border technology transactions. 

Cloud services: Classified as business profits  

The first scenario involved payments made by Company G to a U.S. company (Company A) for IT infrastructure and cloud services. Under the agreement, Company A retained all intellectual property rights, granting Company G only a limited, non-exclusive, and revocable right to use its systems. 

Based on these facts, the Revenue Department concluded that the payments did not qualify as royalties under Article 12 of the Thailand–U.S. Double Tax Agreement. The fees were not for the use of, or the right to use, copyrights or technical know-how.  

As such, the income was classified as “business profits” under Article 7 of the DTA. This means the income is not subject to Thai corporate income tax unless Company A has a permanent establishment (PE) in Thailand. 

Custom software development: Treated as service income  

The second part of the ruling addressed payments made for custom software development services. 

• Company C (Hungary): This vendor was engaged on a work-for-hire basis, with the agreement clearly stating that ownership of the completed software would be transferred to Company G. The Revenue Department characterised the payment as income from services under Section 40(8) of the Revenue Code. Under the Thailand–Hungary Double Tax Agreement, such income is considered business profit and is not taxable in Thailand absent a PE.  
• Company B (Ireland): The ruling also considered a scenario in which the ownership of the custom-developed software was not specified. If Company G holds ownership of the completed software, the treatment would be the same as that applied to Company C.  

However, even if Company B retains ownership, the Revenue Department clarified that the payment would still not be regarded as a royalty— so long as it is not for the right to commercially exploit the software’s copyright. In either case, the payment is considered business profit, not a royalty.  

Core principles established by the ruling  

The ruling reinforces two key principles for analysing and structuring cross-border technology arrangements:  

1. Contractual terms take precedence: The specific rights, limitations, and ownership provisions in the agreement are critical in determining the appropriate tax treatment. The distinction between a limited “right to use” and broader licensing rights is particularly important.  
2. Custom software development as a service: Payments for bespoke software development, especially where ownership is transferred to the customer under a work-for-hire arrangement, are classified as service income under Section 40(8), not royalties. This allows the payment to be treated as “business profit” under relevant tax treaties. 

Observation 

This ruling represents a welcome alignment of Thai tax policy with modern international standards, reducing uncertainty for businesses relying on foreign technology services. The clear distinction from previous interpretations, where software-related payments were often treated as royalties, is a significant development.  

It also signals a departure from the Revenue Department’s long-standing approach to Software as a Service (SaaS) arrangements, where such payments were typically considered royalties without evaluating whether the customer had the right to commercially exploit the software’s copyright.  

That said, tax rulings are not equivalent to law. They are not legally binding and are subject to change. It remains to be seen whether local Revenue Department offices will interpret similar cases in line with this ruling.  

Given these clarifications, businesses are encouraged to strategically review their existing cross-border technology agreements to ensure they are structured for optimal tax treatment and compliance. Contractual language should clearly reflect the nature of the transaction to align with the principles outlined in the ruling.  

At Forvis Mazars, we can help clients review and structure cross-border technology agreements to ensure they reflect the substance of the transaction and align with the latest tax rulings and treaty interpretations.  

Reference (in Thai): 

• Tax Ruling No. Gor.Kor.0702/1626 dated 19 March 2025. Retrieved from The Revenue Department.