Attractive Corporate Taxation Framework and Tax Incentive Schemes for Investors

Key Takeaways

1. Tax Residency
2. Headline Corporate Tax Rate of 17%
3. No Tax Levied on Dividends
4. No Tax Levied on Capital Gains
5. Extensive Double Taxation Treaties
6. Withholding Tax
7. Attribution of Profits to Permanent Establishments (PEs)
8. Tax Exemptions & Incentives

Tax Residency

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%

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

The exception to the above is if the dividends is paid out by a co-operative.

No Tax Levied on Capital Gains

Extensive Double Taxation Treaties

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.

Withholding Tax

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:

1. Interests, commissions, fees or other related payments to loan or debt (15%)
2. Royalty, rights of use, intellectual property (10%)
3. Rent (15%)
4. 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)

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 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

Partial Tax Exemption

Tax Exemption on First $200,000 for YA2020 and after:

Corporate Income Tax Rebates

CIT Rebate for YA2020 and after:

Group Relief

• Current year unutilised capital allowances
• Current year unutilised trade losses
• Current year unutilised donations

• 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)

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

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

• 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)”

Other Tax Incentives

World Most Competitive Economy

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

Asia
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.

Worldwide
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.

Featured photo by Luiz Centenaro on Unsplash