Overview: Rights-Based Approach to Software Payment Classification

The Thai Revenue Department (TRD) has issued a private tax ruling no. Gor Kor 0702/1626[1], dated March 19, 2025, addressing the tax treatment of outbound payments for software and related services. This ruling is noteworthy as it reflects a shift towards a rights-based approach when characterizing payments as 'royalties' versus 'business profits.' 

This development provides greater clarity to taxpayers engaging in cross-border technology transactions, especially in the context of cloud computing and custom software development.

Facts

In order to develop its application, Company K, a Thai company operating in the application development business, engaged three foreign service providers. The scope of services, billing arrangements, and contractual terms governing intellectual property (IP) rights differed across the providers.

The taxpayer in this case sought clarification on whether the payments should be regarded as royalties under Thai tax law and the applicable tax treaties, or whether they should instead be classified as business profits.

Decision

Unlike earlier precedent rulings, the TRD applied a rights-based analysis to each arrangement, focusing on the specific rights granted to Company K rather than merely considering the payments’ association with software or digital services when determining whether the income constituted royalties.

1. IT infrastructure, software, data storage, and cloud computing services (by Company A in United States)

The TRD observed that the arrangement with Company A merely provided Company K with access to the hosted infrastructure and software. The license was expressly limited, revocable, non-exclusive, non-transferable, and non-sublicensable. No rights were granted to reproduce, distribute, adapt, or commercialize the software, and no know-how was provided.

On this basis, the payments were characterized as business profits under Article 7 of the Thailand–U.S. tax treaty[2], rather than royalties under Article 12[3]. In the absence of a permanent establishment in Thailand, no Thai corporate income tax or withholding obligation arises under the Revenue Code.

2. Custom Software Development (by Companies B and C in Ireland and Hungary, respectively)

For the software development payments, the TRD distinguished between two scenarios:

• Scenario (i): IP Transferred to Company K
  • Where ownership of the developed software was transferred to Company K, the payments were treated as service income under Section 40(8) of the Revenue Code, not royalties. Under the tax treaties with Ireland and Hungary, such income falls within business profits under Article 7. 
  • In the absence of a permanent establishment in Thailand, no Thai corporate income tax or withholding obligation arises.
• Scenario (ii): IP Retained by Developer
  • Payments were made for custom software services where IP remained with the developer. Company K only received limited user rights without reproduction, distribution, or modification rights. 
  • As no copyright exploitation was granted, payments are not royalties but are characterized as business profits under Article 7 of the applicable tax treaty. 
  • In the absence of a permanent establishment in Thailand, no Thai corporate income tax or withholding obligation arises.

Alignment with International Tax Standards

This ruling represents a possible step towards alignment of Thailand’s tax practice with international standards, particularly the OECD Model Tax Convention and Commentary. By adopting a rights-based classification, the TRD has narrowed the scope of what constitutes as 'royalty' income in the cross-border software and IT services context. The analysis now focuses on whether copyright exploitation rights are granted, rather than applying a default royalty treatment to all software-related payments.

Steps to Optimize Tax Exposure

This ruling provides an opportunity for businesses to optimize their withholding tax exposure in technology-driven business models. Taxpayers are encouraged to:

• Review existing and future contracts for outbound software and IT service payments to ensure that the contractual terms are consistent with the underlying substance of the transaction.
• Assess the impact and potential uncertainty arising from the TRD’s stated position in this ruling against the company’s current tax positions.
• Maintain clear documentation and alignment between contractual arrangements and the resulting tax treatment to demonstrate compliance and manage potential withholding tax exposure

It should be noted that this ruling reflects the TRD’s current position on the specific cases it addresses; however, whether officers on the ground would automatically apply the same analysis remains uncertain and may require further assessment or negotiation. Taxpayers are strongly encouraged to seek professional advice before implementing contractual or structural changes in response to this ruling.

Conclusion

Thailand’s latest tax ruling on outbound software payments represents a significant shift in tax treatment, focusing on the rights granted rather than defaulting to royalty classification. This development is particularly relevant for businesses involved in cloud computing, custom software development, and other cross-border technology transactions. Taxpayers should act now to align their practices with this new interpretation and optimize their tax positions.

[1] 0702/1626 | กรมสรรพากร - The Revenue Department (rd.go.th)

[2] Article 7 of the Taxation Convention between Thailand and the US https://www.irs.gov/pub/irs-trty/thailand.pdf#page=12

[3] Article 12 of the Taxation Convention between Thailand and the US https://www.irs.gov/pub/irs-trty/thailand.pdf#page=17