Does BOI tax exemption trigger China's CFC rules on undistributed profit?

01The instinct that stopped working in 2019

Owners of Chinese-invested companies that hold BOI promotion in Thailand often share the same instinct: the company pays no tax, the profit stays in Thailand, no dividend goes home, so China has nothing to tax. That instinct stopped being true on 1 January 2019.

Article 8(2) of China's Individual Income Tax Law introduced controlled foreign company (CFC) rules that reach individuals. Where the conditions are met, the tax authorities can treat the undistributed profit attributable to you as though it had been paid out as a dividend and tax you personally at 20% — even though the Thai company has distributed nothing. And the first step that pulls that trigger may be the BOI exemption itself.

Related: whether CRS reports an owner's offshore accounts back to China.

02The exemption paradox: a three-step trigger

A Thai company in ordinary operation pays corporate income tax at 20%. That is not a low burden, and it does not usually bring CFC rules into play. The sensitive case is the BOI exemption: section 31 of Thailand's Investment Promotion Act exempts a promoted project from corporate income tax — three years at tier A4, five years at A3, eight years at A1 and A2, with Merit incentives adding up to three further years. During the exemption period, the effective tax burden on the promoted project can be close to zero.

China's low-tax line for CFC purposes is an effective burden below half of 25%, that is, below 12.5%. This is where people most often come unstuck. Plenty of them see Thailand's headline rate of 20%, note that it sits above 12.5%, and assume they are safe by default. The line looks at the effective tax actually borne, not the headline rate. The more complete the exemption and the longer it runs, the easier it is to fall below the threshold. The tax Thailand gives up can become the condition that lets China tax you.

03Four gates, and all four have to be met

Falling below 12.5% is only one of the gates. A CFC finding needs four conditions at the same time:

• Control. A Chinese resident holds, directly or indirectly, 10% or more of the voting shares on a single-holder basis, and Chinese residents together hold 50% or more; or there is substantive control through shares, funding, operations, or purchasing and sales.
• An effective tax burden that is clearly low. Below 12.5%. That threshold is written into the enterprise income tax rules; on the individual side it is applied by reference, and the official position governs.
• No genuine business need. The profit stays offshore, but there is no real commercial reason to show for it.
• No distribution, or a reduced one. Profit that should be paid out is held inside the company instead.

The four are joined by "and" — hold any one gate and there is no CFC. Even where there is one, the deemed distribution is only the share attributable to your own holding, not the company's whole profit.

The exemption is not the sin; the shell is. CFC rules are aimed at profit parked in a low-tax place through a shell, not at people running a real industrial business in Thailand. A real plant, real employees, profit put back into capacity — that is the business itself, and it is also the strongest evidence you can put up in your own defence. Build the record for it deliberately from the day the company is set up.

04Where to start checking: four variables

Four variables are worth working through on your own facts, before anyone else works through them for you.

• Work out the effective tax burden across the whole company. Not all of the income is usually exempt; non-promoted business is taxed at 20% as normal. On a full-company basis, the effective rate may not in fact be below 12.5%.
• Map the control chain. Shares held personally and shares held through an operating entity are treated on different bases, and the control structure itself leaves room for planning and for argument.
• Check the exemptions. Income derived mainly from actively conducted business, or total annual profit below RMB 5 million, can be exempt from deemed distribution — the rules in force govern. Whether Thailand appears on China's list of jurisdictions treated as not low-tax follows the latest official position.
• Watch the filing window. From 2025 China has been running self-reviews of overseas income for the 2022 to 2024 years, and the annual settlement window each year, 1 March to 30 June, is the point that matters. In practice the tax authorities escalate in order — reminder, contact, formal notice, then a case — and dealing with it at the self-correction stage usually means back tax plus a late-payment surcharge, with penalties often avoided. Leave it until a case is opened and you have no room left.

05What it comes down to: designing distribution and retention

The conclusion is not that a BOI exemption should not be used. It is that where the profit of the exemption period goes has to be designed in advance: how much stays, what it is used for, when it is paid out, and how the evidence is kept. Every one of those steps should have commercial logic behind it and a record to show for it. On the mechanics of paying it out, see how profit from a Thai company gets back to China.

Whether you actually fall inside the CFC rules turns on four variables — the control structure, the substance of the business, how the effective tax burden is measured across the company, and the list position. Our advisers have to check and calculate each of them against your BOI approval, your accounts and your contracts before there is an answer; the framework on this page cannot stand in for a judgement on your own case. Rules on both sides keep changing, so check the latest official announcement before you act. What the tax compliance engagement covers.