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Provident Fund Act in Thailand

Provident Fund Thailand

One of the most common problems once a middle-sized company or large company has already started to conduct business in Thailand is keeping the company's human assets and avoiding the negative effects of "job hopping" among their employees.

Before starting to approach the topic of the Provident Fund, we have to understand the "sui generis" situation of the labor market in this country, where the unemployment rate in Thailand usually is 1.48 % and have even decreased to 1.01 % in June 2016. Obviously, this leads many employees to move from one company to another, which implies tremendous damage for companies that have invested in their employees in terms of high-quality training, trips, and share of know-how.

According to the local statistics, 35% of the Thai employees of any Thai company are actively looking for a new employer, and 81% say that the experience with multiple employers is an asset in their career development. This positive impression is totally opposite to the negative perception in other labor markets such as Japan or Europe. The reasons behind this situation are multiple such as low salaries, lack of career path or promotional incentives.

According to my professional experience advising foreign companies to set up subsidiaries in Thailand, one of the main legal elements to mitigate the negative effects of job-hopping in Thailand is the Provident Fund. The Provident fund in Thailand is voluntarily established by both the employer and the employees, consisting of the contributions from both parties called "Employer's contribution & Employees contribution." The Provident Fund is on a voluntary basis jointly set up by employees and employers. The purpose of the fund is to encourage savings and provide benefits for employees and their families in case of death and in the event of the employees' retirement, disabilities, or resignation from the company.

The Provident Fund is established as a juristic person and registered. After the appointment with the fund management company, the fund must be registered with the Securities and Exchange Commission (SEC) according to the Securities and Exchange Act.

Essentially, a provident fund consists of four parts: The employee's contribution, funded by the employee's monthly salary, the investment returns generated by the employee's contribution, the employer's contribution, and the benefits derived from the employer's contribution.

If you place your funds in a Provident Fund, it is managed by an investment management company in line with a particular investment policy in order to optimize your returns while considering an acceptable risk level.

The provident fund will be registered with the Securities and Exchange Commission and serves as a legal entity, completely separated from the investment management companies and the employer. Therefore, employees reserve the right that if either the investment management company or the employer becomes liquidated, the assets within the Provident Fund established won't be affected by the investment management company or the employer's liabilities and therefore has financial security.

Because aging in Thailand is substantially increasing, the draft bill of the National Pension Fund is currently being discussed but will not affect the existing Provident Fund.

There Are Two Forms Of A Provident Funds

Single Fund

A single fund is a large fund established by a single employer, which includes a particular investment policy and regulations. A single fund is most appropriate for companies that have significant start-up capital.

Master Pooled Fund

A master pooled fund is a fund established by multiple employers with a common investment policy and regulations. Every employer is able to determine certain standards for the provident fund regarding fund regulations. A master pooled fund is most suited for companies that set up the provident fund first, and there are no limitations regarding the fund size or the number of members included.

In terms of compliance, the checklist of documents required for Fund registration is usually:

– Provident Fund Registration Requested Form

– Pay Day Form

– Regulations of the Fund

– Lists of Authorized Fund Committee Members and Signature Specimen

– Agreement of Appointment of Fund Management Company

– Memorandum of Associates

– Minutes of Company's Board of Directors to appoint and elect the Fund Committee Members

– Delivering the reports and document form

The fund committee, which comprises representatives elected by employees and representatives appointed by the employer, is responsible for supervising the fund's management, such as appointing a fund management company, custodian, and auditor, and coordinating with other parties regarding the fund.

The process of setting up a registered Provident Fund follows these steps:

A) Fund Management company selection process

B) Draft and send a confirmation letter to the Fund Management Company that is chosen

C) Drafting your own regulations of the fund and preparing registration documents

D) Documents and regulations are submitted to the Register office.

E) The Register Office will study the documents and will register the fund

F) Deposit of first monthly contributions

The main two objectives are 1) to promote the saving of employees and 2) to provide the members and their families the guarantee of future security in case of resignation, retirement, disability, or death. The involved parties are the company or employer, staff or employee, Fund Committee (representatives of both employer and employee that administrate the fund affair), and the Asset Management Company. Normally, the employee's contribution goes from 2 to 15% of the salary.

Finally, note that the articles of association can help estipulate the benefits of the Provident Fund using a vesting scale based on years of service or years of membership with a scale of % in case of finalizing the working relationship before retirement. In case of termination of the working relationship with the employer before the stipulated time to get 100%, the portion of % that the employee will not receive will come back to the fund or to the employer (if the second option happens, it will be declared as an income for tax reasons).

The philosophy of the Provident Fund is based on risk diversification. Instead of depositing money in a bank, the fund invests in various financial instruments, such as a foreign investment fund or mutual funds, generating high returns.

The fund is managed by a qualified fund manager using the below mentioned financial instruments:

-Equity Instruments

-Fix Income Instruments

-Deposit, Treasury bills

-Convertible financial instruments


-Other types of securities or assets which are allowed to invest by the SEC

On the regulation, when the employer and the employer's employees agree to establish the Provident Fund, the employer has to set up terms and conditions for the fund, for example, the eligibility, termination of membership, payment condition of the company's portion and employees' and employer's contribution rate.

According to Thai Law, the management of the fund shall be carried out by a "Fund Management Company," which is not the employer itself and has qualifications as specified by the pertinent regulator. Therefore the fund will become a juristic person and completely separated from the employer. In other words, the registered provident fund will have its own legal entity separated from the employer but also from the fund management company.

The Provident Fund Act stipulates the following documents in order to register the fund:

-Minutes of the Board of Directors for the fund registration

-Minutes of the Fund Committees

-Signature of the fund committee and authorized signatory committee

-Fund Regulation

-Application of fund registration

-Company Certification from the Ministry of Commerce

-Affirmation of the fund registration

-Other documents that the fund registrar requires

These are key benefits for the employer of having a Provident Fund in Thailand:

-Encourage employee loyalty to the employer, which results in work effectiveness and efficiency. The Provident Fund incentive the employees to work with the employer for a longer period and stop the harmful the high rate of "job-hop" in Thailand and protect the data and human assets from remaining with the employer in Thailand.

-Generally speaking, the Provident Fund will establish in its articles of association a vesting scale in order to keep the employees in the employer-based years of service. Usually, if the employee leaves the company before three years, the employee will get 0% from the fund, and if he/she works for ten years onwards, the employee will receive 100%.

-Human resources and recruiting departments of companies in Thailand spend a large amount of money hiring new staff when an employee decides to leave. In this case, a Provident Fund can reduce the employer's employee turnover in this field.

-Unlike pension funds, which may cause difficulties in preparing the cash budget for resigned or retired employees, under PVD, an employer's monthly contribution is defined as the benefits that a company provides for employees; and when the employees resign or retire, they will receive the payment directly from the fund, not from the employer. Consequently, the company's cash flow will be smooth.

-The employer's contribution is tax-deductible. It is treated as an expense item of the company. The limit is 15% of the annual company's wage expenditure. The employer contribution to the fund is classified as an expense which is a taxable expenditure in the same accounting period that the company remits the contribution into the fund.

-Reduce company work and maximize the benefit from the investment. It will clearly contribute to Thailand's development and growth.

-Provident Funds also allow the employer to have a greater tax benefit.

The benefits of the Provident Fund for the employees:

-The employee receives an extra income from the employer.

-Encourage retirement savings among employees.

-Future security of the employees and their families in case of resignation, retirement, disability, or death.

-Tax benefits.

-Increases the likelihood of earning more than bank deposits.

-Provident Funds are managed by professionals.

There are three tax benefits, first on monthly contributions, second on return from investment, and third on the amount received upon resignation.

a) On monthly employee contribution. The total amount of employee's contribution paid to the fund is tax-deductible for up to 500,000 THB per year. First, the employee's contribution can be used for a tax allowance of up to 10,000 THB. Second, the remaining amount in excess of 10,000 THB but less than 490,000 THB is subjected to tax exemption.

b) On return from investment. Interests and dividends received from the investment are tax exempted.

c) On the amount received upon resignation. The lump-sum amount received from the fund that is taxable includes 1) The employer contribution, 2) the benefit of the employer's contribution, and 3) the benefit of the employee's contribution. The employee's contribution (2-15% of salary) is tax-free. The benefit of the employee's contribution, the employer's contribution, and the benefits of the employer's contribution are considered taxable income with tax reduction. When employees have at least five years of service, the lump sum amount received from the fund is subjected to a special tax deduction, using this formula: Step 1, Deductible = 7,000 x years of service. Step 2, 50% of the remaining.

The lump-sum amount received from the Provident Fund has these tax benefits:

If there are less than five years of service, it is not tax-deductible. The amount received must be taxed as usual.

If there is no retirement and the years of service are five or more than 5, it is tax-deductible.

If there is employment termination (55 years old or more) and five or more years of membership, then it is tax-free, and therefore there is no tax calculation.

On the last 11th of August, the new Provident Fund Act (No. 4) 2558 B.E. (2015) was published and modified certain aspects of the previous law, such as the employee can make higher contributions than the employer, the Finance Minister can allow employees and employers to stop or postpone submitting contributions for no more than one year in case of crisis, an employee who is 55 years old who is going to retire can receive payments that will be tax exempted if the employee has been a member of the fund for more than five years.

Mr. Jose Herrera, Partner at Juslaws & Consult

Ms. Phorn Patimon, Senior Associate at Juslaws & Consult