An investment holding company in Singapore is a fantastic means for both domestic and international investment. Generally, there are many reasons why you should incorporate a holding company in Singapore. But for an investment holding company, the main reason lies in the favorable tax system of the country.
Assume that you establish an investment holding company in Singapore. Foreign-sourced dividends can be exempted from being taxed. Your company can be entitled to a tax exemption rate of 75%. Many expenses can be deducted from accessible income. There are many tax-cut schemes and advantageous policies to help you significantly reduce the amount of payable tax.
Let’s find out more about the tax matter of an investment holding company in Singapore!
Table of Contents
1. Definition of an Investment Holding Company in Singapore
You can define an investment holding company in Singapore as a company that only invests in shares and other properties for long-term purposes. Its income is mainly passive (non-trade income), normally coming from dividends, interest, rental, and royalties.
An investment holding company in Singapore does not carry out any trade or other business activities.
Here’s an important note: You should not mistake an investment dealing company for an investment holding company. These two are different kinds of companies.
For better understanding, an investment dealing company refers to a company that trades shares and properties on a regular basis. Its income is mainly generated from the gains on sales of those shares and properties. Thus, its income is considered trade income.
2. Taxable Income of a Singapore Investment Holding Company
According to the Inland Revenue Authority of Singapore (IRAS), the income that is revenue in nature will be subject to income tax. Some very typical types of taxable income in Singapore are:
- Profits from trading activities or supplying services
- Income from an investment such as dividend, interest, and royalties
- Income from rented property and other types of properties
Since your investment holding company owns shares in other companies and receives dividends as income, it is subject to income tax in Singapore. The income will be assessed on a financial year basis. You will need to decide on the first financial year of your new company. It does not necessarily fall on 31st December annually. In fact, it can fall on any other date. Some other common choices are 31 March, 30 June, and 30 September.
3. The Tax System of Singapore
So now you know your investment holding company in Singapore is subject to taxes, but how and when?
Singapore follows a territorial tax system. This means your company’s income generated within the country will be subject to taxes. Singapore also imposes taxes on your company’s income that is earned in another foreign country, but only when it is remitted and received in Singapore.
The corporate income tax rate in the city-state is currently standing at 17%, which is relatively low when you compare it to other global financial hubs. However, this rate does not reflect the exact payable tax of your company. The actual payable tax is in fact lower, due to some available tax reliefs and beneficial schemes in Singapore.
For example, the Partial Tax Exemption for Companies (PTE) scheme can bring you a low effective tax rate of only 4,25%. Also, the foreign-sourced income can be exempted from Singapore income tax, as long as your company can satisfy certain conditions.
The following are some other keynotes of the Singapore tax system:
Single-tier corporate tax system. This means you, as a shareholder, will not be taxed on the dividends paid by your investment holding company in Singapore.
Foreign-sourced dividend tax exemption. The dividends your company receives in Singapore from foreign subsidiaries can be exempted from tax (subject to certain conditions).
No withholding tax on dividends in Singapore.
Low withholding taxes. The withholding tax rates on interest, royalties, and rent are 15%, 10%, and 15% respectively. These apply to payments made to non-residents who carry business activities outside of Singapore.
Many tax treaties. Singapore has a network of tax treaties with more than 80 countries. These treaties bring favorable tax rates and many other benefits between Singapore and the signed countries.
No capital gains tax in Singapore.
As for the filing requirement, all companies in Singapore have to e-file and submit their corporate income tax returns by 30 November, from 2021.
4. Tax Reduction for Singapore Investment Holding Company
Your investment holding company in Singapore can apply the following methods to lower the payable income tax:
4.1. Expense Deductions
Your company can deduct three types of expenses against its assessable income. Those are direct expenses, statutory and regulatory expenses, and other allowable expenses.
Direct expenses are the expenses that result in the investment income. For instance, for rental properties, the following can be considered deductible expenses: cost for collecting income, insurance, property tax, maintenance, and repair cost. The interest paid to loans, which is spent to buy shares, can also be considered a deductible expense.
Note: These expenses can only be deducted against the respective source of income.
Statutory and regulatory expenses are the expenses that are spent to keep your company stay compliant with the local laws (Singapore Companies Act and other related laws). Some typical examples are:
- Fees for accounting, auditing, and tax service
- Secretarial fees
- Bank charges
Additionally, there are other allowable expenses that your investment holding company in Singapore can deduct. These include:
- Fees for administrative and management
- Fees for directors
- Fees for office (rental, charges for telephone, water, and light for example)
- Salaries, bonus, and allowances for employees
- Other general expenses
According to IRAS, the deducted amount of these other expenses cannot go higher than 5% of the gross income of your company.
4.2. Tax Deductions
Your Singapore investment holding company can transfer the following items to other companies in the same group:
- Current-year unutilized industrial building allowance
- Current-year unutilized land intensification allowance
- Current-year unutilized donations
Under the Group Relief System, two companies are considered in the same group when all of the following conditions are met:
- They are both incorporated in Singapore
- 75% of the ordinary share capital of one company is held by the other, or 75% of each company is held by a third Singapore-incorporated company
- Both companies have the same financial year period
For current-year unutilized losses (caused by expenses exceeding investment income), your company cannot transfer these losses to another company within the same group. Also, it cannot carry forward any losses to the following years to offset future accessible income.
And since your Singapore investment holding company does not carry out any trade, it is not allowed to claim capital allowance. Fixed assets are considered deductible expenses only when they are bought to replace other existing ones.
4.3. Tax Exemption and Rebate
According to IRAS, an investment holding company in Singapore cannot apply for the Tax exemption for new start-ups. However, your company is still eligible for the Partial Tax Exemption (PTE) Scheme for all companies in Singapore.
With the PTE scheme, your company will be entitled to:
- A 75% tax exemption on the first $10,000 of income, and
- Another 50% tax exemption on the next $190,000 of income.
After the PTE scheme, your company will continue to benefit from an annual tax rebate (with a given cap). Every year from 2013, the Singapore government has rebated taxes to all Singapore companies. The tax rebate rate in 2019 was 20%, with a given cap of $10,000. In 2020, the figures were 25% and $15,000.
4.4. Foreign-sourced Dividend Exemption
As mentioned above, your Singapore investment holding company when receiving dividends from foreign subsidiaries can be subject to income tax. However, the dividend income can be exempted from Singapore tax if the following conditions are satisfied:
- The dividends have already been paid/payable in the foreign jurisdiction (where the dividends arise)
- The headline tax rate in the foreign jurisdiction is no less than 15% when the dividends are remitted to Singapore
- The exemption is believed to benefit the resident taxpayers in Singapore.
View a basic format of tax computation for a Singapore investment holding here
An investment holding company in Singapore mainly receives passive income from dividends, interest, rental, or royalties. Investment income from these sources is subject to Singapore taxes.
When your company receives dividends from foreign subsidiaries, it is also taxed in Singapore. However, these foreign dividends can be exempted from Singapore tax, when your company meets certain conditions. Additionally, there is no withholding tax on dividends as well as there is no tax imposed on dividends received by individuals shareholders.
There are many ways to reduce the income tax of an investment holding company in Singapore. In addition to dividend tax exemption, you can deduct many types of expenses against accessible income. You can continue to benefit from the PTE scheme and annual tax rebate to even lower your company’s payable taxes.
If you are planning to set up an investment holding company, Singapore is the right choice. The process of setting up a company in this country can be very straightforward and fast, with BBCIncorp’s Singapore incorporation services. Contact us now for free consulting!