Singapore taxes on foreign income. However, to increase the competitiveness of Singapore as a business hub and enhance international trading, the government allows companies that are tax-residents to be exempted from foreign income tax when certain conditions are satisfied.
Let’s dive into how your Singapore-incorporated company can be granted such exemption!
1. An Overview of Foreign Income Tax in Singapore
As you may know, Singapore adopts a territorial basis to tax on its residents’ income. This means the income generated in or derived from the nation will be subject to taxes.
Singapore also imposes taxes on income generated from a foreign source, however, only when it is received in Singapore. Particularly, a foreign-sourced income is considered as received in Singapore when:
- It is remitted, transmitted, or brought into Singapore
- It is applied to satisfaction of debts incurred in relation to business carried on in Singapore
- It is applied to any purchase of movable property that is brought into Singapore
So, assume that your Singapore-incorporated company provides services overseas and receives income in Singapore, chances are it will be subject to domestic corporate income tax, currently standing at 17%.
2. Types of Foreign Income in Singapore
According to the Inland Revenue Authority of Singapore (or IRAS), foreign-sourced income is further categorized into 3 groups:
- Dividend: a dividend paid by a non-resident is considered foreign-sourced.
- Branch profits: profits paid from overseas trade or business by a foreign branch are considered foreign-sourced.
- Service income: income from service provision from a resident through a fixed place of operation in another jurisdiction is considered foreign-sourced.
For further information, a fixed place of operation is a place of management, an office, or some space where a Singapore resident provides its service. A fixed place must have a feature of permanence. A place that is only set up temporarily for certain operations or preparation will not be considered a fixed place.
If services are not provided through a fixed place of operation, then they will be considered as Singapore-sourced income.
3. Singapore Tax Exemption for Foreign-sourced Income
Let’s move to the main event. With the Singapore foreign-sourced income exemption scheme, your Singapore-based company (must be a tax-resident) can be exempted from the foreign income tax when satisfying the following conditions:
- “Subject to tax” condition
- “Foreign headline tax rate” condition
- “Beneficial tax exemption” condition
3.1. “Subject to tax” condition
To meet this condition, the foreign-sourced income must be subject to tax in the foreign jurisdiction from which the income is generated. This means the tax imposed on foreign-sourced must be paid or payable in the foreign jurisdiction.
There is one circumstance in which the income is not subject to tax in the foreign jurisdiction but the “subject to tax” condition is still met. That is when the income is granted a tax exemption in the foreign jurisdiction due to an incentive for substantive business activities (carried out through professionals and involved with actual expenditure). In this case, your company should present the following documents:
- A declaration by your company that its foreign-sourced income has been exempted from tax in the foreign jurisdiction.
- A copy of such tax exemption certificate issued by the foreign jurisdiction. In case of dividends, there should be a voucher stating that dividend tax is exempted due to an incentive granted to the paying company for its substantive business activities in the foreign jurisdiction.
Things are a little more complicated for a foreign-sourced dividend, but still the same mechanism. Particularly, the tax imposed on a dividend in the foreign jurisdiction still needs to be paid or payable in the foreign jurisdiction. However, the paid or payable tax on dividend includes two types of taxes:
- Dividend tax, which is income tax imposed on the dividend by the foreign-sourced jurisdiction
- Underlying tax, which is income tax paid by the dividend-paying company on the income out of which the dividend is paid.
Assume that your Singapore-incorporated company received a dividend from another company in another foreign nation. Below are ways to determine whether the tax on dividends has been paid in the foreign nation:
The tax on dividends has been paid in the foreign nation when:
- Your Singapore company either suffer or did not suffer from dividend withholding tax in the foreign nation.
- The paying company ether paid or did not pay tax on the profits out of which dividend is paid in the foreign nation.
The tax on dividends has not been paid in the foreign nation when:
- Your Singapore company did not suffer from dividend withholding tax in the foreign nation.
- The paying company did not pay tax on the profits out of which dividend is paid in the foreign nation.
You can prove that the underlying tax has been paid on the foreign-sourced dividend by supplying one of the following documents:
- Audited accounts of the dividend-paying company
- A certification from the bank through which your company invested in the foreign dividend-paying company
- A confirmation letter from the dividend-paying company that foreign tax has been paid on the income out of which dividends are paid
3.2. “Foreign headline tax rate” condition
The headline tax rate need not be the tax levied on the foreign-sourced income. In fact, it refers to the highest corporate tax rate in the foreign jurisdiction. At the time you receive the foreign-sourced income, the highest corporate tax rate must be at least 15%.
3.3. “Beneficial tax exemption” condition
To meet this condition, you need to persuade the Comptroller of Income Tax that the tax exemption for foreign-sourced income in Singapore will bring benefits to certain resident taxpayers.
In case the Comptroller is not satisfied, you can still aim for other tax reliefs on foreign income, tax credits to be more specific.
There is a way for companies to be exempted from Singapore foreign income tax. That is to satisfy the 3 conditions of the Singapore tax exemption scheme for foreign-sourced income.
First, the foreign-sourced income needs to be subject to tax in the foreign jurisdiction where it arises, unless it is granted a tax exemption. Secondly, the highest corporate tax rate of such foreign jurisdiction must be at least 15%. Last but not least, the Comptroller of Income Tax must be persuaded that the tax exemption of foreign-sourced income is beneficial to Singapore-resident taxpayers.
Should you have any further questions on tax exemption in Singapore, consult our experts now!