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 (article about US tax Singapore), or deemed to be remitted into, Singapore under the Income Tax Act, Chapter 134 of Singapore (ITA).
Personal income tax, also referred to as individual income tax, encompasses the taxation of an individual’s salary, earnings, interest, dividends, and other income sources throughout the year. Governments utilize tax revenue to finance public services and fulfill various obligations. All income earned within Singapore or derived from Singapore sources falls under the purview of personal income tax. Generally, income received overseas while residing in Singapore is not taxable, except in specific circumstances. The following sources of income are subject to personal income tax in Singapore:
- Employment: Including salaries and bonuses.
- Trade, Business, Profession, or Vocation: This includes online vendors, gig workers, commission brokers, and private hire car/taxi drivers.
- Assets, Investments, or Real Estate.
- Other Resources: This category includes royalties, annuities, winnings, or trust income.
- Income tax rates in Singapore depend on whether an individual is a tax resident or a non-resident. Let me explain the criteria for tax residency.
If you are a Singapore Citizen or a Permanent Resident living in Singapore, you are considered a tax resident, unless you are temporarily away.
Foreigners can also become tax residents in Singapore under certain circumstances. If they have stayed or worked in Singapore for at least 183 days in the previous year, or continuously for three years, they are considered tax residents. However, the three-year rule applies even if their stay in the first and third year is less than 183 days.
There’s another condition for foreigners who have worked in Singapore across two calendar years. If their total stay, including time before and after employment, adds up to 183 days or more, they are treated as tax residents. This rule doesn’t apply to company directors, public entertainers, or professionals.
To determine tax residency, two things are considered: the number of days an individual is physically present in Singapore (183 days or more in a year makes them a tax resident), and their economic ties to the country. Even if someone doesn’t meet the 183-day requirement, they may still be considered a tax resident if they have significant economic connections in Singapore.
If an individual doesn’t meet any of these conditions, they are classified as non-residents for tax purposes.
The income tax rates for resident individuals in Singapore followed a progressive structure. The rates ranged from 0% for incomes up to $20,000, gradually increasing to a maximum of 22% for higher income brackets. However, starting from YA 2024 and onwards, the tax rates have been adjusted. The current rates range from 0% for earnings up to $20,000 to a maximum of 24% for incomes of $1,000,000 and above. These updated rates ensure a fair and progressive tax system, where individuals contribute taxes proportionate to their income levels.
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%. Non-resident individuals are taxed only on income earned in Singapore and are not entitled to any personal allowances. The income tax rate for non-resident individuals (except on employment income and certain income taxable at reduced withholding rates) will be raised from 22% to 24% from YA2024. Starting in YA 2024, the income tax rate for non-resident individuals (excluding employment income and specific income subject to reduced withholding rates) will be increased from 22% to 24%. This adjustment aims to ensure alignment between the income tax rate applicable to non-resident individuals and the highest marginal income tax rate applicable to resident individuals.
Non-residents are subject to a tax rate of 22% on income from sources such as director’s fees, consultation fees, rental income, and pensions. It’s important to note that this tax rate does not apply to employment income or certain types of income eligible for reduced withholding rates.
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:
- a company;
- a partnership;
- a limited partnership (LP); and
- a limited liability partnership (LLP).
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 %.
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 % of the first S$100,000 of chargeable income, and exemption of 50 % 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 % 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 % of the first S$10,000 of the chargeable income and an exemption on 50 % of the next S$190,000 of the 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 %. Singapore tax-resident individuals are taxed at a progressive rate that ranges from zero to 22% depending on the amount of income received.
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.
Tax treatment of employer benefits in Singapore
The way employer benefits are taxed in Singapore is an important aspect for both employers and employees to be aware of in order to comply with the country’s tax regulations. Employees in Singapore often receive additional benefits and perks from their employers as part of their total compensation package. It is necessary to understand how these benefits are treated for tax purposes.
Cash Allowances: Allowances provided by employers, such as transport, meals, or housing allowances, are generally considered taxable income for employees. These allowances are subject to income tax based on the individual’s tax bracket.
Bonuses and Incentives: Cash payments like bonuses and performance incentives received by employees are usually taxable. They are typically included in the employee’s annual income and subject to income tax.
Central Provident Fund (CPF) Contributions: Employer contributions to an employee’s CPF account are not taxable and are exempt from income tax. However, it is important to note that employee contributions to CPF are not tax-deductible.
Group Insurance and Medical Benefits: Premiums paid by employers for group insurance coverage and medical benefits are generally not taxable for employees. However, benefits received by employees, such as insurance payouts or reimbursements for medical expenses, may be taxable if unrelated to medical treatment or hospitalization.
Employee Share Option Plans (ESOPs): Gains derived from ESOPs provided by employers may be eligible for tax concessions or exemptions under certain conditions. Employees should consult the Inland Revenue Authority of Singapore (IRAS) for specific guidelines on ESOP taxation.
Work-related Overseas Trips: Reimbursements for work-related overseas trips, including travel, accommodation, and meals, are generally not taxable.
Accommodation: When employers provide accommodation to employees, the value of the accommodation is considered a taxable benefit and subject to income tax. However, certain exemptions may apply for accommodation provided in specific circumstances, such as housing provided at remote work locations.
Company Cars: If an employer provides a company car for personal use, the value attributable to personal use is considered a taxable benefit. The value is determined using a prescribed formula provided by the IRAS.
Interest-Free or Low-Interest Loans: If employers grant interest-free or low-interest loans to employees, the difference between the market interest rate and the charged rate, if any, may be considered a taxable benefit.
Stock Options and Shares: The tax treatment of stock options and shares provided by employers depends on specific conditions and employee share plans. Employees should seek guidance from the IRAS regarding the tax implications of these benefits.
Tax Exemptions Deductions and Reliefs
Tax Exemptions, Deductions, and Reliefs are essential components of Singapore’s tax system aimed at reducing the tax burden on individuals, promoting social welfare, and encouraging certain behaviors. Understanding these provisions is crucial for individuals to optimize their tax obligations and improve their financial well-being.
Tax Exemptions: Singapore offers various tax exemptions that allow individuals to reduce their tax liabilities and enjoy exemptions for specific types of income. One important concept is the personal income tax exemption threshold, which determines the income level below which individuals are not required to pay income tax. Currently set at $22,000 per year, this threshold ensures that those earning below it are relieved from the tax burden on their earned income.
Certain types of income are exempt from taxation in Singapore. Capital gains income, such as profits from the sale of assets or stocks, are generally exempt from tax. Dividends received from Singapore companies may also be exempt from tax in specific cases. Inheritance income has been tax-exempt since 2008, and donations in the form of cash, shares, land, or buildings are exempt from taxation. Additionally, certain foreign-sourced income, such as income from Real
Estate Investment Trusts (REITs), can be exempt from tax, excluding income earned through a business partnership within Singapore.
Eligibility for tax exemptions includes Singaporean residents who meet the criteria for tax residency, individuals who have resided in Singapore for fewer than 60 days, recipients of non-taxable dividends from resident Singapore companies, and individuals who earn income from sources outside Singapore.
Tax Reliefs and Deductions: In Singapore, there are various tax reliefs and deductions available to individuals, allowing them to further reduce their tax burden and maximize benefits. Spouse relief of SGD 2,000 is available for individuals whose spouses are living with them or are financially supported by them, provided the spouse’s annual worldwide income does not exceed SGD 4,000. Handicapped spouse relief of SGD 5,500 is provided for the maintenance of a handicapped spouse, without any income threshold. Earned income relief is available for individuals under 55 years of age, with the relief being the lesser of actual earned income or SGD 1,000. There are increased relief amounts for individuals aged 55 and over or those who are handicapped.
Moreover, child reliefs in Singapore encompass various provisions to support families with children. The qualifying child relief provides SGD 4,000 for each child below 16 years of age or in full-time education, as long as their annual worldwide income remains below SGD 4,000. Handicapped child relief offers SGD 7,500 without any income threshold, providing additional support for children with disabilities. Working mother’s child relief varies based on birth or adoption dates, granting a percentage of the mother’s earned income or a fixed amount for qualifying children.
Furthermore, aged dependent relief is available for aged parents or grandparents maintained by taxpayers in Singapore. The relief amount ranges from SGD 5,500 to SGD 14,000, depending on whether the dependent lives with the taxpayer and whether they are handicapped. The relief is subject to the dependent’s worldwide income not exceeding SGD 4,000. Grandparent caregiver relief grants SGD 3,000 to working mothers with Singaporean children aged 12 and below, and there is no age limit for handicapped and unmarried dependent children. This relief is in addition to the aged dependent relief.
Other reliefs include deductions for life insurance premiums, relief on CPF contributions and SRS contributions, educational expense relief for approved courses, deduction for foreign domestic worker levy, reservist relief for those who have completed national service, relief for CPF cash top-ups, and various additional reliefs such as parent relief, handicapped sibling relief, NSman relief, course fees relief, dependant relief, donations, and parenthood tax rebate.
These tax reliefs and deductions serve to alleviate the tax burden on individuals, provide support for specific circumstances, and incentivize certain behaviors.
It is important to note that personal income tax reliefs are subject to a cap of SGD 80,000 per year of assessment. To obtain the most accurate and up-to-date information regarding tax reliefs and deductions in Singapore, it is recommended to consult with a tax professional or refer to the official Inland Revenue Authority of Singapore (IRAS) website.
By understanding and utilizing the available tax exemptions, reliefs, and deductions in Singapore, individuals can optimize their tax obligations, reduce their tax burden, and enhance their financial well-being.
Domestic income tax
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:
- such income is subject to tax of a similar character to income tax under the law of the territory from which it is received; and
- at the time such income is received in Singapore, the highest rate of tax of a similar character to income tax levied under the law of the territory from which income is received on any gains or profits from any trade or business carried on by any company in that territory at that time is not less than 15 %.
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 %, the IRAS has announced that where:
- 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;
- 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
- 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.
Exceptions to Non-Taxable Overseas Income:
However, there are also specific circumstances in which overseas income becomes taxable:
- Partnerships in Singapore:
- If the overseas income is received in Singapore through partnerships established within Singapore, it becomes subject to taxation.
- Incidental Overseas Employment:
- If your overseas employment is incidental to your work in Singapore, meaning that it is an integral part of your Singapore employment and requires overseas travel, the income derived from such employment is taxable.
- Employment on behalf of the Singapore Government:
If you are employed outside of Singapore on behalf of the Singapore Government, the income earned from such employment is taxable.
Declaration of Taxable Overseas Income:
Taxpayers are required to declare qualified taxable overseas income in their tax form under the relevant categories, such as ’employment income’ or ‘other income,’ based on the nature of the income received.
Singapore has also implemented various tax incentives, to attract foreign investment and promote certain sectors. Here are some of the most popular ones:
Pioneer Certificate Incentive (PC): Provides tax exemption for qualifying companies engaged in new, high-value-added industries for a period of up to 15 years.
Development and Expansion Incentive (DEI): Offers reduced corporate tax rates of not less than 5% on incremental income derived from qualifying activities for a period of up to 10 years.
Global Trader Program (GTP): Provides concessionary tax rates of 5% or 10% on qualifying trading income for companies engaged in global trading activities for a period of up to 5 years.
Research and Development (R&D) Tax Incentives: Includes enhanced tax deductions of up to 250% on qualifying R&D expenses incurred in Singapore or overseas; accelerated depreciation allowances on qualifying plant and machinery used for R&D; and cash grants of up to 30% on qualifying R&D projects under the Productivity and Innovation Credit Plus scheme.
Financial Sector Incentive (FSI): Offers tax incentives ranging from 5% to 13.5% on income derived from qualifying activities such as banking, fund management, insurance, or capital market services for qualifying financial institutions for a period of up to 10 years.
Maritime Sector Incentive (MSI): Provides various tax benefits for companies engaged in maritime-related activities such as ship owning, ship operating, ship management, maritime leasing, or maritime support services. These benefits include tax exemption or concessionary tax rates on qualifying income; automatic withholding tax exemption on qualifying payments; accelerated depreciation allowances on qualifying assets; and enhanced tax deductions on qualifying expenses.
Intellectual Property (IP) Development Incentive (IDI): Offers tax benefits such as deductions and exemptions on income derived from qualifying IP development and exploitation activities for companies that meet certain minimum IP spending and substance requirements for a period of up to 10 years.
Meanwhile, the Land Intensification Allowance (LIA) provides tax allowances of up to 25% on qualifying capital expenditure incurred for the construction or renovation of qualifying buildings or structures used for land-intensive activities such as manufacturing or logistics for a period of up to 15 years. The Investment Allowance (IA) provides tax exemption on an amount of profits based on a specified percentage of the capital expenditure incurred for qualifying projects or activities within a period of up to 8 years. The percentage can be up to 100% and the cap can be up to S$10 million per project, depending on the type and scale of the project.
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. Moreover, companies must meet specific eligibility criteria tailored to different types of incentives. These requirements may include industry-specific requirements and operational activities.
For example, certain incentives target specific industries such as manufacturing, research and development (R&D), technology, financial services, global trading, maritime, intellectual property, and land intensification. Eligibility often depends on operating within these designated industries or engaging in qualifying activities related to them.
The process of applying for tax incentives in Singapore typically involves several essential steps. Companies seeking tax incentives need to follow these steps to be considered for eligibility:
Firstly, companies are required to gather and prepare the necessary documentation as part of their application. This documentation may include financial statements, business plans, project proposals, investment details, and other supporting documents that are specific to the particular tax incentive they are seeking.
Once the documentation is prepared, the completed application is submitted to the relevant government agency responsible for administering the specific tax incentive. The agency overseeing the incentive may vary depending on its nature. For instance, the Economic Development Board (EDB), Inland Revenue Authority of Singapore (IRAS), Monetary Authority of Singapore (MAS), Enterprise Singapore (ESG), or Maritime and Port Authority of Singapore (MPA) may oversee different incentives.
After the submission, the agency evaluates the application based on the eligibility criteria set for the tax incentive. This evaluation process involves reviewing the submitted documents, conducting interviews with representatives from the company, and occasionally conducting site visits to assess the potential economic impact.
If the application meets the necessary requirements and is approved, the company will receive an official notification of approval. Along with the approval, the company will also be provided with guidance on the compliance requirements that must be adhered to in order to enjoy the benefits of the tax incentive.
Throughout the incentive period, companies may be required to submit periodic reports or comply with specific obligations to maintain eligibility. It is important for the company to fulfill these reporting requirements and adhere to the compliance guidelines.
In some cases, tax incentives may require renewal after a specified period. Companies must follow the renewal process outlined by the relevant agency to continue enjoying the benefits of the tax incentive.
Benefits of availing tax incentives in Singapore
Tax incentives in Singapore offer a range of advantages to companies, providing them with significant benefits for their operations and growth.
Firstly, these incentives lower the tax burden for eligible companies, effectively reducing the overall tax rate. By paying lower taxes, companies can increase their after-tax profits, which enhances their competitiveness and profitability. This allows them to allocate more resources to various aspects of their business, such as expanding their operations, investing in new technologies, or developing innovative products and services.
One of the notable advantages of tax incentives is the enhanced cash flow they provide. Companies can benefit from deferred or reduced tax payments, freeing up more funds for business expansion or reinvestment. This improved cash flow allows companies to pursue strategic initiatives, such as research and development (R&D) activities, acquiring new equipment, or expanding their workforce.
Tax incentives also offer companies greater market access. Singapore has established an extensive network of double taxation avoidance agreements (DTAs) with over 80 countries. Through these agreements, eligible companies can enjoy preferential tax treatment, avoiding double taxation and facilitating their international operations. This advantageous tax framework opens up new markets and allows companies to expand their reach globally.
Singapore’s Double Taxation Agreements (DTAs) are the product of bilateral negotiations between countries, serving as a framework to address tax conflicts and establish rules for allocating taxing rights in cross-border transactions.
Benefits of DTAs
One significant benefit of DTAs is the elimination of double taxation. These agreements ensure that income is not subject to being taxed twice by allowing taxpayers to claim relief through methods such as exemption or credit. This promotes fair taxation and removes barriers to cross-border trade and investment, as businesses are not burdened by being taxed multiple times on the same income.
DTAs also provide businesses with enhanced tax planning opportunities. By strategically utilizing the provisions within these agreements, businesses can effectively minimize their overall tax burden. They can allocate profits efficiently, optimizing their financial strategies and improving cash flow.
Tax Treaty Provisions and Eligibility Criteria
An overview of the key provisions within DTAs includes the concept of a “permanent establishment” (PE). DTAs typically define what constitutes a taxable presence for a business in a foreign country. The existence of a PE is crucial in determining the allocation of taxing rights between countries. This provision provides clarity on how businesses are taxed when operating in foreign jurisdictions.
Residency status is another important criterion outlined in DTAs. These agreements define the criteria for determining an individual or company’s residency status for tax purposes. Residency status influences the application of the DTA’s provisions and determines the country
Moreover, tax incentives in Singapore encourage companies to invest in innovation and productivity-enhancing activities. Companies are incentivized to allocate resources towards R&D, intellectual property (IP) development, automation, and digitalization. These investments not only improve their operational efficiency but also foster technological advancements and the creation of value-added products or services. By prioritizing innovation and productivity, companies can enhance their competitiveness and adapt to evolving market demands.
Furthermore, tax incentives have a positive impact on the overall economy. They attract foreign direct investment (FDI), contributing to job creation and skill development. Additionally, companies benefiting from tax incentives often generate spillover effects throughout the economy. This includes increased exports, local supplier development, and the transfer of technology and knowledge.
Top 10 DTAs
Singapore, recognized for its robust financial sector and global business environment, has entered into an extensive network of tax treaties with numerous countries. These treaties provide Singaporean taxpayers with relief from double taxation and foster international trade and investment. Here are the top 10 noteworthy tax treaties Singapore has established in relation to both personal and corporate income:
United States – Singapore DTA: The DTA with the United States is beneficial as it provides reduced withholding tax rates for dividends, interest, and royalties, making it attractive for businesses and investors. It also provides for the elimination of double taxation and offers enhanced tax certainty.
China – Singapore DTA: This DTA is significant because it provides reduced withholding tax rates, particularly on dividends, interest, and royalties, promoting bilateral trade and investment between the two countries. It also contains provisions for the avoidance of double taxation and exchange of tax information.
India – Singapore DTA: The DTA with India is highly advantageous as it offers various tax benefits, including lower withholding tax rates and provisions for the avoidance of double taxation. It has contributed to the growth of investment flows and economic cooperation between India and Singapore.
United Kingdom – Singapore DTA: This DTA is favorable because it provides reduced withholding tax rates, tax relief for individuals and businesses, and mechanisms to avoid double taxation. It promotes trade and investment between the United Kingdom and Singapore by offering tax certainty and favorable tax treatment.
Australia – Singapore DTA: The DTA with Australia is beneficial due to reduced withholding tax rates, provisions for the elimination of double taxation, and mechanisms for resolving tax disputes. It enhances economic cooperation and facilitates cross-border activities between Australia and Singapore.
Japan – Singapore DTA: This DTA is favorable as it provides reduced withholding tax rates and mechanisms to avoid double taxation. It encourages trade and investment between Japan and Singapore by providing tax certainty and favorable tax treatment for individuals and businesses.
Germany – Singapore DTA: The DTA with Germany offers reduced withholding tax rates, provisions for the avoidance of double taxation, and mechanisms for resolving tax disputes. It promotes economic cooperation and investment flows between Germany and Singapore.
Malaysia – Singapore DTA: This DTA is advantageous as it provides for the elimination of double taxation, reduced withholding tax rates, and mechanisms for resolving tax disputes. It facilitates cross-border activities and promotes economic integration between Malaysia and Singapore.
Netherlands – Singapore DTA: The DTA with the Netherlands is favorable due to reduced withholding tax rates, provisions for the avoidance of double taxation, and mechanisms for resolving tax disputes. It supports bilateral trade and investment between the Netherlands and Singapore.
Switzerland – Singapore DTA: This DTA offers reduced withholding tax rates, provisions for the elimination of double taxation, and mechanisms for resolving tax disputes. It promotes economic cooperation and investment flows between Switzerland and Singapore.
These DTAs play a crucial role in promoting international trade and investment, preventing double taxation, and providing tax benefits for individuals and companies operating in Singapore and its partner countries.
Singapore does not have any thin capitalization 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.
Common ownership: group structures and intercompany transactions
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.
Ownership structure of related parties
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 % 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.
Domestic intercompany transactions
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.
International intercompany transactions
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 scrutinize 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.
Overview of Singapore’s Transfer Pricing Regulations:
- Arm’s Length Principle: Singapore’s transfer pricing regulations are based on the arm’s length principle, which requires related entities to transact as if they were unrelated parties in similar circumstances. The Inland Revenue Authority of Singapore (IRAS) expects multinational companies to demonstrate that their intercompany transactions are priced at arm’s length.
- Transfer Pricing Documentation: Multinational companies are required to maintain contemporaneous transfer pricing documentation to support their pricing policies. The documentation should provide detailed information on the selection of the most appropriate transfer pricing method, comparable analysis, and economic analysis of the controlled transactions.
- Transfer Pricing Guidelines: The IRAS provides transfer pricing guidelines that align with international standards, including the Organization for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines. These guidelines assist multinational companies in determining and justifying their transfer pricing policies in Singapore.
Best Practices for Implementing Transfer Pricing Policies:
Conduct a Transfer Pricing Risk Assessment: Multinational companies should regularly assess their transfer pricing risks to identify potential areas of concern. This includes analyzing transactions with related entities, assessing the level of economic substance, and considering the impact of recent regulatory developments.
- Establish and Document Transfer Pricing Policies: Clear and comprehensive transfer pricing policies should be developed, considering the nature of the business, functions performed, and risks assumed by each entity within the multinational group. These policies should be documented in transfer pricing documentation to demonstrate compliance with the arm’s length principle.
- Perform Comparable Analysis: Multinational companies should conduct thorough comparable analysis to support their transfer pricing policies. This involves identifying appropriate comparable, analyzing financial data, and documenting the rationale for selecting the chosen transfer pricing method.
- Maintain Adequate Documentation: Detailed and contemporaneous transfer pricing documentation is essential to demonstrate compliance with Singapore’s regulations. The documentation should provide a clear and accurate account of the transfer pricing policies, economic analysis, and supporting data.
There are opportunities for tax planning in third-party transactions, depending on the commercial objectives of the relevant parties.
Sales of shares or assets for cash
Singapore does not impose tax on capital gains, but imposes tax on income. There are no specific laws or regulations that deal with the characterization 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.
According to the Income Tax Act (ITA), there is a safe harbour provision under Section 13Z that exempts gains derived by a divesting company from its disposal of ordinary shares in a target entity from 1 June 2012 to 31 May 2022 from taxation. This exemption applies if, immediately prior to the date of disposal, the divesting company has held at least 20% 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. However, it 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% of the higher of consideration or the net asset value of such shares. It is also chargeable on instruments with respect to transactions relating to immovable property in Singapore (including mortgages and leases), and in particular, based on the higher of the purchase price or market value of the property.buyer’s stamp duty (BSD): BSD is payable by the purchaser at approximately 3 % for non-residential properties, and approximately 3 % to 4 % for residential properties;
- additional buyer’s stamp duty (ABSD): ABSD is payable by the purchaser for residential property, at a rate depending on the profile of the purchaser and the number of residential properties in Singapore owned by the purchaser, up to 20 % for foreigners and 25 % for entities, with an additional 5 % for housing developers; and
- seller’s stamp duty (SSD): SSD is payable by the seller for certain disposals of residential or industrial properties within a specified holding period on a sliding scale depending on the nature of the property and when it was acquired.
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 % 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 % to 4 %, and for ABSD at 30 %.
Unutilized 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 % 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.
Tax-free or tax-deferred transactions
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:
- 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;
- any royalty or other payments in one lump sum or otherwise for the use of or the right to use any movable property; or
- 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.
Withholding Tax Rate:
In Singapore, the withholding tax rates vary depending on the type of payment and whether a lower treaty rate applies. The general withholding tax rates are as follows: 15% for interest payments, rentals from movable property, and income earned by non-resident professionals; and 10% for royalties. However, payments to non-resident company directors are subject to a higher withholding tax rate of 22%. It is important for employers and payers to accurately calculate and withhold the appropriate amount of withholding tax based on the specific rates applicable to each payment category. Compliance with Singapore’s withholding tax regulations is crucial to avoid penalties. Seeking professional assistance or consulting with qualified tax professionals is advisable to ensure compliance and navigate the complexities of Singapore’s withholding tax framework effectively.
Compliance and Consequences:
Complying with Singapore’s withholding tax regulations is crucial to avoid penalties and adhere to tax laws. Payers have the responsibility to identify payments subject to withholding tax, calculate and remit the appropriate amount to the Inland Revenue Authority of Singapore (IRAS) within the specified timeframe. Timely payment and accurate reporting, supported by proper documentation, are essential. Non-compliance can lead to penalties, interest charges, legal consequences, and reputational damage. Penalties vary based on the extent and duration of non-compliance, and IRAS has the authority to take legal action to recover outstanding tax amounts. Maintaining a good compliance record is important for building trust and credibility with stakeholders.
GST is a 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 %. 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).
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 2022 Budget that the GST rate would be increased to 8% on 1 January 2023 and 9% on 1 January 2024.
GST Compliance and Reporting Obligations
GST returns must be filed regularly based on your business’s filing frequency, which can be monthly, quarterly, or annually. The filing frequency depends on your estimated annual taxable turnover or historical filing pattern.
Maintaining accurate and up-to-date records of your transactions is crucial as a GST-registered business.
Correctly accounting for and reporting both input tax (GST paid on business purchases) and output tax (GST collected on sales) in your GST returns is essential. Claiming input tax credits on eligible business expenses can help reduce your GST liability.
To file GST returns, use the Inland Revenue Authority of Singapore (IRAS) myTax Portal for electronic filing. Provide the relevant figures, including output tax, input tax, and net tax payable. Pay the net tax payable by the specified due date in the GST return.
The IRAS may conduct GST audits to ensure compliance with regulations. Audits involve reviewing your records, transactions, and GST treatment. Non-compliance may result in assessments, penalties, or further enforcement actions by the IRAS.