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Thailand-United States

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applies concept of beneficial owner to interest paid to (US) foreign entity

The Thai Revenue Department (RD) issued Revenue Ruling No. GorKor 0706 (GorMor.08)/577 on 9 May 2006, in which the RD adopted the position of applying the "beneficial owner" concept in order to determine the rate of withholding tax applicable to interest paid to a company residing in the United States.

In general, when a Thai company pays interest on a loan or debentures to a foreign company, the interest falls within the scope of income under Sec. 40(4)(a) of the Revenue Code (the Code) and is subject to 15% withholding tax under Sec. 70 of the Code. Financial institutions that qualify for treaty rates are subject to a 10% withholding tax.

The ruling dealt with the Depository Trust Company (DTC), a US company operating as a depositor and/or custodian of financial assets, such as certificates in respect of shares, debentures and bonds for the benefit of its client. The DTC is considered to be a financial institution under US law and purchased debentures issued by a Thai company. The Thai company subsequently paid the interest on the debentures to the DTC when this became due under the terms and conditions of the debentures.

The question that arose was whether or not the Thai company should withhold tax on the interest paid to the DTC at the rate of 15% or 10%. To this end, the RD examined whether or not the DTC was the beneficial owner of that interest. If it was, the withholding tax rate would be reduced from 15% to 10% by virtue of the Thialnd-US tax treaty. If the DTC was not found to be the beneficial owner of the interest, either the client or the DTC would have to demonstrate that it was a financial institution before the 10% withholding tax rate could apply.

The RD observed that the DTC acted as a custodian for its client and that the debentures were held solely for the benefit of the client and held that withholding tax should be imposed at 15%, even though the recipient of the interest (the DTC) was a financial institution. The main reason for this is that the Thailand-US tax treaty specifically states that the beneficial owner of the interest must be a financial institution.

The position of the RD is, however, uncertain in respect of other treaties that do not specifically state that the recipient of interest must be the beneficial owner.

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