On 19 March 2025, the Thai Revenue Department (“TRD”) issued Tax Ruling No. Gor Kor 0702/1626, introducing a significant change in the tax treatment of outbound payments for software and IT-related services. This ruling adopts a rights-based approach, focusing on the specific contractual rights granted to Thai companies when classifying payments as either “royalties” or “business profits”. The development brings Thailand’s tax practice closer to international standards, particularly those of the OECD, and provides much-needed clarity for businesses engaged in cross-border technology transactions, including cloud computing and custom software development.

Core Principles Established

  • Contractual Terms Are Critical

The specific rights, limitations, and ownership provisions in each agreement determine the tax treatment. The distinction between a limited “right to use” and broader licensing rights is decisive.

 

  • Custom Software as a Service

Payments for bespoke software development, especially under work-for-hire arrangements where ownership is transferred, are classified as service income, not royalties, and thus treated as business profits under tax treaties.

Implications and Recommendations

This ruling marks a clear departure from previous TRD practice, where software-related payments – especially for Software as a Service (SaaS) – were often automatically treated as royalties. The new approach narrows the definition of royalties to payments involving copyright exploitation rights, reducing uncertainty and aligning with international norms.

Software-related payments that do not fall under the above scenarios are treated as royalties and therefore subject to withholding tax.

Businesses should:

  • Review and, if necessary, revise existing and future contracts for outbound software and IT service payments to ensure contractual terms accurately reflect the substance of the transaction.
  • Assess the impact of this ruling on current tax positions and maintain clear documentation to support the intended tax treatment.
  • Seek professional advice before making contractual or structural changes, as tax rulings are not legally binding and may be subject to varying interpretations by local tax authorities.

Treatment of Standard Software

For standard, off-the-shelf software such as Microsoft Office, SAP etc., the tax treatment under the new rights-based approach depends on the nature of the rights granted to the user. Typically, standard software licenses provide only a limited, non-exclusive, non-transferable right to use the software for internal business purposes, without granting rights to reproduce, modify, distribute, or commercially exploit the underlying copyright. In such cases, payments for standard software are generally not considered royalties but are classified as “business profits” under the relevant tax treaties. As a result, if the foreign software provider does not have a permanent establishment in Thailand, no Thai withholding tax obligation arises on these payments. However, if the license grants broader rights, such as the right to reproduce or distribute the software, the payment may be treated as a royalty and subject to withholding tax. Careful review of the license terms is essential to determine the correct tax treatment.

Conclusion

Thailand’s latest tax ruling on outbound software and technology payments represents a significant shift toward a rights-based, substance-over-form approach. By focusing on the actual rights granted, the TRD has clarified the distinction between royalties and business profits, offering greater certainty for cross-border technology transactions. Businesses should act promptly to align their agreements and practices with this new interpretation to optimize tax outcomes and ensure compliance.