Singapore has emerged as a credible and attractive jurisdiction from which to base international business activities. There are three principal factors in this development : it is a politically stable international financial centre, has “state of the art” service facilities, and adopts an “investor friendly” tax system.

The Singapore tax system is territorial. Income tax is levied on the net income of residents from sources within Singapore and on foreign source income if remitted into Singapore. Non-resident companies are taxed on income derived from sources within Singapore. The company income tax rate is currently 24.5%. There are wide ranging tax exemptions and tax concessions designed to attract foreign business to Singapore.

INTERNATIONAL HOLDING COMPANIES

Apart from specific tax and economic incentives, general tax exemptions offer significant benefits to international holding companies operating from within Singapore. Singapore has a network of approx. 38 double tax agreements which in most instances provide concessional rates of withholding tax on dividends paid to Singapore resident companies. As noted above foreign source income, including dividend income, is only taxed if it is remitted into Singapore. Consequently dividends received by Singapore resident companies are taxable in Singapore with credit allowed for foreign dividend withholding taxes paid. As a result of amendments made to the Income Tax Act in 1992/93 the credit for foreign taxes paid now also includes the foreign income tax paid on the underlying corporate profits from which the dividends are received. The entitlement to such foreign tax credits is subject to a 25% equity level similar to the European style “participation exemptions”.

There is no dividend withholding tax levied on dividends paid from Singapore companies to non-residents. However as Singapore adopts an imputation system of taxation, dividends paid from unfranked profits can be subject to a “section 44” charge for the additional tax on the “unfranked” dividend. Singapore resident companies that qualify for the “participation exemption” on foreign source dividends can pass such dividends through to their non-resident shareholders without liability to the “section 44” charge.

These exemptions make a Singapore resident company an attractive entity for holding foreign investments. If the foreign source income has borne tax on an aggregated basis at a rate of 24.5% or more, then the Singapore resident holding company will not pay any Singapore tax on such income and dividends paid out of such income are tax exempt. As Singapore does not tax capital gains, further benefits may arise to the holding company upon the disposal of its investment in the foreign company, particularly in tax treaty countries where the treaty concedes to Singapore the right to tax capital gains.

NON RESIDENT COMPANIES

Singapore non-resident companies, i.e. companies which have their central management and control located outside Singapore, are not liable to Singapore tax on foreign source income. Non-resident companies are not subject to the imputation system. Consequently they can be used as tax effective international business entities.

(a) International Holding Companies :

Non-resident Singapore companies are not entitled to the benefits of double tax treaties. Their use as international holding companies is therefore appropriate where treaty benefits are inapplicable or where the underlying investments will not quality for the “participation exemption” described above, e.g investments in low tax countries. Foreign source dividends are not subject to Singapore tax nor is the “section 44” charge applicable to non-resident companies. Foreign source dividends can therefore pass through Singapore non-resident companies without liability to Singapore tax.

(b) International Trading Companies :

On a similar basis trading activities conducted outside Singapore by non-resident Singapore companies are not subject to Singapore income tax. Profits can be distributed to non-resident shareholders without liability to Singapore tax.

TAX & ECONOMIC INCENTIVES

Singapore has an extensive range of tax incentives to encourage the development of industrial, commercial and financial services enterprises in Singapore. These include :

Operational Headquarters (OHQ) Incentive : Qualifying companies are, inter alia, exempted from tax on dividends received, and dividends paid to the parent company are similarly exempt. Management fees received from group companies and royalties received from Singapore-based research and development activities are taxed at the concessional rate of 10%. The criteria for qualification as an OHQ include the need to maintain a substantial operational presence in Singapore to support a regional network of business activities.

Business Headquarters (BHQ) Programme : Qualifying companies may apply for any of the incentives available under the Economic Expansion Incentives Act and can apply for exemption from tax on foreign source dividends received in Singapore. One of the criteria for qualification is the need to employ at least 15 people in Singapore.

Other incentives include tax concessions for Fund Management, Approved International Traders, Approved Oil Traders, Countertrade, Export Services, Venture Capital, and Approved Royalties.

In summary, Singapore is a major financial centre which provides an attractive fiscal and economic environment from which to base international holding companies and regional business activities.

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Asiaciti Corporate Services Pte Ltd, 3 Raffles Place, #09-01 Bharat Building, Singapore 048617. Tel: (65) 6533 2611 Fax: (65) 6532 5092 Email : [email protected]