ROH: Regional Operating Headquarters

in Thailand

• What are the regulatory requirements to participate from this tax scheme?

• What are the benefits and tax savings of a ROH in Thailand?

• What are the next steps to getting things done?

• Which legal and tax advice is required to optimize the ROH structure?

ROH in a Nutshell

• Advantages✓Personal income tax reduction from up to 35% (formerly 37%) to a flat

rate of 15%.✓CIT reduction from 20% (formerly 30%) to 0% or 10%.✓Additional tax and non-tax advantages.

• Requirements✓Three associated companies worldwide - but 5 years transition period.✓Registered share capital THB 10 Mio. and annual expenses of THB 15

Mio.✓Additional requirements have to be carefully examined.

ROH: Timeline since 2002

• August 16, 2002: Old ROH legislation „to encourage more foreign direct investment to Thailand“.

• February 10 2010: ROH (Closed) Forum with MOF, RD, BOI and BOT.• May 24, 2010: Deputy Finance Minister Pradit Pataraprasit's speech to

about 300 participants at the ROH Open Forum.• June 2, 2010: Thai cabinet released its resolution to improve ROH

legislation („with the aim of achieving the best tax incentives in the region“).• July 2010: According to unconfirmed newspaper reports, six multinational

companies expressed interest - the Japanese automakers Nissan and Toyota, the Japanese electronics firm Hitachi, the German conglomerate Siemens, the US chemical firm Dow Chemicals and Siam Cement.

• Expected for August 2010: Enactment of new ROH legislation promised to be retroactively and effective as from June 1, 2010.

• Published in the Royal Gazette on November 8, 2010.

Status quo ante: The need for new ROH legislation

• Thailand as a high-tax jurisdiction in the region and abroad✓Hong Kong 16,5% CIT✓Singapore 17% CIT✓Thailand 20% CIT✓Vietnam 25% CIT✓China 25% CIT✓Germany 30-33% CIT (average)

• Unattractive old ROH legislation in Thailand✓Tough and inflexible requirements.✓More than 50% of income has to be generated from ROH activities.✓Bad marketing of the ROH opportunities by the government in 2002.

Source: OECD Tax Database

Key benefits of the new ROH legislation

• Reduction of corporate income tax rate from 20% (in 2013, 2014) to 0% for offshore profits.✓derived from affiliates abroad

• Reduction of corporate income tax rate from 20% (in 2013, 2014) to 10% for onshore profits.✓derived from Thailand

• Reduction of personal income tax rate for ROH senior management expatriates from 35% (progressive) to 15% (flat). ✓Conditions apply.✓Limited to eight years

• Additional tax and non-tax benefits available.

Requirements and key qualifications

• Minimum registered share capital of THB 10 Million (Euro 250,000), fully paid in.

• Minimum annual expenses in Thailand of THB 15 Million (Euro 375,000), or total investment of THB 30 Million (Euro 750,000). Conditions apply.

• Services for at least one affiliated company outside Thailand in first fiscal year, later at least three affiliated companies within five years

• Minimum number and salary for expatriates✓50% test requirement✓Senior management test requirement

• Additional requirements for tax benefits on interest payments, dividends and royalties✓50% test requirement✓Documentation requirement

Limitations

• ROH advantages restricted to a broad scope of permissible services✓administrative✓technical and ✓other support services.

• Non-qualified services are subject to normal taxation rules.• Non-qualified services do not negatively effect the registration of a ROH.• No requirement that 50%+ of the total income has been generated by ROH

activities.• ROH qualified and non-qualified areas can exist in one company. In that

case a separate accounting has to be maintained („unbundling“).

Legal and tax advice and assistance, part I

• Advice on the decision to register for ROH with the existing corporation or to set-up a new legal entity

• Advice how to beneficial and tax-efficient split the existing business into ROH and non-ROH area

• Set-up and monitoring of the unbundling ✓in separate payroll ✓and in a separate accounting cycle

• Adjustment of medium sized enterprises to ROH requirements➡For details please see our article in the Legal Newsletter of the German-

Thai Chamber of Commerce: “How to Adjust Your Company to Meet ROH Requirements”

Legal and tax advice and assistance, part II

• Optimization of the tax benefits, above all ✓Review and adjustment of the group’s transfer pricing policy✓Review of the managements’ employment agreements to (1) adjust

scope of local responsibility, (2) to relocate employees to Thailand and (3) to adjust remuneration scheme within the group.

✓Review of supply chain, group financing, etc. for tax optimization purposes.

• Tax driven separation and allocation of ✓staff, ✓assets ✓and contracts

• Statement by local tax advisor that ROH requirements are fulfilled.

Legal and tax advice and assistance, part III

• Risk management with respect to ongoing obligations under the ROH legislation✓Is the business in-line with existing ROH legislation?✓Change in law requires adjustment of business?✓Ongoing advantageousness of the ROH structure✓Alternative solutions offer greater benefits?

• Implementation of a comprehensive ROH risk management system✓Risk identification✓Risk analysis✓Risk evaluation✓Risk steering

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How to Adjust YourCompany to Meet ROHRequirements

The establishment of a RegionalOperating Headquarters (“ROH”) isenjoying a certain amount of hypein discussions between Germanentrepreneurs and their taxadvisors. The excitement is notwholly undeserved since having aROH in Thailand offers real taxadvantages, which have not beenseen in recent years. The mainbenefits are on the one hand thereduction of the expat manager’spersonal income tax burden from aprogressive rate of up to 37% to aflat rate of 15% for the next eightyears and on the other hand, a taxholiday on the profits generatedoffshore by the ROH for a period of15 years. In addition, other tax andnon-tax advantages and benefitsapply as well.

The prerequisites to registering a ROHhave been widely discussed in the localnewspapers and tax publications andthere is no need to repeat thisinformation here. It is far moreinteresting to know to what extent therules offer useful and practical benefitsto medium-sized companies. Is it factor just a preconception that this newscheme is appropriate for bigcorporations, but is out of reach ofsmaller enterprises?

First, a minimum registered capital ofTHB 10 millions should not be a deal

I S S U E N O . 3 | S E P T E M B E R 2 0 1 0 P. 3

breaker. German entrepreneurstraditionally prefer a smaller equityinvestment to finance growth byshareholders’ loans. However, thistype of thinking is in principle tax-driven, since interest payments are,unlike dividends, tax deductible.However, since the tax burden is underthe ROH scheme dramaticallyreduced, this should more thancompensate for the disadvantages ofequity financing.

Another key qualification for ROHstatus is the need for at least threeaffiliated companies located outsideof Thailand which are to be servicedby the ROH. However, companies willbe offered a comfortable transitionperiod of five years. During the firstbusiness year of this period the ROHwill need only one operating companyabroad.

Other conditions of ROH status relateto the annual expenses incurred withinThailand and the income to be derivedfrom the services provided to theassociated companies. Without adoubt, a total investment of THB 30million or annual expenses of THB 15million are not insignificant. However,an entrepreneur well advised in taxmatters knows there are ways andmeans to structure a group ROH-efficiently, to concentrate assets froma book-keeping perspective inThailand and to pool and channelpayments diligently and beneficiallyat the same time.

The ROH rules will allow for aminimum number of specializedprofessionals and top executives aswell as minimum salaries. Theserequirements may potentially be ahurdle even for bigger corporations,since the ROH services can normallybe provided by a small number ofqualified staff. However, before thiscondition can be condemned as thedeath knell at a ROH wake, one shouldbear in mind that expatriates aretaxed at 15% only. A smart staffingplan and remuneration schemes withinthe group should not result in asituation where the head is too big forthe body.

When the general decision to go aheadwith the establishment of a ROH ismade, the current overall taxstructure should be reviewed andsubjected to new scrutiny. Thetransfer pricing policy of the groupcompanies will have to be examinedand adjusted as well as the supplychains, group financing andemployment structures. Under theROH structure a big corporation mightactually be smaller, smarter and more

efficient. For a medium-sized companythis will not be an option, but actuallya necessity.

Dr. Ulrich EderRechtsanwalt und Steuerberater

European ASEAN Business Centre (EABC) 69

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PUGNATORIUS Ltd.29th Floor, Central World Tower999/9 Rama I Road, PathumwanBangkok 10330, ThailandTel: 0066 22072647Fax: 0066 22072657E-mail: lawyers@pugnatorius.comWebsite: www.pugnatorius.com

EABC RepresentativeDr. Ulrich EderRechtsanwalt, Steuerberater, Managing Directorlawyers@pugnatorius.com

Company ProfilePUGNATORIUS is an independent law office based in Bangkok, Thailand. We provide international corporations, investors and law firms with premium legal and tax services relating to Thailand, Southeast Asia and offshore jurisdictions. We are specialized to guide foreign clients through the red-tape requirements, legal hurdles and international tax structuring of their foreign investments, trade operations, real estate developments or other business in Thailand and Southeast Asia.

Products & ServicesExpert advice in foreign direct investments in Thai manufacturing and service sectors and real estate developments. Gateway to investments in Myanmar and utilization of Thailand as investment hub for the ASEAN region. Implementation of cross-border tax planning strategies for overall tax mitigation and risk management. International tax advice and individually tailored tax planning solutions for corporate and private clients with the inclusion of offshore jurisdictions. Corporate asset protection and advanced financing solutions.

Senior Management1. Dr. Ulrich Eder, German lawyer and tax counsel, Managing Director