Thailand-EU FTA Set for 2025: Impact on Trade and Growth

Thailand and the European Union (EU) will aim to complete a much-anticipated free trade agreement (FTA) by 2025. The fourth round of talks was held on November 4, 2024.

Negotiations were relaunched in 2021 after almost a decade of trade talks collapsing due to the military coup in Thailand in 2014.

This landmark agreement is expected to significantly impact key areas such as investments, taxation, and sustainable development. By fostering deeper economic cooperation, the Thailand-EU FTA is poised to attract increased foreign direct investment, streamline cross-border taxation, and promote sustainable business practices, making it a crucial development for both regions’ economic future.

Impact on investments

The EU was Thailand’s fifth largest trading partner in 2023 with total trade reaching US$41.6 billion with Thai exports to the EU reaching US$21.8 billion. For the first five months of 2024, total trade tallied to US$18 billion, an increase of 1.58 percent year-on-year.

As such, a free trade agreement will significantly boost bilateral trade. Lower trade tariffs and reduced non-tariff barriers are anticipated, creating new opportunities for Thai exporters, enhancing market access, and improving the competitiveness of Thai products in the European market. According to the Institute of Future Studies for Development, an EU-Thai FTA could increase Thailand’s annual economic growth by 1.2 percent. In comparison, exports to the EU are expected to increase by 2.83 percent and imports by 2.81 percent.

Top 5 Thai Exports to the EU
Product	Value (US$)
Electrical machinery and equipment	5.5 billion
Nuclear reactors, boilers, machinery and mechanical appliances	4.7 billion
Vehicles	1.7 billion
Natural or cultured pearls, precious or semi-precious stones, precious metals	1.5 billion
Rubber and articles thereof	1.4 billion

Source: Trademap

Top 5 Thai Imports From the EU
Product	Value (US$)
Nuclear reactors, boilers, machinery and mechanical appliances	3.1 billion
Nuclear reactors, boilers, machinery and mechanical appliances	4.7 billion
Vehicles	1.7 billion
Natural or cultured pearls, precious or semi-precious stones, precious metals	1.5 billion
Rubber and articles thereof	1.4 billion

Source: Trademap

The trade balance shows a healthy exchange of industrial goods and high-value products between the two regions, focusing on machinery and technology imports from the EU and a robust electrical machinery market for Thailand. This trade relationship underscores the complementarity of both economies, making the FTA even more crucial for future growth.

Impact on taxation

The proposed Thai-EU Free FTA aims to gradually eliminate tariffs, boosting the competitiveness of Thai and EU trade. Further, the agreement will promote the alignment of regulations, particularly in areas such as intellectual property and business operations. This alignment reduces administrative burdens and operational costs for businesses, improving tax compliance and overall efficiency.

Impact on sustainability in Thailand

The Thai-EU FTA is structured not only to enhance economic cooperation but also to promote sustainability. With a strong focus on environmental protection, labor rights, and social responsibility, the FTA is designed to improve Thailand’s sustainability standards by aligning with the EU’s rigorous regulations. Key areas of impact include environmental compliance, green economy promotion, and trade and sustainable development (TSD) commitments.

Environmental provisions

Thai exporters must meet the EU’s stringent environmental regulations to receive preferential market access. This includes compliance with measures such as Sanitary and Phyto-sanitary (SPS) regulations, genetically modified organisms (GMO) restrictions, hazard analysis and critical control points (HACCP), good agricultural practices (GAP), organic food labeling, and health certifications.

Promoting a green economy

The FTA emphasizes the integration of green economic models, such as Thailand’s Bio-Circular-Green (BCG) approach. This model encourages the adoption of circular economy principles, sustainable production practices, and environmental innovations within Thailand’s policy framework, helping the country transition toward a greener economy.

Robust TSD disciplines

The agreement includes comprehensive Trade and Sustainable Development (TSD) provisions that uphold high standards for worker protection, environmental sustainability, and climate action. These disciplines are in line with the EU’s Environmental Governance Directive (EGD) and aim to ensure that trade is conducted with a strong commitment to social and environmental responsibility.

Boosting innovation and sustainability

The agreement promotes digital trade by reducing barriers and encouraging innovation. Intellectual property protections and the recognition of geographical indications are key components of this strategy, which supports the development of sustainable economic models. These innovations will foster environmentally friendly solutions and drive long-term sustainability efforts.

Thailand’s pursuit of FTAs amid slow economic recovery

Thailand is actively seeking FTAs as part of its strategic efforts to address its slow economic recovery, which has been notably sluggish following the COVID-19 pandemic, growing only 1.9 percent in the first half of 2024, trailing behind the Philippines (6.3 percent) Vietnam (6.9 percent), Malaysia (5.9 percent) and Indonesia (5.05 percent).

This delayed recovery is largely due to Thailand’s heavy dependence on tourism and its substantial informal economy, both of which were hit hard by the pandemic’s effects.

Thailand-Poland: Regional case study

Tax perspective

Economic cooperation in the context of tax regulation

The economic relationship between Poland and Thailand is based on solid legal-tax foundations and involves the exchange of goods from a wide range of sectors. The primary source  of international tax law governing these relations is the Double Taxation Avoidance Agreement (DTAA). The provisions are adapted to modern requirements by incorporating the provisions of the MLI Convention. This allows economic operators to avoid double taxation and benefit from greater transparency in their tax returns.

The tax cooperation framework between the two countries follows OECD principles, including the BEPS initiative and the CRS information exchange standards. Poland, as a member of this organization, and Thailand, which implements these regulations, are adopting unified rules to facilitate trade and reduce tax avoidance practices. As a result, trade between the two countries is likely to gain stability and predictability.

Double taxation avoidance agreement (DTAA)

One of the fundamental documents governing tax relations between Poland and Thailand is the Double Taxation Avoidance Agreement (DTAA), signed in 1978. This document prevents situations where income of the same entity would be taxed in both countries simultaneously. It covers various aspects of income, particularly labor, dividends, interest, or corporate profits.

Applying the DTAA is of fundamental importance for business entities from Poland and Thailand. Thanks to the elimination of double taxation, it is possible to improve the competitiveness of companies in foreign markets. In addition, the agreement regulates the exchange of tax information, which prevents fraud and increases transparency.

The Polish-Thai DTAA provides a method of exclusion with progression, a preferred mechanism for avoiding double taxation in Polish double taxation treaties. Following the ratification of the Multilateral Convention (MLI), to which Poland has been a party since 1 July 2018 and Thailand since 1 July 2022, it is possible to introduce modifications to the provisions of this agreement. One such tool is the so-called switch-over clause, which mandates the proportional deduction method in cases where income is not adequately taxed in the source state using the progressive exclusion method. This solution aims to prevent instances of tax avoidance or under-taxation.

This clause most often covers income from dividends, interest, and royalties. However, the Polish-Thai double taxation agreement does not provide for the application of the proportional deduction method for interest income.

As the Polish-Thai agreement does not provide a switch-over clause for interest income, the exemption method with progression will apply to the taxation of this source of income. In such a situation, Poland will not tax this income, even if Thailand imposes zero tax on it (e.g. due to a tax exemption).

The existence of the DTAA indicates that Poland and Thailand are strengthening their economic relationship by grounding it on a solid tax and legal foundation, derived from international agreements, including the MLI multilateral convention and the OECD principles aimed at increasing transparency and eliminating tax barriers. These make trade and investment cooperation more dynamic and give partners more confidence in joint operations. The EU-Thailand FTA, scheduled for implementation in 2025, is also expected to have a significant impact on trade growth.

Multilateral convention

The Multilateral Tax Convention, which entered into force in Poland on 1 July 2018, is part of the BEPS project (Base Erosion and Profit Shifting). The provisions of the MLI Convention target aggressive tax planning policies and aim to determine where the added value is effectively generated.

Poland and Thailand are signatories to this Convention, meaning they are required to apply its provisions. While most of the provisions are voluntary, ratifying the Convention obliges the parties to adhere to the so-called minimum standard, which includes:

– pursuing the objectives of double taxation agreements, understood as the avoidance of double taxation, as well as the prevention of tax avoidance or evasion,

– the application of abusive clauses aimed at preventing wealth gains (in practice PPT and LOB clauses),

– application of dispute settlement provisions (the so-called mutual agreement procedure).

As already mentioned, the Polish-Thai DTAA does not provide for the application of the proportional interest deduction method, which is a consequence of the voluntary nature of the other provisions of the Convention. In practice, this means that if the interest earned by a Polish resident in Thailand is not taxed in Thailand (e.g. due to local tax exemptions), in exceptional situations, this income may not be taxed either in Thailand or in Poland.

Role of the OECD in Poland-Thailand cooperation

The OECD is an institution that plays a crucial role in shaping a framework for tax cooperation between countries. Through OECD initiatives like the Base Erosion and Profit Shifting project, both countries are introducing international standards that aim to minimize tax abuse, such as shifting profits to lower-tax jurisdictions.

Poland, as a member of the OECD, and Thailand, as a cooperating country, benefit from the exchange of tax knowledge and experience. Harmonizing regulations and promoting best practices in international trade allows for greater predictability in economic relations.

The OECD also plays a significant role in promoting global standards for the exchange of tax information. One notable example is the implementation of the CRS (Common Reporting Standard), which enables the automatic exchange of financial data between countries, making it much more difficult to hide income abroad. Both Poland and Thailand adhere to the CRS reporting standard.

OECD standards promote the growth of Polish-Thai trade through tax transparency, elimination of administrative barriers, and fraud prevention.

In recent years, the OECD has also been at the forefront of work on a global tax regime for the digital economy, which includes the introduction of a minimum global corporate income tax. These efforts aim to reduce harmful tax competition and ensure that multinational corporations pay taxes where they generate profits. As a result, the OECD is an important pillar in laying the foundation for a fairer, more sustainable, and more efficient tax system at a global level, adapted to the challenges of today’s economy and the economy of the future.

Business perspective

Poland and Thailand: Trade relations, investments and prospects

For decades, Poland and Thailand have maintained economic relations that promote cooperation and development. Both countries are members of key international organizations and trade blocs, such as the United Nations (UN), the World Trade Organisation (WTO), the International Monetary Fund (IMF) and the World Bank. They leverage each other’s strengths to build a solid partnership for trade and investment.

Trade relations: Growing partnerships

Poland and Thailand note a rapidly growing trade relationship. According to data from the Central Statistical Office (GUS) in the “Foreign Trade Statistical Yearbook 2023,”  Thailand was Poland’s second-largest trading partner in the ASEAN region in 2022, accounting for 17% of Poland’s total trade with that region.

Insigos data from the Polish Ministry of Entrepreneurship and Technology shows that in 2022, the value of trade between countries exceeded US$ 1,785 million, an increase of 14 percent compared to the previous year. In 2023, Poland’s trade turnover with Thailand amounted to US$ 1,808 million, marking a rise of 1.3 percent compared to 2022. Poland mainly exports to Thailand electrical equipment, general industrial machinery, and agri-food products. In contrast,  imports from Thailand primarily include automotive components, electronic equipment, foodstuffs, and textiles.

Investment flows: Opportunities and challenges

Economic relations between Poland and Thailand mainly focus on trade, while bilateral investments remain low. As reported by the National Bank of Poland, Thailand’s foreign direct investment (FDI) in Poland reached a total of USD 67.9 million at the end of 2022. As stated by the Polish Ministry of Development and Technology, there has been a notable decline in Polish investments in Thailand over the past several years.

One of the largest Polish investors in the country is the Mercator Medical Group, which specializes in the production of medical and industrial gloves and the distribution of medical disposables. The company has completed an investment in Thailand worth about PLN 200 million. The new facility is one of the most modern plants in the world, and the associated projects (photovoltaic farm, industrial water recirculation system) are important from an economic and environmental perspective.

Comarch S.A. is another major player, operating an office in Bangkok that serves clients in the finance, insurance, and telecommunications industries. This office serves as the regional headquarters for Southeast Asia. The company won the prestigious Asian Banker Finance Thailand 2021 Award in the category “Best Digital Transformation Implementation in Thailand” for modernizing the IT system of a local bank.

Another Polish IT investment in Thailand was reported in 2023, valued at BHT 2.27 million. This investment ranked Poland 15th among investors in the country.

On the other hand, the most significant Thai investments in Poland are those made by companies operating in the food processing sector: the Thai-listed S. KhonKaen Food Industry Public Company Limited producing cold meats, and Lucky Union Foods Co Ltd, which has built a plant in Poland producing crab sticks.

Despite the relatively low level of investments, companies from both countries continue to develop cooperation, which gives perspectives for further strengthening of economic relations in the future. According to information on the Polish Investment and Trade Agency (PAIH) website, Thailand is the second largest economy in ASEAN and a strategic gateway to the entire region, making it an attractive destination for Polish companies planning to expand into Southeast Asian markets.

Barriers to collaboration

One of the significant challenges in economic relations between Poland and Thailand is the regulatory and customs barriers that significantly complicate trade cooperation. Thailand imposes high tariffs on selected non-ASEAN imports, which can act as a disincentive for Polish exporters. On the other hand, as an EU member state, Poland applies strict regulations on imports from outside the EU. In addition, the complexity of administrative procedures, such as product registration, obtaining permits or marketing goods, often proves both time-consuming and complicated, which adds to the difficulties for entrepreneurs.

Prospects: Strengthening cooperation

Poland and Thailand, although geographically distant, have many opportunities for economic cooperation based on mutual benefits.  They are characterized by dynamically developing economies, and their trade cooperation is growing yearly, as shown in statistical data. As a member of the European Union, Poland benefits from preferential trade rules while allowing Thailand easier access to the significant European market. In turn, data from the National Bank of Poland indicate a growing interest of Polish companies in investing in Southeast Asia, with Thailand, particularly as a crucial economic partner.

One of the main challenges is to continue strengthening trade and investment relations between Poland and Thailand while also working to reduce regulatory barriers that could restrict their further development. Thus, implementing regulations like the Free Trade Agreement (FTA) is particularly important for fostering free trade and promoting economic growth.

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