Does a Singapore Tax Resident need to pay tax on Foreign Investment Income?
Many of our Singapore clients ask about the tax treatment of their overseas investments. The good news is that investment income of SG tax residents isn't usually taxed by IRAS.
In Singapore, taxes are imposed on income earned or accrued in Singapore, as well as foreign-sourced income remitted into Singapore. The foreign-sourced income tax exemption regime means that foreign branch profits, service income and dividends are exempt from tax upon remittance into Singapore, if conditions are met. All other sources of foreign income continue to be subject to the foreign tax credit system.
A Singapore tax resident company can enjoy tax exemption on its specified foreign income that is remitted into Singapore. Again, the three categories of specified foreign income are:
- Foreign-sourced dividend
- Foreign branch profits
- Foreign-sourced service income
Under Section 13(9) of the Income Tax Act, tax exemption will be granted when all of the following three conditions are met :
- The highest corporate tax rate (headline tax rate) of the foreign jurisdiction from which the income is received is at least 15% at the time the foreign income is received in Singapore;
- The foreign income had been subjected to tax in the foreign jurisdiction from which they were received (known as the "subject to tax" condition). The rate at which the foreign income was taxed can be different from the headline tax rate; and
- The Comptroller is satisfied that the tax exemption would be beneficial to the person resident in Singapore.
To enjoy the tax exemption, you have to provide the following information in your Income Tax Return (Form C/ P):
- Nature and amount of income received;
- Jurisdiction from which the income is received;
- Headline tax rate of the foreign jurisdiction; and
- Confirmation that foreign tax has been paid in the jurisdiction from which the income was received. This is to satisfy the "subject to tax" condition.
For the purpose of this “subject to tax” condition, tax paid or payable on foreign-sourced dividend received in Singapore includes:
- the dividend tax, which is income tax levied on the dividend by the foreign country of source; and
- the underlying tax, which is income tax paid or payable by the dividend paying company on the income out of which the dividend is paid.
The Comptroller will regard the "subject to tax" condition as being met if the income is exempt from tax in the foreign jurisdiction due to tax incentive(s) granted for substantive business activities carried out in that jurisdiction. The following documents must be prepared and retained*:
- A declaration by the company that the foreign jurisdiction has exempted the foreign income from tax because of substantive business activities carried out by the company in that jurisdiction; and
- A copy of the tax incentive certificate/ approval letter issued by the foreign jurisdiction. In the case of a foreign-sourced dividend, a dividend voucher (if available) stating that the dividend is exempt from tax due to tax incentive granted to the payer company for carrying out substantive business activities in that foreign jurisdiction will be sufficient.
You can provide the following documents to substantiate that the underlying tax has been paid on the income out of which the foreign-sourced dividend is paid:
a) Audited accounts of the foreign payer company
- Currently, to demonstrate that their foreign-sourced dividend has suffered underlying tax, taxpayers can provide the audited accounts of the foreign payer company for the financial period ending in the year prior to the year the dividend is received in Singapore whereby the accounts show a positive current year tax(excluding deferred tax expense).
- For details, refer to the e-Tax guide Tax Exemption for Foreign-Sourced Income (121KB).
- From 20 July 2016, as a concession, IRAS is prepared to accept the consolidated accounts of the foreign payer company and its group companies as proof that the “subject to tax” condition has been met, provided that the foreign payer company is:
- a company listed on a stock exchange; and
- an operating company carrying out substantive business activities (investment-holding is excluded). This must be supported by evidence such as description in the consolidated accounts or any official publication showing the principal activities of the foreign payer company to be such (as opposed to the Group).
- Under this concession, the consolidated accounts of the foreign payer company and its group companies for the financial period ending in the year prior to the year the dividend is received in Singapore must show a positive current year tax (excluding deferred expense). For example, if the dividend is received in Singapore on 30 June 2014, the consolidated accounts of the foreign payer and its group companies for the financial year ending in 2013 must show a positive current year tax.
b) Alternative documents accepted
- IRAS will also accept the following documents showing that the income of the foreign payer company has been subject to tax (or that it is enjoying tax incentive on its substantive business activities):
- a certification from the bank through which the taxpayer invested into the foreign payer company; or
- a confirmation letter from the foreign payer company that foreign tax has been paid on the income out of which dividends are paid.
- If you are unable to secure any proof that tax has been paid on the income of the foreign payer company, the “subject to tax” condition will not be considered as met.
- IRAS may review and modify the use of the alternative documents should there be any cases of abuse.
* The relevant information/ documents must be retained for a period of at least five years from the relevant YA. These information/ documents should be submitted to the Comptroller of Income Tax upon request. For more information on record keeping, please refer to Business Records That Companies Must Keep.