Do not let the Thailand’s tax regulation stop you from investing abroad

• A change to Thailand’s income tax regime has left many investors confused and concerned about investing abroad from Thailand

• The change necessitates investors report capital gains as part of their income taxes.  Capital gains for domestic investments remain exempt from taxation

• If your capital gains from abroad are taxed, at least you have a return in your hands.  Investment returns domestically have been dismal for more than a decade.  There are not many convincing arguments suggesting an inflection point is near

• Investors can still mitigate the impact from this change via certain exemptions.  The gift tax exemption is quite accommodative in this respect and allows up to Bt20 million (~US$560,000) to be transferred annually

Change to tax rule has left many uneasy

An update to Thailand’s income tax regime has left many investors confused and concerned about investing abroad from Thailand.  Following the change, Thai taxpayers are required to include any capital gains earned abroad in their income tax filing when funds are repatriated.

The update was made to an existing tax ruling that previously afforded investors with some latitude in tax avoidance.  The Thai Revenue Department announced the change last September, and is now effective beginning 2024.

Many investors are unsure how to navigate the new regime.  The impact will vary by individual depending on what income tax bracket the capital gains are added to.  Thailand applies progressive tax rates on income. 

Some wonder whether investing abroad is worth the effort given this new hurdle.  Investment profits earned from domestic assets are not subject to capital gains tax, and in theory is simpler to navigate.  The easier option is not always the best.

Do not close the door

Limiting your investment pool to domestic assets in Thailand is foolish and investment returns will most suffer as a result.

There is enough literature and public commentary disparaging Thai investments, particularly the local stock exchange.  Instead of repeating the same arguments, I will highlight some facts.

The Thailand Stock Exchange has returned 1.9% per annum for the past decade.

Thai equities have underperformed global equities by a huge amount.  In Thai Baht terms, global equities – as measured by the MSCI ACWI Index – returned above 7% annually.  Investing in United States equities would have produced more than a 2x total return in Thai Baht over this period.

Figure 1: Thailand has lagged global equities dramatically over the past 10 years

Source: Reuters.
Note: Returns shown in Thai Baht terms. Global equities represented by ACWI ETF and United States equities represented by Vanguard Total Stock Market Index (VTI).

If you have capital gains by investing abroad, at least you have made profit.  Many investors that have restricted themselves to Thailand have received no – or negative – returns.

There are many reasons why Thai market returns have been poor.  The largest companies on a market capitalization basis are energy companies and banks.  Combined, they represent 25% of companies on the Thailand Stock Exchange.  Energy companies are at the mercy of commodity cycles and see profitability go up and down.  Thai banks have seen their profitability deteriorate considerably over the past decade.

Figure 2: Banks represent 12.1% of the Thailand Stock Exchange

Source: Stock Exchange of Thailand.
Note: Data as of February 2024.

Figure 3: Thai banks return on equity have almost halved since 2014

Source: Company data.
Note: Data points represent aggregate of four largest Thai commercial banks.

Much of the decline in bank profitability is due to weak credit growth, over-aggressive lending to SMEs a decade ago and rising restructured loans.  Even the most optimistic sell-side brokers will have difficulty arguing that an inflection point will soon be seen.

Options to invest globally are aplenty

There are many ways to access offshore investing from Thailand, and investors can use this to their benefit.  This can be directly offshore or onshore via local financial institutions.

Retail investors can transfer money into investment accounts and/or assets offshore with a license issued by the Bank of Thailand.  The application process is electronic and provides an annual limit of US$5mn for outbound transfers.  Many are not aware of this.   

Investing in global assets domestically is also an option.  Foreign asset managers are not allowed to operate domestically and offer foreign investment products to Thai investors.  Retail investors are unable to directly purchase a Vanguard ETF, for example.

Foreign funds are available only via mutual funds that are ‘wrapped’ by Thai banks.  You can only invest in an S&P500 index fund by investing in a Thai bank mutual fund where the underlying holding is the index fund.  These are referred to as ‘Foreign Investment Funds (FIF)’.

This is not very efficient and often investors are penalized.  Often, Thai banks charge a management fee on top of what the underlying index fund charges.  Investors have caught on to this and now Thai banks have started to waive or charge nominal fees for these structures.  It is still egregious to charge retail investors for what is a glorified custodian fee.  Furthermore, a portion of the fund assets are kept in liquid assets to manage redemptions by local investors at the Thai fund level.  This is another drag on the net return you receive.

An alternative to the FIF structure is to purchase offshore assets via a Thai broker.  Many of them offer ‘Global’ trading accounts that are tied to a foreign low-cost broker such as Interactive Brokers.  Commissions are not as low as if you trade though the low-cost broker directly.  The Thai broker needs to make their cut.  This is a great option for investors that want to bypass the FIF products to access global investments.  Better yet, apply for a BOT license and open a global account directly offshore.

Ways to mitigate the impact of new tax ruling

There are several ways to mitigate the impact of the tax change and lower your liability.  I am not a tax expert and will not discuss them all in detail.  There is clear Thai and English information available at (link).

The method which looks tenable is the usage of the gift exemption.  The annual limit of US$5 million is conducive to managing sizeable amounts of repatriation, even for the ultra wealthy.

The additional work is worth it

Taking the extra effort to set up accounts and/or spend more time doing taxes is worth it if it means restricting yourself to domestic investments.

Decades ago, most investors did not have the luxury of accessing global investments.  There was no infrastructure that supported this and as a result, home-country bias is rampant.

Today, this is no longer the case.