5. Taxation

a. Introduction

Tax policy is an integral part of Singapore’s fiscal policy. Tax revenue is a substantial source of funding for government operations. The fundamental tenet of Singapore’s tax policy is to keep tax rates low for corporations and individuals and to keep the tax base broad.

The Inland Revenue Authority Singapore (IRAS) is responsible for the collection of these taxes.

b. Tax system

i. General concepts of tax liability

Singapore has a territorial and remittance income tax system. Only income accrued in or derived from Singapore, or income derived overseas but received in Singapore, is subject to tax.

An individual is resident in Singapore for tax purposes if that person has, in the preceding year, resided in Singapore for 183 days or more (presence of a lesser period may still be regarded as residence on a qualitative basis if the individual’s intention is to establish residence in Singapore).

A company (including a corporate trustee) is resident in Singapore for tax purposes if the control and management of its business is exercised in Singapore. The place of incorporation of the company is not relevant.

ii. Rates and tax incentives

A resident individual taxpayer is taxed on chargeable income at a graduated rate (0 per cent to 20 per cent).

The prevailing corporate tax rate is 17 per cent. Under the tax exemption scheme for new start-up companies, a newly incorporated Singapore company may enjoy tax exemptions of up to SGD200,000 for the first SGD300,000 of chargeable income for each of its first three consecutive years of assessment. To qualify for this tax exemption scheme, the company must:

  • be incorporated in Singapore
  • be a tax resident in Singapore for that year of assessment
  • have no more than 20 shareholders throughout the basis period relating to that year of assessment, and
  • have at least one individual shareholder holding at least 10 per cent of the total number issued ordinary shares or all shareholders who are individuals.

Exempt amount for new start-up companies:

  • First SGD100,000 @ 100 per cent SGD100,000
  • Next SGD200,000 @ 50 per cent SGD100,000
  • Total exempt amount for first SGD300,000 chargeable income is SGD200,000

Singapore companies that do not meet the above qualifying criteria will be given the partial tax exemption. Under the partial tax exemption scheme, 75 per cent of the first SGD10,000 of chargeable income (excluding Singapore dividend income) and 50 per cent of the next SGD290,000 of chargeable income (excluding Singapore dividend income) is exempt from corporate tax.

Tax incentives have long been an important instrument for Singapore’s economic development strategy. Singapore offers a wide range of tax incentives. Tax incentive schemes for corporations are offered to the financial, technology and trade sectors. For example, financial tax incentives provide a concessionary tax rate of 10 per cent on income earned by an approved trustee company from providing specified trustee and custodian services to non-residents in respect of designated investments. There is also a tax incentive scheme for asset management aimed at encouraging the development of the fund management industry.

iii. Tax evasion and avoidance

The Income Tax Act gives the comptroller of income tax the right to, among other things, vary any arrangement and recompute profits so as to counteract any tax advantage obtained or obtainable under the arrangement. Specifically, any arrangement that alters the incidence of tax payable, relieves any person from any liability to pay tax or make a return, and any arrangement that reduces or avoids any liability imposed or that would be imposed, will come within the ambit of this provision. This provision does not apply to arrangements that are carried out for bona fide commercial purposes and that had not, as one of their main purposes, the avoidance or reduction of Singapore income tax.

This Act further provides that any person who wilfully with intent to evade or assist any other person to evade tax shall be liable to penalties, fines and/or imprisonment.

Taxable periods and filing requirements

The tax year runs from 1 January to 31 December. Tax is imposed on a preceding year basis, that is, profits for the financial year ended 2009 are taxed in the year of assessment, 2010. Where a person carrying on a trade, business, profession or vocation prepares annual accounts to a date other than 31 December, and the Comptroller of Income Tax is satisfied that the accounts are made up to that date regularly, that person is allowed to adopt the financial year as the basis period.

c. International

i. Residents with foreign-source income

The general rule is that foreign-source income is taxable in Singapore if it is remitted or deemed remitted into Singapore. With effect from 1 June 2003, certain foreign income in the form of dividends, branch profits and service income remitted into Singapore may be exempt from tax. For companies and partnerships, the exemption of foreign-sourced income is granted upon satisfying certain conditions, the two main ones being that the foreign sourced income is received from a jurisdiction where the headline tax is at least 15 per cent and the foreign income has been subjected to tax in the foreign jurisdiction. To enable businesses to make best use of all their sources of funds to meet their financing needs in Singapore during the economic downturn, however, the above two conditions are temporarily lifted for a one-year period from 22 January 2009 to 21 January 2010. In this case, the foreign-sourced income should be earned or accrued outside Singapore on or before 21 January 2009.

ii. Expatriates

The amount of tax an expatriate pays depends on whether the expatriate is a tax resident or non-resident in Singapore, or whether the individual has been accorded Not Ordinarily Resident (NOR) status, and the amount of income earned.

An expatriate who is employed for a period of 60 days or less in a calendar year will be exempted from paying income tax unless employed as a director, public entertainer or is exercising a profession in Singapore. An expatriate whose employment period is more than 60 days but less than 183 days is taxed on their employment income at 15 per cent or the applicable resident rates, whichever is higher.

An expatriate whose employment period in Singapore exceeds 183 days is regarded as resident in Singapore. For such expatriates, income earned in Singapore, less personal relief allowed, is taxed at graduated rates from 0 per cent to 20 per cent.

Individuals with NOR status can enjoy certain tax benefits for a period of five years.

iii. Non-residents

A non-resident individual is liable to Singapore tax only in respect of income sourced in Singapore. A non-resident company that carries on a trade or business in Singapore through a branch or agency is subject to tax in respect of income sourced in Singapore. It may also be subject to tax on income sourced outside Singapore to the extent that such offshore income is directly attributable to the company’s Singapore operations.

Generally, withholding taxes of 15 per cent and 10 per cent respectively are imposed on interest and royalties paid to non-residents. For certain payments such as technical assistance and management fees, the withholding tax rate rate is at the prevailing corporate rate (17 per cent with effect from year of assessment 2010).

These withholding tax rates imposed on interest and royalties may be reduced under the terms of a double taxation agreement (DTA) concluded by Singapore with its treaty partners.

Singapore does not levy a separate withholding tax on dividends.

iv. Tax treaties

A DTA between Singapore and another country serves to prevent double taxation of income earned in one country by a resident of the other country. It also makes clear the taxing rights between Singapore and its treaty partner on different types of income arising from cross-border economic activities between the two countries. The agreements also provide for reduction or exemption of tax on certain types of income.

Some 60 comprehensive DTAs covering all types of income and seven limited DTAs covering only income from shipping and/or air transport are in force.

Generally, a resident company is entitled to the benefits conferred under the DTAs Singapore has concluded with treaty countries.

d. Taxation of trusts

Types of trusts and tax liability

In recent years Singapore has introduced various tax incentives to encourage trusts to be administered within the jurisdiction. These incentives are considered further below. The general tax liabilities on trusts that do not qualify for these exemptions are as follows:

(a) Trust income derived by the trustee from carrying on a trade or business in Singapore will be subject to a final tax at the trustee level (corporate tax rate of 17 per cent). Distributions made out of such income are in the nature of capital and will not be subject to any further tax in the hands of the beneficiaries.

(b) The tax treatment of trust income (other than trade or business income) depends on the residency of the beneficiary and whether the beneficiary is entitled to the trust income.

(i ) Trust income (non-trade and non-business) to which the beneficiaries are not entitled and is treated in the same way as trade or business income above and subject to a final tax at the trustee level.

(ii) Trust income (non-trade and non-business) to which non-resident beneficiaries are entitled, is also treated in the same way as trade or business income above and subject to a final tax at the trustee level.

(iii) For trust income (non-trade and non-business) received by resident beneficiaries (residents of Singapore) who are entitled to the trust income, the resident beneficiaries will be accorded the concessions, exemptions and foreign tax credits as if the beneficiaries had received the trust income directly.

The effect of the above is as follows:

  • Resident beneficiaries entitled to the trust income will be accorded tax transparency treatment and tax will not be applied at trustee level. The beneficiaries are subject to tax on the distributions received, which will be deemed to have retained the nature of the underlying trust income for the purpose of claiming concessions, exemptions and foreign tax credits. This does not apply to income of the trustee from a trade or business carried on in Singapore or to resident beneficiaries who are not entitled to the trust income: in such cases tax will be applied at the trustee level.
  • Non-resident beneficiaries will not be accorded tax transparency treatment and final tax will be applied at the trustee level. Trustees will be treated as a body of persons for purposes of tax and claims for relief, concessions and exemptions. Distributions received by non-resident beneficiaries will be treated as capital and will not subject to further tax in the hands of the beneficiaries.

Foreigners who set up a Qualifying Foreign Trust (QFT) and Singapore residents who set up a Qualifying Domestic Trust (QDT) may, however, enjoy attractive tax exemptions, as outlined below.

Generally, a settlement that gives powers of revocation so that any income or capital included in the settlement can revert to the settlor or to the spouse of the settlor (other than by reason of the demise of the beneficiary) may be disregarded for tax purposes. In such circumstances, the income arising from the settlement is deemed to be income of the settlor. If the settlor, a relative of the settlor or a person under the direct or indirect control of the settlor or the settlor’s relative makes use of income of the settlement to which there is no such entitlement, such income is deemed to be that of the settlor.

For any trust that is registered under the Business Trusts Act 2004, the above tax treatment of trusts will not apply. Instead it will be treated like a company under the one-tier system with effect from the first year it commences operation as a registered business trust.

ii. Transfers to a trust

Stamp duty may be payable on documents relating to the transfer of immovable property, stocks and shares to a trust. Stamp duty is discussed below.

Taxation of QDT and Eligible Holding Company

The general rule is that all Singapore source trust income is taxable in Singapore. Specified Singapore source investment income derived on or after 17 February 2006, and foreign source income received on or after 17 February 2006 by qualifying domestic trusts (QDTs) and their eligible holding companies, qualify for tax exemption. Distributions made by QDTs to their beneficiaries out of such income will also be tax exempt in the hands of the beneficiaries.

iv. Taxation of QFT and Eligible Holding Company

Specified income derived from designated investments by qualifying foreign trusts and eligible holding companies administered by an approved trustee company (ATC) in Singapore qualify for tax exemption. The ATCs administering qualifying foreign trusts (QFTs) are themselves taxed at a concessionary tax rate of 10 per cent.

A ‘foreign trust’ is defined to include a trust by deed where every settlor and beneficiary of the trust, in the case of individuals, is neither a citizen of Singapore nor resident in Singapore. In the case of a company, the company must not be incorporated or resident in Singapore, and if it has not more than 50 shareholders, the whole of its issued shares must not be beneficially owned, directly or indirectly, by persons who are citizens or residents of Singapore. If it has more than 50 shareholders, at least 95 per cent of its issued shares are to be beneficially owned, directly or indirectly, by persons who are neither citizens nor residents of Singapore.

Enhancements announced in the 2006 national Budget covered three aspects. The first expanded the scope of qualification criteria to include a wider range of qualifying settlors and beneficiaries, thus allowing foreign individuals using non-traditional vehicles of investment to qualify for tax exemption. The second extended the tax exemption scheme for QFTs to situations where qualifying foreign trusts are administered by companies that are exempt from the requirement to hold a trust business licence. The third extended the ATC tax incentive scheme to companies that are exempt from the requirement to hold a trust business licence and that are administering QFTs in Singapore. Specified income derived on or after 17 February 2006 by such companies is taxed at the concessionary tax rate of 10 per cent.

v. Taxation of income earned in the trust

A trustee has to file an annual tax return relating to trust income accruing in, derived from or received in Singapore. If a trustee is claiming tax exemption on income derived by a foreign trust pursuant to the regulations, no return need be filed in respect of such income, but the trustee must file a declaration with the IRAS in the form as prescribed by the regulations. The trustee has to keep clear and accurate accounts of the trust property. A trustee is to furnish a beneficiary with full and accurate information as to the amount and state of the trust property if a beneficiary so requests.

vi. Tax Incentive Scheme for Family-owned Investment Holding Companies

The tax incentive scheme for family-owned investment holding companies (FIHC) was announced by the Minister in Budget 2008. Generally, a qualifying FIHC shall be exempt from tax on specified Singapore-sourced income received in Singapore on or after 1 April 2008 and foreign-sourced income received In Singapore on or after 1 April 2008, to the extent that such income would have been exempt from tax if derived or received directly by an individual.

e. Taxation of estates

i. Estate duty

With effect from 15 February 2008, estate duty has been abolished.

Previously, estate duty was payable on the principal value of all property that passes on the death of any person.

Where the deceased person was domiciled in Singapore at the time of death, estate duty was payable on movable property (wherever situated) and immovable property situated in Singapore, which passed on the death of the deceased.

Where the deceased person was not domiciled in Singapore at the time of death and died on or after 1 January 2002, estate duty was payable only on immovable property situated in Singapore that passed on the death of the deceased.

The original rates of estate duty payable in the case of persons dying on or after 28 February 1996 were as follows:

Principal value of the estate Rate of duty
For every dollar of the first SGD12million 5%
For every dollar exceeding SGD12million 10%

This was after an exemption of SGD9 million for Singapore residential properties and SGD600,000 for other assets.

ii. Taxation on death

There is no inheritance tax in Singapore.

f. Other taxes

Goods and Services Tax (GST) of 7 per cent is levied on all imports and supplies of goods and services in Singapore. All supplies of goods and services, other than financial services and residential property transactions, are subject to GST if made by GST-registered businesses. Goods that are exported, international services, and administration services provided by a Singapore trust company to a foreign trust of which it is not a trustee, are zero-rated.

Property tax is imposed on immovable properties at 10 per cent of the annual value of the property for industrial, commercial and let-out residential properties, and at 4 per cent for owner-occupied residential properties.

Stamp duty is payable only on documents relating to immovable property and stocks and shares. Duties are payable on the transfer of immovable property made by way of purchase or gift at 1 per cent to 3 per cent on the purchase price or the value of the property conveyed, whichever is higher, and on transfer or gift of shares at 0.2 per cent on purchase price or net asset value, whichever is higher.

There is no capital gains tax in Singapore.

© 2012 Society of Trust & Estate Practitioners