Tax Treatment on Foreign-sourced Income

In Singapore, tax is imposed on income derived from or accrued in Singapore, as well as foreign-sourced income received in Singapore. With increasing globalisation, it is not surprising that many tax-resident companies in Singapore derive income from overseas. Such income (referred to as foreign income) is taxable in Singapore when remitted to and received in Singapore, which can result in double taxation — once in the foreign country, and a second time when the foreign income is remitted into Singapore.

Determining the Source of Income

There is no universal rule for determining whether income is Singapore-sourced or foreign-sourced. It depends on the nature of the profits and of the transactions that give rise to them. The following points can be used as a guide:

1. Identify the operations that produced the relevant profits and ascertain where those operations took place.
2. If there is no business presence overseas and the principal place of business is in Singapore, profits earned by that business are likely to be treated as sourced in Singapore.
3. For profits earned from trading in goods and commodities, determine the place where the contracts for purchase and sale are effected (i.e. negotiated, concluded, and executed).
4. For businesses earning commission, determine where the commission agent’s activities are performed. If performed in Singapore, the income is treated as sourced in Singapore.

When Is Foreign Income “Received” in Singapore?

If income is determined to be foreign-sourced, the next question is whether it is received in Singapore. Under Section 10(25) of the Income Tax Act, income from outside Singapore is considered received in Singapore when it is:

1. remitted to, transmitted to, or brought into Singapore in the form of cash, cheque, dividends, electronic transfer, etc.;
2. used to pay off any debt incurred in respect of a trade or business carried on in Singapore; or
3. used to purchase any moveable property brought into Singapore (e.g. equipment or raw materials connected to the business).

There have been concerns that Section 10(25) discourages foreigners and foreign businesses from using Singapore’s banking and fund management facilities. However, foreign income received in Singapore is only taxable if it belongs to an individual resident in Singapore or an entity located in Singapore. Non-resident individuals and foreign businesses not operating in or from Singapore can therefore remit their foreign income to Singapore without being taxed on it.

Foreign-Sourced Income Exemption (“FSIE”) Scheme

As foreign-sourced income can otherwise be taxed twice — once in the foreign jurisdiction and again in Singapore when remitted here — tax benefits are available to alleviate the double taxation.

From 1 June 2003, a Singapore tax resident company can enjoy tax exemption on specified foreign income remitted into Singapore under the FSIE scheme. The three categories of specified foreign income are:

1. Foreign-sourced dividends
2. Foreign branch profits
3. Foreign-sourced service income

The exemption is granted by Section 13(8) of the Income Tax Act 1947, and the qualifying conditions sit in Section 13(9). All three must be met:

1. The headline tax rate of the foreign country from which the income is received is at least 15%. This is the highest corporate tax rate of that country in the year the income is received in Singapore, and it need not be the rate actually applied to the income;
2. The foreign income has been subject to tax in the foreign jurisdiction from which it was received — the rate at which it was taxed can differ from the headline tax rate; and
3. The Comptroller is satisfied that the tax exemption would be beneficial to the resident company.

Getting the Exemption

To enjoy the tax exemption, the following information must be provided in the company’s Income Tax Return (Form C/P):

• Nature and amount of income received;
• Jurisdiction from which the income is received;
• Headline tax rate of the foreign jurisdiction; and
• Confirmation that foreign tax has been paid in the jurisdiction from which the income was received, to satisfy the “subject to tax” condition.

If the company is filing Form C-S instead of Form C, this information should instead be included in the company’s tax computation, with supporting documents retained.

”Subject to Tax” Condition

To meet this condition, the specified foreign income received in Singapore must have been subject to tax in the foreign country from which it was received.

For this purpose, tax paid or payable on foreign-sourced dividends received in Singapore includes:

1. the dividend tax, which is income tax levied on the dividend by the foreign country of source; and
2. the underlying tax, which is income tax paid or payable by the dividend-paying company on the income out of which the dividend is paid.

”Subject to Tax” Concession for Substantive Business Activities

The Comptroller will regard the “subject to tax” condition as met if the income is exempt from tax in the foreign jurisdiction due to a tax incentive granted for substantive business activities carried out in that jurisdiction. The following documents must be prepared and retained:

1. A declaration by the company that the foreign jurisdiction exempted the foreign income from tax because of substantive business activities carried out by the company in that jurisdiction; and
2. A copy of the tax incentive certificate or approval letter issued by the foreign jurisdiction. For a foreign-sourced dividend, a dividend voucher (if available) stating that the dividend is exempt from tax due to a tax incentive granted to the payer company for substantive business activities in that jurisdiction will suffice.

If the FSIE scheme does not apply, resident companies may instead claim tax credits to alleviate double taxation:

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

Expenses Incurred in Respect of Foreign-Sourced Income

All expenses incurred in respect of foreign-sourced income received in Singapore that qualifies for tax exemption must be deducted against that foreign-sourced income, and are not available for deduction against any other taxable income.

Section 10L: Gains on Disposing of Foreign Assets

The rules above deal with foreign income. From 1 January 2024, Section 10L of the Income Tax Act 1947 deals separately with foreign disposal gains, and it changes the answer to a question many businesses treat as settled.

Singapore does not tax capital gains as a general matter. Section 10L cuts across that: gains from the sale or disposal of a foreign asset, received in Singapore, can be charged to tax as income, even where the gain would otherwise have been capital in nature.

Who It Applies To

Section 10L applies to an entity that is a member of a relevant group. A group is a relevant group where it has an entity or a permanent establishment in a foreign jurisdiction.

That scoping matters, and it is the part most often overstated. A single Singapore company with no overseas entity or permanent establishment is not within Section 10L. A Singapore holding company in a group with an overseas subsidiary can be.

The Economic Substance Requirement

For a foreign asset other than intellectual property rights, the gain is not treated as chargeable income if the entity has adequate economic substance in Singapore.

Economic substance is assessed on the substance of the operations here, not on the paperwork: what the entity actually does in Singapore, who does it, and whether the resources committed are commensurate with the activity. Intellectual property rights are dealt with on a different basis and are not covered by the substance test in the same way.

What to Do About It

Three questions settle most cases:

1. Is the group a relevant group? If there is no foreign entity or permanent establishment, Section 10L does not apply.
2. Is the asset a foreign asset, and are the gains received in Singapore? Both are needed for a charge to arise.
3. Is there adequate economic substance in Singapore? If yes, gains on foreign assets other than IP rights are not charged. If the answer is uncertain, seek an advance ruling.

References

• Companies receiving foreign income — IRAS
• Tax Exemption for Foreign-Sourced Income — IRAS e-Tax Guide
• Income Tax: Tax Treatment of Gains or Losses from the Sale of Foreign Assets — IRAS e-Tax Guide
• Economic Substance Requirement — IRAS