Retention money is common in Thailand’s construction, engineering, renovation and project-based service industries. It allows a customer to withhold part of a contract payment until the contractor meets specified conditions, completes outstanding work or fulfils the agreed defect-liability period.
Although retention money is withheld temporarily, it can affect a company’s revenue recognition, accounts receivable, cash flow, value-added tax (VAT) and corporate income tax.
A common misconception is that retention money should only be recognised as revenue or included in tax calculations when the cash is received. In practice, the correct treatment depends on the contractual terms, applicable accounting standards and Thai tax regulations.
This article explains how businesses can account for retention money and manage the related tax obligations in Thailand.
What Is Retention Money and How Should It Be Recorded?
Retention money is a portion of a contract payment withheld by a customer as security for the contractor’s performance. It is commonly used in construction and other projects where the customer needs assurance that the work will be completed satisfactorily and any defects will be rectified.
For example, a contractor completes a project milestone valued at THB 1,000,000, excluding VAT. Under the contract, the customer withholds 5% of the milestone value, or THB 50,000, until the agreed release conditions are satisfied.
The contractor receives THB 950,000 of the contract price, while THB 50,000 remains outstanding as retention money.
From the contractor’s perspective, the retained amount may be recorded as a receivable when the applicable revenue-recognition criteria have been met and the business has an appropriate right to consideration. The fact that payment is withheld does not automatically mean that the amount should be treated as an expense or excluded from revenue.
From the customer’s perspective, the corresponding amount is generally recognised as part of the relevant project cost, asset or expense, with a corresponding liability, depending on the nature of the work and the applicable accounting requirements.
Businesses should distinguish retention receivables from ordinary trade receivables in their accounting records where appropriate. They should also monitor the expected release date, contractual conditions and collectability of outstanding balances.
Revenue Recognition: When Should Retention Money Be Recognised?
The timing of revenue recognition is one of the most important considerations when accounting for retention money.
Under Thai Financial Reporting Standards on Revenue from Contracts with Customers (TFRS 15), where applicable, revenue is recognised when or as a business satisfies its performance obligations. The amount recognised reflects the consideration to which the business expects to be entitled in exchange for transferring the promised goods or services to its customer.
For construction and project-based contracts, revenue may be recognised over time if the relevant criteria are satisfied. Otherwise, revenue is recognised at a point in time. The contractual payment schedule alone does not determine when revenue should be recognised.
If a contractor has satisfied the relevant performance obligations and the retention amount forms part of the consideration to which it is entitled, the amount may need to be recognised as revenue even though the customer has not yet released the payment.
However, if the amount remains contingent on substantive future performance, acceptance requirements or other contractual conditions, the business must assess those conditions before determining the appropriate accounting treatment.
For the example above, if the contractor has earned the full THB 1,000,000 milestone revenue and the THB 50,000 retention is simply withheld as security, the illustrative accounting entry, excluding VAT, would be:
At the point of revenue recognition
Debit: Trade receivables — THB 950,000
Debit: Retention receivable — THB 50,000
Credit: Revenue — THB 1,000,000
The VAT component should be recorded separately in accordance with the applicable tax point and invoicing requirements.
When the retention is subsequently released
Debit: Bank — THB 50,000
Credit: Retention receivable — THB 50,000
These entries illustrate the accounting treatment where the full milestone revenue has been earned and the retention is recoverable. Actual entries may differ depending on the contract, invoicing arrangements and applicable accounting framework.
For corporate income tax purposes, Section 65 of the Thai Revenue Code generally requires companies to calculate taxable net profit using the accrual basis, subject to the applicable tax rules. Therefore, businesses should not automatically defer taxable revenue solely because retention money has not been received.
Companies should separately assess their accounting and tax treatment and document any differences requiring adjustments in the corporate income tax computation.
VAT Treatment of Retention Money in Thailand
VAT is another important consideration because the timing of VAT liability may differ from the timing of revenue recognition or the receipt of cash.
Under Section 78/1 of the Thai Revenue Code, VAT liability for services generally arises when payment for the services is received, unless an earlier event specified by law, such as issuing a tax invoice or using the service, triggers liability for the relevant amount. Special rules apply to certain contracts and payment arrangements.
The Revenue Department’s ruling No. 0706/พ.789, dated 1 February 2008, specifically addresses VAT on retention money in a construction contract. The ruling discusses a situation in which a contractor withheld 10% of milestone payments when calculating the amounts invoiced and paid. It explains that, under the circumstances considered, the retained amount had to be included in the VAT tax base.
This ruling is an important reference for contractors. It demonstrates that retention money cannot automatically be excluded from the VAT calculation merely because the customer has withheld payment.
For example, if a taxable construction milestone is valued at THB 1,000,000 and the applicable VAT rate is 7%, the VAT on the full taxable value would be THB 70,000. A 5% retention of THB 50,000 does not, by itself, reduce the taxable value to THB 950,000.
The precise timing and amount of VAT liability must nevertheless be assessed against the contract, the relevant milestone, tax invoices issued and applicable statutory provisions.
Thailand VAT rate update for 2026: Thailand’s reduced VAT rate of 7%, inclusive of local tax, has been extended from 1 October 2026 through 30 September 2027 under Royal Decree No. 807, as reported in the August 2026 tax update published by BDO Thailand.
Businesses should ensure that retention money is handled consistently across their tax invoices, output VAT reports and monthly VAT returns. If a previous VAT calculation incorrectly excluded retention, the company should review the appropriate corrective action with its accounting or tax adviser rather than waiting until the retained amount is released.
Corporate Income Tax and Withholding Tax Implications
Retention money may affect corporate income tax and withholding tax, but the two taxes have separate requirements and should not be treated as having the same tax point.
For corporate income tax, Thai companies generally calculate taxable net profit on an accrual basis under Section 65 of the Revenue Code, subject to the applicable rules. If retention revenue is recognised and is taxable in the relevant accounting period, the company may need to include it in that period’s tax computation even though cash collection will occur later.
Businesses should also review the tax treatment of related project costs and expenses. Accounting recognition and tax deductibility do not always coincide, and any required adjustments should be reflected in the company’s corporate income tax calculation.
Withholding tax must be assessed separately. The applicable withholding tax rate, deduction point and filing obligations depend on the nature of the payment, the parties involved and the relevant tax rules.
Where a customer pays a contractor in instalments and withholds a portion of the contract price as retention, both parties should review the withholding tax treatment of the payments and the subsequent release of retention. They should not assume that the withholding tax obligation necessarily arises at the same time as accounting revenue recognition or VAT liability.
Contractors should retain withholding tax certificates and reconcile them with their receipts, outstanding retention balances and tax credits claimed. Customers should ensure that their withholding tax deductions, remittances and supporting documents reflect the actual payment arrangement.
Best Practices for Managing Retention Money in 2026
Effective retention management helps businesses maintain accurate financial records, manage cash flow and reduce tax compliance risks.
First, businesses should review their contracts to identify the retention percentage, milestone payment terms, acceptance criteria, defect-liability period and conditions for releasing the retained amount. These details help determine the appropriate accounting treatment and support the assessment of when revenue is earned.
Second, companies should maintain a retention schedule showing the original contract value, milestone revenue recognised, invoices issued, retention withheld, VAT reported, withholding tax deducted and amounts subsequently collected. Reconciling this schedule with the general ledger and customer confirmations can help identify outstanding balances and inconsistencies before tax filings are submitted.
Third, finance teams should review the collectability of retention receivables, follow up on overdue amounts and assess whether an impairment allowance is required under the applicable accounting framework. Where the release of retention is disputed or delayed, the company should maintain supporting correspondence and evaluate the appropriate accounting treatment.
Finally, businesses should coordinate their accounting records with VAT returns, withholding tax documentation and annual corporate income tax computations. This is particularly important when accounting revenue recognition, cash collection and tax obligations fall into different reporting periods.
For the 2026 financial year, businesses should also confirm that their accounting treatment follows the financial reporting framework applicable to their entity and that tax calculations reflect the Thai Revenue Code and relevant Revenue Department guidance in force for the applicable period.
Retention money is not simply a delayed cash receipt. Depending on the contract and applicable rules, it can affect revenue recognition, receivables, VAT reporting, withholding tax and corporate income tax in Thailand.
Businesses should assess each retention arrangement based on the contractual terms, performance obligations and relevant tax requirements rather than automatically recognising revenue or calculating tax only when the retained cash is received.
