Attractive Corporate Taxation Framework and Tax Incentive Schemes for Investors
Singapore consistently ranks highly as one of the most attractive and conducive places in the world to start a company and conduct business operations. This is in part due to having one of the lowest corporate tax rates, complimented by the numerous tax schemes and incentives by the government. This article seeks to provide an overview of the corporate taxation framework in Singapore.
- Tax Residency
- Headline Corporate Tax Rate of 17%
- No Tax Levied on Dividends
- No Tax Levied on Capital Gains
- Extensive Double Taxation Treaties
- Withholding Tax
- Attribution of Profits to Permanent Establishments (PEs)
- Tax Exemptions & Incentives
Singapore follows a territorial basis for corporate tax.
For a company to be considered a tax resident in Singapore, we need to determine where its control and management is exercised. The residency status of a company may vary year to year depending on changes to this. Control and management are defined as the making of decisions on strategic matters relating to policy and strategy which usually takes place in the form of board meetings. Therefore, the location where this takes place is one key determining factor of control and management.
Another key factor in determining tax residency is whether at least one key management personnel (ie. C-Suite level, Director) is based in Singapore.
An important point to note about tax residency is that a company incorporated in Singapore is not automatically considered a tax resident of Singapore, and even if its day to day operations is in Singapore.
Headline Corporate Tax Rate of 17%
Singapore’s headline corporate tax rate is capped at a flat 17% based on the company’s assessable income. This was reduced from 18% previously effective YA2011, to maintain Singapore’s competitiveness as an attractive investment location.
However, one should note that the headline corporate tax rate does not necessarily provide an accurate picture of the effective rate that a company incurs due to the various tax exemptions and incentives (discussed below).
Additionally, there are numerous industry-specific tax incentives that encourages investment and growth in certain sectors which companies can take advantage of.
No Tax Levied on Dividends
Under a one-tier corporate tax system, dividends paid out by a Singapore resident company will not be subject to any tax levied. This is advantageous to shareholders of a Singapore tax resident company as the company’s earnings will avoid being taxed twice – firstly at the corporate income tax level, secondly when dividends are declared.
The exception to the above is if the dividends is paid out by a co-operative.
No Tax Levied on Capital Gains
Capital gains are not taxable in Singapore. Some examples of this include gains on disposal of fixed assets such as property, or foreign exchange gains on capital transactions. However, the capital gains may be taxed if frequency of such transactions are high with the intention of making profits in the short term.
Extensive Double Taxation Treaties
A Double Taxation Agreements (DTA) serves to relieve the effects of double taxation of income by companies operating in different tax jurisdictions. At present, Singapore has well over 80 DTAs in force with other countries. For companies that have cross-border businesses, this is especially beneficial when considering setting up a business here in Singapore.
For countries that do not have DTAs with Singapore, companies may also apply for Unilateral Tax Credits (UTC) for all foreign-sourced income received in Singapore, subject to certain conditions.
When a non-resident company or individual receives a payment from a Singapore tax resident source, that payment is subjected to a Singapore withholding tax. The resident company must then pay the withholding tax to IRAS on behalf of the non-resident company of individual.
Common types of payments subjected to withholding tax include:
- Interests, commissions, fees or other related payments to loan or debt (15%)
- Royalty, rights of use, intellectual property (10%)
- Rent (15%)
- Management fees, services fees (prevailing corporate tax rate)
For items 1 to 3 above, the withholding tax rates would apply when the income is derived by the non-resident person through operations that are carried on outside of Singapore. This rate is to be applied on the gross payment and the resulting tax payable is a final tax. For situations when operations are carried out in Singapore, the following tax rates will apply on gross payments:
- Non-resident person (other than individuals): Prevailing corporate tax rate
- Non-resident individuals: 22% (20% for engagement period prior to 1 Jan 2016)
Attribution of Profits to Permanent Establishments (PEs)
A permanent establishment refers to a fixed place of business through which the business of an enterprise is wholly or partly carried on.
Activities that are performed by a company in Singapore for its overseas related company may create for the overseas company a permanent establishment whose profits may be liable to tax in Singapore.
However, if the following conditions are met, there will be generally no tax liability for the overseas company as a result of the inter-company service arrangement.
- The Singapore company receives an arm’s length fee from overseas company
- Fees paid by overseas company complies with arm’s length principle with adequate transfer pricing documentation
- Overseas company does not perform any functions, use any assets, or assume any risks in Singapore
Tax Exemptions and Incentives
Tax Exemptions for Start-ups
To encourage entrepreneurship in Singapore, the tax authority in Singapore introduced a tax exemption scheme in 2005 for new start-up companies in the first three years of assessment.
To qualify for this tax exemption:
- The company must be incorporated in Singapore
- The company must be a tax resident in Singapore
- The company must not have more than 20 shareholders, or at least 1 individual shareholder is holding at least 10% of issued shares
- The company must not be an investment holding or property company
Tax Exemption on First $200,000 for YA2020 and after:
Partial Tax Exemption
As announced during Budget 2018, and as part of further support for businesses, all qualifying companies will enjoy partial tax exemptions if they do not qualify for the start-ups tax exemptions.
Tax Exemption on First $200,000 for YA2020 and after:
Corporate Income Tax Rebates
To ease business costs for companies, a Corporate Income Tax(CIT) rebate is given to all companies.
CIT Rebate for YA2020 and after:
Illustration of company with $500,000 income taxable at 17%:
Companies within the same group will be treated as if they are one single company under the group relief system. This means that the following items of one company can be deducted against the assessable income of another in the same group:
- Current year unutilised capital allowances
- Current year unutilised trade losses
- Current year unutilised donations
Qualifying conditions include:
- Transferor and claimant companies must be incorporated in Singapore
- Transferor and claimant companies must belong to the same group
- Transferor and claimant companies must have the same financial year end
- Transferor and claimant companies must satisfy 75% ordinary shareholding level
Unutilised Items (Losses, Capital Allowances, and Donations)
Trading losses, capital allowance, and donations can be carried forward to future years to reduce tax payable until it is fully utilised. Trading losses can be carried forward indefinitely while unutilised donations can be carried forward for up to 5 years of assessments.
Companies must satisfy the shareholding test to qualify whereby there is no substantial change in its shareholders and their shareholdings at the relevant dates.
Loss Carry-Back Relief for Unutilised Items
Effective YA2006, companies may carry back current year unutilised capital allowances and trade losses to reduce the tax payable in the immediately preceding YA. This helps businesses cope with cash flow problems especially in a cyclical downtown. This loss carry-back tax relief complements the carry forward unutilised losses and capital allowances mentioned above.
To further help businesses with their cash flow, an enhancement of this tax relief was announced during Budget 2020 as follows:
- Unutilised capital allowances and trade losses can be carried back from YA2020 up to three YAs immediately preceding YA2020 (instead of one YA)
- Companies may elect for the enhanced carry-back relief based on an estimate of current year unutilised capital allowances and trade losses for YA2020
Some things to note regarding Loss Carry-Back Relief:
- Maximum amount of qualifying deductions that can be carried back is $100,000
- Carry-back system available to all businesses, including sole proprietors and partnerships
- Companies have to satisfy the same substantial shareholding test and same business test discussed in “Unutilised Items (Losses, Capital Allowances, and Donations)”
For newly set up companies that qualify for “Tax Exemption for Start-Ups”, this may not apply for its first YA, but may apply to its subsequent YAs.
Other Tax Incentives
The Singapore government provides a host of tax incentives designed to drive economic activities and business capabilities in Singapore. These are generally available for a wide range of industries with various qualifying conditions. The below table briefly illustrates some of these incentives for Singapore tax resident companies.
World Most Competitive Economy
Singapore has retained its top spot as the world’s most competitive economy, in the latest edition of the Switzerland-based Institute for Management Development (IMD) world competitiveness Ranking in 2020.
Singapore rise to the No1 spot was largely driven by the relative ease of setting up business, the availability of skilled labour and its cutting-edge technological infrastructure. The top 5 most competitiveness global economies after Singapore were Denmark, Switzerland, The Netherlands and Hong Kong.
Easiest Place to do Business : Study
Singapore is in second place in a league table of ranking Asian economies on how easy it is to conduct business. A study by the TMF Group study 77 jurisdictions across the world looked at indicators such as legislation, accounting procedures, tax regimes and human resources rules.
The study put Singapore at 18 place, behind Hong Kong at 12 place. The top jurisdiction was Curacao, an island state that is part of the Netherlands, followed by the United States. The Index showed that Singapore’s strengths lie in its accounting and tax standards, which are aligned with international measures. It also provides clarity and relative ease in filing requirement. Singapore’s competitive corporate tax rate of 17 per cent and double tax agreements signed with over 80 countries also make it attractive to do business.