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Corporate Tax

A Brief Guide on Singapore Corporate Taxation

Singapore Merlion

In 2015, Singapore has been ranked as the most business-friendly economy for the tenth year in a row by World Bank. Many factors have contributed to Singapore’s competitive edge: easy access to capital, strategic location, excellent infrastructure, ease of doing business etc. And one prominent factor is Singapore’s tax-friendliness.

Overview

In Singapore, income accrued in or derived from Singapore and income received in Singapore from overseas are taxable. IRAS assesses the amount of tax based on the income earned by the company in the preceding financial year. In other words, the income earned in the financial year 2016 will be taxed in 2017, which is referred to as Year of Assessment (YA) 2017.

With effect from 2010, all companies are taxed at a flat rate of 17% on its chargeable income i.e. taxable revenues less tax-allowable expenses. In addition to the competitive tax rate, Singapore government offers incentives, subsidies and schemes which lowers the effective tax payable further.

Here are some of the tax schemes available to lower the tax payable:

I) Tax Exemption Scheme for New Start-Up Companies

To promote entrepreneurship and support the growth of local enterprises, this scheme was introduced in YA 2005. This is available to all new companies except investment holding companies and companies engaged in development of properties.

To be eligible for this scheme, companies must satisfy the following qualifying conditions:

  1. Incorporated in Singapore;
  2. Tax resident in Singapore for that YA;
  3. Have no more than 20 shareholders. (there must be at least one individual shareholder holding at least 10% of the issued shares)

Qualifying companies can enjoy full exemption on the first $100,000 chargeable income and a further 50% exemption on the next $200,000 of chargeable income for the first three consecutive YAs.

II) Partial Tax Exemption for Companies (PTE)

From the fourth YA onwards, companies can enjoy the partial tax exemption.

All companies can enjoy PTE, unless they have already claimed the Tax Exemption Scheme for New Start-Up Companies. Qualifying companies can enjoy:

  • 75% tax exemption on the first $10,000 of chargeable income; and
  • A further 50% tax exemption on the next $290,000 of chargeable income.

III) Corporate Income Tax Rebate

All companies (including Registered Business Trusts, non-resident companies that are not subjected to final withholding tax and companies with income taxed at a concessionary tax rate) are granted 50% corporate income tax rebate, subjected to an annual cap of $20,000, for YA 2016 and YA 2017.

IV) Productivity and Innovation Credit Scheme (PIC)

Under PIC, companies have to carry out active business operations in Singapore and engage in one of the following six qualifying activities:

  1. Acquisition and Leasing of PIC IT and Automation Equipment
  2. Training of Employees
  3. Acquisition and Licensing of Intellectual Property Rights
  4. Registration of Patents, Trademarks, Designs and Plant Varieties
  5. Research and Development
  6. Investment in Design Projects

Qualified companies can opt for the following to boost tax savings:

Tax Deductions/Allowances 400% tax deductions/allowances on up to $400,000 of spending per year in each of the qualifying activity.
Cash Payout Convert up to $100,000 of total spending in all six activities for each YA into a non-taxable cash payout.
For qualifying expenditure incurred:

  • From YA 2013 to 31 July 2016, the cash payout rate is 60%.
  • On or after 1 Aug 2016 to YA 2018, the cash payout rate is 40%.


V) Tax Breaks on Foreign Income

With the increase of globalisation, it is not surprising that many tax-resident companies in Singapore are deriving income from overseas. Such income (referred to as foreign income) is taxable in Singapore when remitted to and received in Singapore, which may result in double taxation – once in the foreign country, and a second time when the foreign income is remitted into Singapore.

To alleviate the double taxation suffered, resident companies may claim the following:

Foreign Tax credit (FTC)

Under FTC, companies may claim credits for the foreign tax paid against the Singapore tax payable on the same income. There are two ways to claim:

  • Unilateral tax credit (UTC) – This is for income remitted from countries which Singapore does not have a Double Taxation Agreement (DTA) with; or
  • Double taxation relief (DTR) – This is for income remitted from countries which Singapore has a DTA with.

Tax Exemption of Foreign-Sourced Income (FSIE)

Under FSIE, a Singapore tax-resident company can enjoy tax exemption on specified foreign income (i.e. foreign-sourced dividends, foreign branch profits and foreign-sourced service income) provided that the following conditions are met:

  • The headline corporate tax rate of the foreign country from which the income is received is at least 15%;
  • The foreign income has been subjected to tax in the foreign country; and
  • The Comptroller is satisfied that the tax exemption would be beneficial

FTC Pooling System

Introduced in 2011, the FTC Pooling system provides greater flexibility to businesses in their FTC claims, reduces the tax payable in Singapore on remitted foreign income and simplifies tax compliance. Under this system, resident companies may elect to aggregate the foreign taxes paid.

To be eligible:

  • The headline corporate tax rate of the foreign country from which the income is received is at least 15%;
  • Foreign income tax is paid on the income in the foreign country from which the income is derived;
  • The company is entitled to claim FTC under the Income Tax Act; and
  • There is tax payable on the foreign income in Singapore.

VI) Tax Residency of Company

The basis of taxation is generally the same for resident and non-resident companies. However there are certain benefits that are available to resident companies only.

Some of the benefits include:

  • Tax benefits under DTA concluded between Singapore and treaty countries;
  • FSIE; and
  • Tax exemption for new start-up companies.

To determine the tax residency of a company, the location where the business is controlled and managed will be looked at. This would mean that a company is a tax resident in Singapore when the control and management of the company is exercised in Singapore.

VII) Withholding Tax on Non-Resident Companies

For non-resident companies, when payment of a specified nature (e.g. interest, commission, fee in connection with any loan or indebtedness; royalty etc. 1) is made to them, tax must be withheld.

The rate of withholding tax depends on the nature of payment. For example, 15% has to be withheld for payment of interest derived by non-resident companies through operations carried on outside Singapore.

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Singapore Tax Residency Status of a Company or a Body of Persons

Singapore River & Merlion

Singapore Tax Residency Status

Singapore has a relatively simple, predictable and low tax system as compared to the rest of the World. It has one of the most tax-friendly economies supplemented by numerous tax schemes and incentives by the government to help companies grow their business. In addition, numerous double taxation agreements (“DTA”) signed between Singapore and foreign tax jurisdictions further enhances its attractiveness for investment holding. When a Singapore company earns foreign income from a treaty partner, the company may wish to claim the benefits under the DTA that entitles the company not to pay tax or to pay tax at a reduced rate in the foreign jurisdiction.

How to determine Tax Residency Status?

According to Income Tax Act, the tax residency of a company is determined by where the business is controlled and managed.  The residency status of a company may change from year to year. A company is a tax resident in Singapore when the control and management of the company is exercised in Singapore. “Control and management” is the making of decisions on strategic matters, such as those on company policy and strategy. Where the control and management of a company is exercised is a question of fact. Typically, the location of the company’s Board of Directors meetings, during which strategic decisions are made, is a key factor in determining where the control and management is exercised.   To be regarded as tax resident in Singapore, it is therefore advisable to have as many of its Board meetings in Singapore, showing that key decisions by the controlling and managing authority of the company are made in Singapore.

Conversely, a company is a non-resident when the control and management of the company is not exercised in Singapore.

Some factors which were regarded by the courts as being attributes of that superior or directing authority include the following:

  • Ability to raise finance
  • Power to declare a dividend
  • Power to decide on the acquisition of a new business
  • Control of bank accounts
  • Discussion and approval of accounts and
  • Power to appoint those who manage the daily operations of the company

Other contributing factors in determining the residency of a company are the residency of the directors and the location of the books and records of the company.

Foreign-Owned Investment Holding Companies

Foreign-owned investment holding companies, with purely passive sources of income or receiving only foreign-sourced income are generally regarded as non-residents because these companies usually act on the instructions of its foreign companies/shareholders. A foreign-owned company is a company where 50% or more of its shares are held by foreign companies/shareholders.

However, they may still be treated as Singapore tax residents if they are able to satisfy IRAS that certain conditions have been met.

Non-Singapore Incorporated Companies and Singapore branches of foreign companies

Non-Singapore incorporated companies and Singapore branches of foreign companies are controlled and managed by their foreign parent and are, therefore, regarded as non-residents.

However, they may still be treated as Singapore tax residents if they are able to satisfy IRAS that certain conditions have been met.

Certificate of Residence (COR)

Singapore tax residents that derive income from other countries may apply to IRAS for a Certificate of Residence (COR). The COR is a letter certifying that the company is a tax resident in Singapore. Tax residents need this certificate to claim benefits under the DTAs Singapore has concluded with other jurisdictions.

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IRAS Update on Reinstatement Costs (expenses incurred to reinstate premises to its original condition prior to vacating it at the end of the tenancy agreement)

Updates

IRAS Update on Reinstatement Costs

IRAS have published the following update pertaining to reinstatement costs (expenses incurred to reinstate premises to its original condition prior to vacating it at the end of the tenancy agreement) on 13 August 2015.

Reinstatement Costs (expenses incurred to reinstate premises to its original condition prior to vacating it at the end of the tenancy agreement)

Generally, reinstatement costs are not deductible as they are considered to be capital expenditure disallowed under section 15(1)(c) of the Income Tax Act (ITA). This is because such expenditure are usually incurred in respect of business premises vacated and hence no longer used for acquiring income. Following a review of the tax treatment for reinstatement cost, we concluded that there are merits in considering costs incurred under certain conditions to have a nexus to the leasing of the premises for use by the business and hence deductible under Section 14(1) of the ITA. Specifically, we are prepared to allow the deduction where the costs incurred meet the following conditions:-

a) Costs claimed do not relate to provisions made under FRS 16(1) (i.e. expense has been incurred);

(b) Costs claimed are contractually provided for in the tenancy agreement and hence considered to be part of the costs of renting the property for use in the business in the first place; and

(c) The premises are not vacated due to cessation of business.


(1) Under paragraph 16 of FRS 16, the cost of an item of property, plant and equipment includes the initial estimate of the costs of dismantling and removing the item, restoring the site on which the item is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period.

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IRAS Update on Tax Treatment of Motor Vehicle Expenses

Updates

IRAS Update on Tax Treatment of Motor Vehicle Expenses

IRAS have published the following update pertaining to the tax treatment of motor vehicle expenses on 13 August 2015.

Tax Treatement of Motor Vehicle Expenses

Motor vehicle expenses incurred on goods and commercial vehicles such as vans, lorries and buses are deductible. Some examples of motor vehicle expenses are repairs, maintenance, parking fees and petrol costs.

No deduction is allowed on motor vehicle expenses incurred on S-plated cars, RU-plated cars and company cars (excluding Q-plated cars registered before 1 Apr 1998), whether they are directly incurred or paid in the form of reimbursement. This is so even if these cars are being used for business purposes.

The tax treatment of motor vehicle expenses incurred by a company is summarised as follows:

New! Transportation Services

Expenses incurred on transportation services are to be distinguished from expenses to hire a motor car. The former is a payment for services to commute from one place to another without the passenger having any control or possession of the motor car whereas in the latter scenario, the motor car would be at the disposal of the hirer.

Such payment for transportation services (e.g. bookings for SZ-plated or S-plated car via mobile applications) will qualify for tax deduction, if such expenses were incurred for business purposes. On the other hand, the hiring charges for SZ-plated or S-plated cars used in Singapore will not qualify for tax deduction.

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