BSL Bulletin

The amalgamation process is one in which two or more companies can be “combined” such that the property, rights, privileges, liabilities and obligations of one or more amalgamating (i.e. discontinuing) companies are transferred to, and vested in, one amalgamated (i.e. continuing) company by operation of law. Effectively this means that the amalgamated company will have assumed all the assets and liabilities, and continues the operations and businesses of the amalgamating companies which cease to exist upon the amalgamation.

Amalgamation was enacted into law under the Companies Act Sections 215A to 215J and became effective from 30 January 2006. It is stated in the Companies Act section 215G that the effect of amalgamation would entail:

(c) all the property, rights and privileges of the each of the amalgamating companies be transferred to and vested in the amalgamated entity;…

(e)all conviction, ruling, order or judgement in favour of or against
an amalgamating company may be enforced by or against the
amalgamated company;…”

Therefore, technically speaking there should be no transfer or cessation of businesses in an amalgamation process whereby two or more entities can merge or amalgamate into an existing amalgamated entity or become a newly amalgamated entity.

However, the Inland Revenue Authorities of Singapore’s (“IRAS”) previous position was that the amalgamating company was treated as having ceased its business and having disposed its assets and liabilities and the amalgamated company as having acquired or commences new business. This practice would have led to additional tax costs for both companies as IRAS would have inter alia, disregarded any unabsorbed tax losses and capital allowances of the amalgamating entities and in the process also apply the balancing charge calculations on the “transfer” of assets, unless a section 24 election is made.

In keeping with the changes made to the Companies Act, the Income Tax Act has been finally amended to cater for a tax efficient amalgamation process to allow consolidation and effective streamlining of group companies and their operations in Singapore.

The Ministry of Finance had previously issued a public consultation on the new income tax framework for amalgamation of companies which closed on 20 March 2009. Following this, the new income tax framework is now enacted in section 34C of the Income Tax (Amendment) Bill 2009.

The qualifying conditions for the carry forward of unabsorbed losses, capital allowances and donations are included under paragraphs (23) to (25) of section 34C as follows:

(23) Where —
(a) an amalgamating company ceases to exist after the date of amalgamation; and 
(b) the amalgamating company has any capital allowance, donation or loss remaining unabsorbed on the date of amalgamation, sections 23 and 37 shall apply, with the necessary modifications, as if the amalgamated company is the amalgamating company for the purposes of deducting the unabsorbed capital allowance, donation or loss against the income or the statutory income, as the case may be, of the amalgamated company, subject to conditions specified in subsection (23).

(24) The conditions referred to in subsection (23) are —
(a) the amalgamating company was carrying on a trade or business up to the date immediately before the date of amalgamation; and
(b) the amalgamated company continues to carry on the same trade or business on the date of amalgamation as that of the amalgamating company from which the unabsorbed capital allowance, donation or loss were transferred immediately before the date of amalgamation.

(25) Any deduction referred to in subsection (23) shall only be made against the income of the amalgamated company from the same trade or business in respect of which the unabsorbed capital allowance, donation or loss was transferred.

If the Singapore companies in the amalgamation process can satisfy the above conditions, there should not be any issues arising to carry forward the unabsorbed capital allowances and tax losses including donation from the amalgamating companies to the amalgamated company. The application for the waiver from the ownership continuity test is also available provided the amalgamation is not motivated for tax reasons.

The new tax framework will be applicable to amalgamations carried out on or after 22 January 2009. The amalgamated company is required to make an election in writing to IRAS to apply the new income tax framework within the following time frame from the date of issue of the E-Tax Guide. The E-Tax Guide on the Tax Framework on Corporate Amalgamation was issued on 20 Jan 2010.

For amalgamation that takes place after 22 Jan 2009 but before 20 Jan 2010, IRAS must be informed within 90 days from 20 Jan 2010 that is by 20 April 2010. For amalgamation that takes place after 20 Jan 2010, 90 days from the date of the qualifying amalgamation.

From the Goods and Services Tax perspective, the amalgamation should automatically qualify for exemption as a Transfer of business as a going concern. Also stamp duties relief is available provided it satisfies the Stamp Duties (Reconstruction or Amalgamation of Companies) Rules.

In today’s competitive business environment group companies are under duress to achieve productivity and streamline their business processes to reduce costs and increase shareholder value. In doing so, the consolidation of companies arising from the amalgamation process should be a seamless process that should give rise to an efficient and minimal or even a tax neutral impact. Therefore, with this in mind the Singapore government has adopted a pro-business policy to minimize and mitigate any adverse tax consequence arising from the amalgamation process.

DID YOU KNOW?

The Auto-Inclusion Scheme (AIS) is a scheme that allows employers to electronically upload their employees’ employment income, tax-deductible donations and CPF contributions to IRAS. As these information will be auto-included in the employees’ income tax assessments, the employees need not declare/claim such details when filing their income tax returns.

It was compulsory with effect from Year of Assessment (YA) 2009 for employers with more than 100 employees to file their employees’ employment information electronically with IRAS. The compulsory AIS is now extended to employers with 50 to 99 employees from YA 2010. Employers who have fewer than 50 employees can join the scheme if they wish to.

“50 or more employees” include full-time, part-time, resident, non-resident employees, directors and pensioners as well as employees who have resigned but were employed by the company from 1 January 2009 to 31 December 2009. Please refer to http://iras.gov.sg/irasHome/page04_ektid3258.aspx for more information on the scheme.