This article aims to provide guidance on practical operational considerations to enjoy the tax treaty benefits and other tax matters relevant to Singapore entities.
Singapore Income Tax Regime and Implications on Dividends, Interest and Royalties Received by Singapore Entities
Singapore adopts a territorial tax system. Only income that are accrued or derived from Singapore or received in Singapore from outside Singapore may be subject to tax in Singapore. Generally, expenditures are deductible against taxable income if they were incurred wholly and exclusively for the production of income and not prohibited by Section 15 of the Income Tax Act.
Singapore does not impose tax on capital gains. Hence expenses incurred in the production of capital gains are not deductible against taxable income for tax purposes.
Singapore imposes 0% withholding tax on dividends paid by Singapore tax resident company. Singapore, however, imposes withholding tax on certain payment of a specified nature made to non-residents companies. These payments include interest, commission, fee or other payment in connection with any loan or indebtedness and royalties. The respective withholding tax rates are 15% and 10%. Technical assistance, service fees or management fees made to non-tax residents of Singapore will also require the payer to withhold the tax due and have it paid to the Comptroller before 15th day of the immediate second month following from the date of payment or its accrual, whichever is earlier, unless the services are rendered wholly outside Singapore.
The income derived and earned by Singapore entities from companies in China are not taxable in Singapore if they are not received in Singapore. Section 10(25) of the Income Tax Act provides that the following amount would be regarded as “income received in Singapore from outside Singapore” if any amount from any income derived from outside Singapore is:
• Either remitted to, transmitted or brought into Singapore;
• Applied in or towards the satisfaction of any debt incurred in respect of trade or business carried on in Singapore; and
• Applied to purchase any movable property brought into Singapore.
Tax exemption may be granted to a Singapore tax resident company on its foreign-sourced dividend income received in Singapore under Section 13(8) of the Act if the following conditions are met:
• At the time the dividend income is received in Singapore, the headline corporate tax rate of the foreign jurisdiction from which the dividend income is received is at least 15%;
• The dividend income had been subjected to tax in the foreign jurisdiction from which they were received; and
• The Comptroller is satisfied that the tax exemption would be beneficial to the Singapore tax resident.
The corporate tax rate for China is more than 15% and China imposes withholding tax on dividends, interest and royalty payments to non-tax residents under its domestic legislations. In this respect, the above conditions shall be considered as met where dividend income from China is concerned. Companies may wish to obtain information from the local tax advisor on this.
The above Section 13(8) tax exemption is only applicable to Singapore tax resident companies. To be regarded as Singapore tax residents, control and management of the companies’ businesses must be exercised in Singapore. Control and management refer to companies’ policy level decision making on strategic matters and business plans. It is a question of fact. Typically, the control and management of a company’s business are vested in its board of directors (“BOD”) and the place of residence is where the directors meet for strategic business discussions or hold their board meeting.
In the event that Singapore entities are not eligible for tax exemption on foreign dividends remitted to Singapore, foreign tax credit is claimable against Singapore tax payable on the same income.
Claiming of Reduced Withholding Tax Rates under DTAs
Dividends, interest and royalties from companies in China are subject to local withholding tax of 10% under its local domestic legislations. The rate may be reduced to 5%, 7% for dividends and interest respectively under the provisions of Avoidance of Double Taxation Agreement (“DTA”) entered into between Singapore and China on satisfying certain conditions. This is as summarised:
|Payer country||Domestic Withholding Tax (Dividends / Interest / Royalties)||DTA Withholding Tax (Dividends / Interest / Royalties)||Savings|
|China||10%||5% / 7% / 10%||5% / 3% / 0%|
• 5% reduced rate applies to the gross amount of the dividends if the beneficial owner (recipient) is a business that owns directly at least 25% of the share capital of the enterprise (payer) paying the dividends.
• In all other cases, the gross amount of dividends are taxed at a rate of 10%.
• 7% reduced rate will be levied on the gross income derived from interests received by any bank or financial institution.
• In all other cases, the gross amount interest are taxed at a rate of 10%.
• The tax charged shall not exceed 10% on the gross amount of royalties.
In the cases of business profits and income from immovable property, companies will be taxed in their home jurisdictions. Exception is when companies perform the activities or carry on businesses through permanent establishments in China or Singapore. This provision in the Singapore – China double tax treaty also applies to income derived from agricultural and forestry-related activities.
The term “permanent establishment” is defined as a fixated place of business through which the business of an entity is wholly or partly carried on. It includes a place of management, a branch, an office, a factory, a workshop, construction site, mine, oil or gas well, a quarry or any other place of extraction of natural resources of a Chinese company in Singapore.
Operations carried on by Singapore companies in China are also deemed permanent establishments. It is mandatory that for a company to be considered a permanent establishment, it must carry out its activities continually for a period of more than 6 months in China or Singapore. Where an establishment provides services and employs headcounts in the other jurisdiction, the minimum period required should aggregate more than 6 months within any twelve-month period.
To avail for the reduced withholding tax rates under the DTA, Singapore entities may be required to obtain Certificates of Residence (“COR”) from the Inland Revenue Authority of Singapore (“IRAS”) for submission by the companies in China to the China Tax Authority.
IRAS has stringent substance requirements for companies claiming DTA benefits. This is to avoid treaty abuse strategies that undermine tax sovereignty such as claiming treaty benefits in cases where these benefits were not intended to be granted, thus depriving countries of tax revenues. These measures were endorsed and implemented by IRAS within the inclusive framework for the Base Erosion and Profit Shifting (BEPS) project proposed by the OECD.
A COR may be issued if the foreign-owned companies are able to meet the following conditions:
a. Majority of the BOD meetings for discussion on strategic business matters are held in Singapore, with documentary evidence and support of minutes of meetings; and
b. The company has a valid and commercial purpose for setting up office in Singapore.
The shareholding test for a foreign-owned company is such that 50% or more of its shares capital are held by foreign entities / individual shareholders.
If the company is a foreign-owned investment holding company, then at least one of the following conditions must be satisfied:
• Have presence of related entities in Singapore that are tax residents and carry on business activities in Singapore; or
• Receive administrative support services from a Singapore related entity; or
• Have at least 1 director residing in Singapore who holds an executive position. This director must not be a nominee director; or
• Have at least 1 key employee holding important positions such as CEO, CFO, COO based and residing in Singapore.
The above-mentioned conditions would not be met by Singapore entities if they derive only passive income such as dividend or interest. For COR to be issued by IRAS, Singapore entities may wish to consider implementation of the following:
• Valid reasons and documentation for setting up office in Singapore. The reasons shall primarily be commercially driven and tax benefits shall not be the main reason.
• Carry on other business activities apart from investment holding or receive administrative support services from a Singapore related entity. These business activities include the provision of consultancy and management services to related companies; and
• Have at least 1 key employee or director who hold an executive position based in Singapore.
• BOD meetings for deciding strategic matters of the company are held in Singapore with proper documentation.
Minutes of Directors’ meetings are different from Directors’ resolutions. Directors’ resolutions are passed on writing by directors but minutes of BOD meeting is a record of the list of attendees of BOD meeting, location where the meeting was held and the agenda discussed.
We trust the above meet the requirements of the treaty benefits between Singapore and China. Please let us know if you require any clarification or advice at firstname.lastname@example.org.