BSL Bulletin

Singapore has many advantages. It is a developed country which has achieved US$55,000 per capita GDP, a small city state with 5.4 million people located strategically in South East Asia along major trading routes.

We have excellent infrastructures to facilitate free trade, and many companies locate their headquarters in Singapore as it is politically stable with its global connections and cordial relationship with its neighboring countries that makes it a neutral base.

There are many factors that attract foreign companies to locate their headquarters in Singapore.

Doing business

We have been ranked number one in doing business in 2014 by the World Bank Group. It is easy to set up a company to do business in Singapore. Singapore is a financial hub for international banking, trade and maritime financing, insurance, finance and treasury operations as well as is a renowned wealth management center in the region.

Setting up a company or a business is relatively a straightforward and easy process. Singapore has always focused on attracting foreign investment and foreign talent here. We have an enforceable legal system that protects contracts and agreement including intellectual property rights based on common law principles. Our government and legal system are transparent.

One tier tax system

Singapore tax system operates on a territorial basis. For companies, income accrued in or derived from Singapore or received from outside Singapore is subject to tax in Singapore. There are partial tax exemptions on the first $300,000 chargeable income which give rise to effective tax rates ranging from 5.7% to 8.4%. Thereafter, the current headline corporate tax rate of 17%. The resident individual tax rates ranges from 0% to 20%.

Under the one tier tax system, companies are subject to tax only once, and their after tax profits paid as dividends to shareholders whether local or foreign are tax exempt, in other words, the dividend income is tax free in the hands of the shareholders.

Singapore Foreign sourced exemption rules

For companies resident in Singapore certain foreign sourced income derived from any territory outside Singapore comprising:

• dividend;
• branch profits; and
• professional, consultancy and other services rendered from outside Singapore,

are exempt from any Singapore tax provided the following conditions are all satisfied:

• The foreign sourced income is subject to some form of income tax in the foreign jurisdiction;
• The highest rate of tax in the foreign jurisdiction from which the foreign sourced income was derived is at least 15%; and
• The Comptroller is satisfied that the tax exemption will be beneficial to the company resident in Singapore.

Both residents and non-resident individuals who are in receipt of any foreign sourced income are also exempt from Singapore tax.

Therefore, the foreign source exemption rules that allow a Singapore resident holding company to receive tax exempt dividend income streams from its subsidiaries is a very attractive feature of Singapore.

No capital gains tax

Singapore does not impose any capital gains tax. However, the onus of proving that the gain is derived from capital accretion lies with the taxpayer. In this regard, badges of trade factors such as intent, frequency, duration of holding the asset, nature of transactions and circumstances surrounding the sale amongst other things are evaluated to determine whether a transaction arose from trade or business activities of the taxpayer.

To make Singapore an attractive holding company location as well as to reduce uncertainty on the taxation on disposal of share investments, the government introduced clarity that if certain conditions are met, then the disposal of such investment would be treated as a capital gain. The conditions are that the company holds at least 20% of the investment, which has been for at least a period of 24 months before its disposal.

Wide network of tax treaties

Furthermore, Singapore has a wide network of favourable tax treaties with more than 70 countries that allows the mitigation or reduction of tax in relation to cross border transactions in locations where the group’s entities are located.

Foreign sourced income such as dividend, interest and branch profits are only assessable to tax upon remittance to Singapore.

Such income derived from treaty countries, which has been subject to foreign tax, and where the foreign sourced tax exemption rules are not applicable, such income assessable to Singapore tax is allowed foreign tax credit relief at the lower of Singapore effective tax payable and the foreign tax suffered.

Even if there is no tax treaty, the Singapore tax rules allow unilateral tax credit relief to be granted to Singapore resident companies.

The above go towards mitigating the double taxation of the same income, firstly in the foreign country and secondly when it is remitted into Singapore.

No thin capitalization

There is no thin capitalization rule in Singapore. However, any interest payments to the shareholders and lenders who are non-residents will be subject to withholding tax at 15% unless reduced by tax treaties.

Interest expense or borrowing costs incurred by the Singapore holding companies will attract interest restriction if such costs are incurred or attributable for non-trade or non-income producing investments. Please also note that should the Singapore holding company fund its investments in its subsidiaries through interest bearing borrowings, such borrowing costs may not have any tax deductible value, even if the investments in the subsidiaries yield dividend income, as such income would be likely treated as tax exempt.

Therefore, it may be more tax efficient to push the borrowings to the subsidiary and operating company level. Domestic loans to group entities can be given interest free.

However, there is a requirement to comply with arm’s length principle in extending cross border intercompany loans. On the other hand, even if the Comptroller should enforce and deem the interest on an interest free loan extended to an overseas entity, it would not be chargeable to Singapore tax, as it should be considered foreign sourced income which has not been received in Singapore for tax purposes.

In such instance, the Comptroller has clarified that where the arm’s length principle is not followed, in the future they will not be prepared to enter into any mutual agreement procedures or allow any claim, should the borrower’s country make any tax or transfer pricing adjustments which may cause withholding tax to become payable by the Singapore lender.

Tax and other incentives

Businesses are encouraged to invest in productivity and innovation initiatives to bring the Singapore economy to the next level of high value added growth. Companies which invest or incur costs on automation/computerization or their processes and workflow, research and development activities, registration of intellectual property making Singapore an IP hub, training of their employees, etc. will qualify to obtain enhanced tax deduction at 400% of the qualifying costs capped at $400,000 qualifying cost per activity incurred for each year up to the year ended 31 Dec 2017.

Furthermore, businesses with substantial growth potential using Singapore as a headquarter hub or conduct high value added activities, or global trading operations can apply for various tax incentive programs that may reduce the headline tax rate to 0% to 10%. Successful companies will be required to meet certain criteria including headcount and business spending.

In conclusion, as can be seen from the above, Singapore offers many attractive benefits. We have a smart and educated talent pool that speaks English as the first language. Singapore is used as a launch pad to do business in the regional countries such as China, India, Australia and South East Asia. We have excellent infrastructure, amongst the premier air and sea ports.

Although our cost of doing business can be high, this can be offset by structuring the businesses in an efficient and productive manner. We have a very stable government that is very pro-business that offers incentives to allow businesses to thrive in an honest and very open economy.