Tax Planning in Singapore
Being based in Singapore means that it is a jurisdiction that we believe in and actively promote. When talking to entrepreneurs considering their options for structuring their businesses, Singapore always comes up.
I also write about it frequently -
Today I thought I would go into it more deeply.
Singapore generally imposes tax on income sourced in Singapore as well as foreign-sourced income remitted into, or deemed to be remitted into, Singapore under the Income Tax Act, Chapter 134 of Singapore (ITA).
The Singapore tax regime affords flexibility to corporations to carry out tax planning depending on their commercial objectives, as opposed to adopting an overly prescriptive and onerous approach.
Income tax in Singapore is generally administered by the Inland Revenue Authority of Singapore (IRAS).
A business in Singapore can be structured in various forms, including the following commonly used vehicles:
In determining which vehicle would be most appropriate for the specific business activities to be carried out in Singapore, one would have to consider various factors, including ring-fencing of liability, scope of business activities intended to be carried out in Singapore and ability of the vehicle to hold property in its own name.
A company has a separate legal personality from its members. Accordingly, a company is subject to tax on chargeable income under the ITA. The prevailing tax rate for income received by companies, both resident and non-resident, is 17 per cent.
A company may be eligible for the start-up exemption scheme (the SUTE scheme) or the partial tax exemption scheme (the PTE scheme). Under the SUTE scheme, with effect from the year of assessment (YA) 2020, qualifying companies will be eligible for tax exemption on 75 per cent of the first S$100,000 of chargeable income, and exemption of 50 per cent on the next S$100,000 of chargeable income. The SUTE scheme is available to all new companies for the first three YAs, except companies whose principal activity is investment holding and companies that undertake property development for sale, investment or for both investment and sale. Under the SUTE scheme, the new company must be incorporated in Singapore and tax-resident in Singapore for the particular YA. In addition, the total share capital of the new company must be beneficially held directly by 20 or fewer shareholders throughout the basis period for the relevant YA, with all shareholders being individuals or at least one shareholder being an individual holding 10 per cent or more of the issued ordinary shares in the company.
Under the PTE scheme, from YA 2020 onwards, tax exemption will be granted on 75 per cent of the first S$10,000 of chargeable income and an exemption on 50 per cent of the next S$190,000 of chargeable income.
Under both schemes, the remaining chargeable income (after the tax exemption) will be taxed at the applicable corporate tax rate.
Unlike a company, a partnership does not have a separate legal personality from its partners. A partnership is regarded as a tax-transparent entity and the partners are then taxed on their share of income in the partnership due to them for a basis period, at their applicable income tax rates. If a partner is a company, the partner will be charged tax on its share of the income from the partnership at the prevailing corporate tax rate. As mentioned above, the tax rates for companies (whether tax-resident in Singapore or not) is 17 per cent. Singapore tax-resident individuals are taxed at a progressive rate currently ranging between zero and 22 per cent, depending on the amount of income received. Non-resident individuals, subject to certain exceptions, are subject to income tax on income accrued in or derived from Singapore at the rate of 22 per cent.
While an LLP is regarded as having a separate legal personality under Section 4 of the Limited Liability Partnership Act, Chapter 163A of Singapore, it is treated as a partnership for the purpose of income tax. Accordingly, the partners are taxed on their respective share of the income received from the LLP and the LLP itself is not subject to tax. In addition, the total amount of a partner's share of capital allowances and trade losses arising from the LLP, which are set off against income from sources other than the LLP cannot generally exceed such partner's contributed capital in the LLP (the Deduction Restriction).
An LP is accorded similar tax treatment as a LLP in that each partner is taxed on its share of income from the LP at the applicable tax rates as the LP is also regarded as a tax-transparent vehicle. A limited partner in an LP, like a partner in an LLP, is generally also subject to the Deduction Restriction. An LP is usually used for the purpose of establishing private funds, given that the features of such partnership (such as subscriptions and redemptions) are more aligned with the commercial objectives of private funds.
The variable capital company (VCC) is a new corporate structure introduced in 2018 to further develop Singapore as a hub for fund management and domiciliation, by providing greater operational flexibility and allowing consolidation of fund management activities. A VCC may be structured on a stand-alone basis or as an umbrella VCC with sub-funds.
In the Budget Statement for the Financial Year 2018 (Budget 2018) delivered on 19 February 2018, the Minister for Finance, Mr Heng Swee Kiat (the Minister), announced that a VCC will be treated as a legal person and should be able to claim benefits under the various double tax treaties Singapore has entered into. The various tax exemptions for fund management in Singapore would also be extended to VCCs.
Singapore does not tax capital gains but taxes gains of an income or trading nature (i.e., revenue gains). We will elaborate on the distinction between capital and revenue gains later in this chapter.
As mentioned above, Singapore does not tax foreign-sourced income, unless such income is received (or deemed to be received in Singapore). Under the ITA, the following are deemed as income received in Singapore from outside Singapore:
- any amount from any income derived from outside Singapore that is remitted to, transmitted to or brought into Singapore;
- any amount from any income derived from outside Singapore that is applied in or towards satisfaction of any debt incurred in respect of a trade or business carried on in Singapore; and
- any amount from any income derived from outside Singapore that is applied to purchase any movable property then brought into Singapore.
However, foreign-sourced income in the form of dividends, branch profits and service income received or deemed to be received in Singapore by a Singapore-resident company would be exempt from tax if:
In the case of dividends paid by a company resident in a territory from which the dividends are received, the 'subject to tax' condition in point (a) above is considered met where tax is paid in that territory by such company in respect of its income out of which such dividends are paid (i.e., underlying tax) or tax is paid on such dividends in that territory from which such dividends are received (including withholding tax).
In addition, as a concession, the subject to tax condition would be considered met for specified foreign income that is exempt from tax in the foreign jurisdiction from which the specified foreign income is received if the exemption is resulting from a tax incentive granted by the foreign jurisdiction for carrying out substantive business activities in that jurisdiction. Generally, substantive business activities refer to business activities that are carried out through staff with certain expertise and actual expenditure is incurred to carry out the activities.
With respect to the condition in point (b) above that the headline tax rate of the relevant foreign tax jurisdiction is at least 15 per cent, the IRAS has announced that where:
(1) the specified foreign income received in Singapore is chargeable to tax under a special tax legislation of that foreign tax jurisdiction instead of its main tax legislation;
(2) the special tax legislation imposes tax at a rate lower than the highest tax rate applicable to other companies in that foreign tax jurisdiction under its main tax legislation; and
(3) the application of the lower rate of tax under the special tax legislation is not a tax incentive for carrying out substantive activities in that foreign tax jurisdiction; the headline tax rate for the purposes of the condition in point (b) shall be the highest tax rate stipulated in the special tax legislation, instead of the highest tax rate stipulated in the main tax legislation.
The IRAS has also announced that if the conditions for exemption of specified foreign income described above are not met, the IRAS may nevertheless consider granting an exemption on such income received by resident taxpayers on a case-by-case basis under certain specified scenarios and subject to certain conditions being met.
Singapore has also implemented various tax incentives (such as tax exemption of international shipping profits, a concessionary tax rate for finance and treasury centres, a concessionary tax rate for global trading companies and a concessionary tax rate for financial sector incentive companies), to attract foreign investment and promote certain sectors. To qualify for such incentives, substantive economic activities must generally be carried out in Singapore, including meeting certain targets and thresholds for minimum business spending requirements and minimum number of employees to be employed in Singapore.
Singapore does not have any thin capitalisation rules in place under the ITA. However, in order for interest and certain other borrowing costs to be tax-deductible, such expenditure should be incurred for the production of taxable income, and the relevant financing documents should also clearly state the purpose of such financing.
Ultimately, the appropriate group structure depends on the commercial objective of the group as well as the nature of business activities undertaken by the group. Common transaction structures encountered in practice include locating a holding company in Singapore to hold and provide services to various subsidiaries in the Asia-Pacific region.
Group relief is generally available under the ITA, such that unabsorbed capital allowances, trade losses and donations for the current year may be transferred by a Singapore-incorporated company to another Singapore-incorporated company within the same group, provided certain conditions are met, including that 75 per cent or more of the total number of issued ordinary shares in one company are beneficially held by the other company through Singapore-incorporated companies.
Under the ITA, there is no concept of controlled foreign corporations.
Intercompany transactions, whether domestic or cross-border, must adhere to the arm's-length principle – that is, transactions between related parties must be made under comparable conditions and circumstances as a transaction with an independent party would have been (the Transfer Pricing Requirement).
Under the ITA, the Comptroller of Income Tax (the Comptroller) has wide powers to adjust for tax purposes actual payments and receipts made under non-arm's length circumstances between related parties under various circumstances.
In addition, with effect from YA 2018, taxpayers are required to report certain details of related-party transactions, where the value of such transactions in the audited accounts for the financial year exceeds S$15 million in the Form for Reporting Related Party Transactions, to be submitted with the tax return to the IRAS.
With effect from YA 2019, taxpayers must prepare and maintain transfer pricing documentation for their related-party transactions undertaken in a basis period where gross revenue derived from their trade or business is more than S$10 million for that basis period. However, there are certain exceptions to such requirement, including where the loans owed to all related parties are less than S$15 million per financial year.
The same considerations for domestic related-party transactions in relation to the Transfer Pricing Requirement generally apply to cross-border related-party transactions as well. However, the IRAS is more likely to scrutinise and raise queries for cross-border related-party transactions, whereby one party is located in an offshore jurisdiction or has limited economic activities. In this regard, it would be even more critical to prepare and maintain transfer pricing documentation to substantiate that the Transfer Pricing Requirement is satisfied in such circumstances.
There are opportunities for tax planning in third-party transactions, depending on the commercial objectives of the relevant parties.
Singapore does not impose tax on capital gains, but imposes tax on income. There are no specific laws or regulations that deal with the characterisation of whether a gain is income or capital in nature. Gains arising from the disposal of shares for cash may be construed to be of an income nature and, accordingly, subject to Singapore income tax, especially if they arise from activities that the IRAS regards as the carrying on of a trade or business in Singapore. Case law has generally held that the most significant factor is the taxpayer's intention upon acquisition of the asset (i.e., whether the asset was acquired for investment or trading purposes (and assuming there is no subsequent change of intention)). The test to determine if gains derived on the disposal of assets are revenue or capital in nature is also an objective one, as opposed to the stated intention of the taxpayer and is arrived at after having considered the activities of the taxpayer and all the circumstances relating to the purchase and sale of the securities in question. The local courts have also endorsed the six badges of trade (as evolved from the United Kingdom) as relevant in determining whether a transaction of purchase and sale is, or is not, to be regarded as a trading transaction. Such badges of trade include the length of period of ownership, frequency of similar transactions, circumstances responsible for the disposal and the motive for acquisition.
However, the ITA provides for a safe harbour provision under Section 13Z. Gains derived by a divesting company from its disposal of ordinary shares in a target entity from 1 June 2012 to 31 May 2022 are not taxable if, immediately prior to the date of disposal, the divesting company has held at least 20 per cent of the ordinary shares in the target for a continuous period of at least 24 months. The above rule applies irrespective of whether the investee company is incorporated in Singapore or elsewhere, but does not apply to a divesting company whose gains or profits from the disposal of shares are included as part of its income as an insurer; or an unlisted investee company that is in the business of trading or holding Singapore immovable properties (other than the business of property development).
In addition, stamp duty relief may be available for the transfer of shares between associated permitted entities and for reconstruction or amalgamation of companies. Stamp duty is chargeable on instruments effecting a transfer of shares of a Singapore-incorporated company (or a foreign company maintaining a share register in Singapore) at 0.2 per cent of the higher of consideration or the net asset value of such shares; and on instruments with respect to transactions relating to immovable property in Singapore (including mortgages, and leases) and in particular, the following based on the higher of the purchase price or market value of the property:
Additional conveyance duties (ACD) may also be payable for the sale and acquisition of certain shares in property-holding entities (PHEs) acquired on or after 11 March 2017, if the seller or purchaser is or becomes a significant owner, after such acquisition or disposal. ACD is chargeable at 12 per cent for the disposal of shares in a PHE. For the acquisition of shares in a PHE, ACD is chargeable at, for the existing BSD 1 per cent to 4 per cent, and for ABSD at 30 per cent.
Unutilised trade losses, capital allowances and donations may be carried forward and deducted against subsequent income of a company, provided that there is no substantial change in the shareholding of the company – that is, that 50 per cent or more in shareholders and their respective shareholdings at the relevant dates have remained the same (the Substantial Shareholding Test). A sale of shares in third-party transactions may thus result in the Substantial Shareholding Test not being met. Companies may apply for a waiver of the Substantial Shareholding Test, provided that the Comptroller is satisfied that such substantial change in shareholders was not to seek any tax benefit.
For a sale of assets, a balancing charge or allowance may be applicable, if capital allowances had previously been claimed in respect of the asset, including a plant or machinery. A balancing charge is applicable where the consideration for the sale of the asset exceeds the total tax written-down value of such asset, whereas a balancing allowance may be claimed where the consideration for the sale of the asset is less than the total tax written-down value of the asset.
There are no tax-free or tax-deferred transactions available in Singapore.
Withholding tax may be applicable on certain payments to a person not tax-resident in Singapore (other than non-resident individuals) including the following, which are deemed to be derived in Singapore:
(1) any interest, commission, fee or any other payment in connection with any loan or indebtedness or with any arrangement, management, guarantee, or service relating to any loan or indebtedness;
(2) any royalty or other payments in one lump sum or otherwise for the use of or the right to use any movable property; or
(3) any payment for the use of or the right to use scientific, technical, industrial or commercial knowledge or information; where such payments are borne, directly or indirectly, by a person resident in Singapore or a permanent establishment in Singapore (except in respect of any business carried on outside Singapore through a permanent establishment outside Singapore or any immovable property situated outside Singapore), or deductible against any income accruing in or derived from Singapore.
The applicable rate of withholding tax depends on the nature of the payment and whether such income is derived through a trade or business in Singapore and the recipient is tax-resident in a country that has a tax treaty with Singapore.
GST is form of value added tax charged on goods and services supplied in Singapore by GST-registered persons and on the import of goods into Singapore. The current rate of GST imposed on standard rated supplies is 7 per cent. Input GST incurred by a GST-registered person for the purpose of making GST-taxable supplies is generally recoverable from the IRAS (subject to certain exceptions) by way of a refund or credit against the output GST payable on supplies made by such GST-registered persons.
Persons in Singapore whose total value of GST-taxable supplies exceeds or is expected to exceed S$1 million over four quarters (i.e., 12 months) will have to register for GST purposes. However, entities may also register voluntarily to claim any input GST incurred on GST-taxable supplies made to such entities (which are used by such entities to make their own GST-taxable supplies).
GST on imported services
Singapore does not currently impose GST on services imported into Singapore and provided by a foreign supplier without an establishment in Singapore.
However, in the 2018 Budget, the Minister announced that GST on imported services will be introduced on or after 1 January 2020 to ensure a level playing field by according the same GST treatment to imported and local services.
For imported services provided by a business outside Singapore to a business in Singapore, GST will be charged through a reverse charge mechanism (i.e., the Singapore entity is to account to IRAS for GST chargeable on services it imports and is entitled to make input tax claims on such GST, provided the relevant input tax requirements have been complied with). In addition, for imported digital services between a business outside Singapore and a customer in Singapore, foreign businesses with a global turnover exceeding S$1 million per annum and making supplies of digital services to customers in Singapore exceeding S$100,000 per annum, including electronic marketplace operators, will be required to register for GST, and such services will be subject to tax through an overseas vendor registration mode.
Change in GST rate
The Minister announced in the 2018 Budget that the government plans to raise the GST rate to 9 per cent at some point in the period from 2021 to 2025.
International intercompany transactions
Sales of shares or assets for cash
Tax-free or tax-deferred transactions