The following is a excerpt from the March 2014 Edition of Asia Briefing Magazine, titled “The Gateway to ASEAN: Singapore Holding Companies.”
Aside from providing additional legal distance between the parent company and its Asia-based investment holdings, Singaporean holding companies also enable foreign firms to take advantage of the city-state’s various tax treaties. Singapore’s double taxation agreements (DTAs) limit or eliminate the level of withholding taxes payable on dividends from overseas holdings, and the city-state’s low corporate income tax rate (17 percent) and lack of a capital gains tax make it an ideal jurisdiction for basing holding company operations.
Double taxation occurs when entities are taxed on the same income or capital by two different tax jurisdictions. Oftentimes, this occurs when an entity earns income in a country other than the one in which it is resident. In such cases, both the source state in which the income is earned and the entity’s residence state may have the right to tax that same income under each jurisdiction’s domestic tax laws. Another instance of double taxation can occur when an entity is deemed to be resident in more than one state, and is therefore liable for taxation in both. Because double taxation acts as a strong deterrent to cross-border investment, countries often work together to provide bilateral tax relief via DTAs.
Singapore boasts one of the most extensive networks of DTAs in the world, with over 70 comprehensive DTAs in force, applicable to both income and capital. Singapore has DTAs with China, India, and all members of ASEAN except Laos and Cambodia, among others. Additionally, Singapore currently has a number of limited DTAs which cover only income derived from air transport and shipping, with treaty partners including Hong Kong and the U.S. Even when no DTA applies, Singapore offers unilateral tax credits to prevent double taxation if certain conditions are met.
Who Qualifies for Relief?
Only residents of Singapore or its treaty partners can take advantage of the benefits available under the relevant DTAs. An entity must first obtain a Certificate of Residence (COR) from the Inland Revenue Authority of Singapore (IRAS) before it can claim treaty benefits as a Singapore tax resident.
To obtain a COR, the control and management of a company’s business must be exercised in Singapore. Merely being incorporated in Singapore will not be sufficient to meet this requirement. Factors considered by the IRAS include: whether Board of Directors’ meetings are held in Singapore; the presence of other related companies in Singapore; and the presence of at least one executive director or key employee in Singapore.
A foreign-owned holding company in Singapore with only passive or foreign sources of income will need to provide reasons for setting up an office in Singapore, and convince the IRAS that its control and management are based in Singapore. Licence agreements, where intellectual property is registered in Singapore and licensed to an ASEAN subsidiary, or arrangements to provide management services from Singapore, are possible ways in which control and management might be exercised in Singapore.
However, investors need to ensure they do not fall foul of ant avoidance laws and transfer pricing regulations. The IRAS does not approve of “treaty shopping” or the abuse of its DTAs by entities with little commercial substance in Singapore, so foreign investors need to be alert to economic substance requirements under anti-avoidance provisions, which can override and disallow treaty benefits.
The concept of “permanent establishment” (PE) features in virtually all DTAs. Under most DTAs, when an entity resident in one country carries out business in another country (the “source” country), business profits will not be taxed in the source country unless the business is carried out through a PE. Once PE status is triggered, the entity will usually be subject to corporate tax, and qualifying staff will be subject to individual income tax in the source country.
The terms of individual DTAs may vary, but a PE is generally defined as a fixed place at which the business of an enterprise is carried out, either wholly or in part. It typically includes a place of management, a branch, an office, a factory or workshop, etc. but can also cover certain activities (such as a building site, construction project, or provision of consultancy services) lasting over a certain period of time, usually ranging from 6 to 12 months. Moreover, a PE may also exist where an agent has, and habitually exercises, a general authority to negotiate and conclude contracts on behalf of the enterprise.
As the presence or absence of a PE usually determines where business profits are sourced and taxed for the purposes of a DTA, this can have significant implications for the legal structure or vehicle through which an entity chooses to conduct its business.
What Relief is Available?
There are two main methods by which Singapore and its treaty partners grant relief from double taxation: the credit method and the exemption method. These methods may be used either separately or in combination.
The Credit Method
Under the credit method, Singapore will typically grant a foreign tax credit (FTC) to an entity that has paid taxes on business profits derived in the source state. The entity can then offset that FTC against its tax liability in Singapore. Singapore’s laws provide that an FTC can only be offset against the tax liability arising from that same income in Singapore, and not against the entity’s other income. Accordingly, if the source country’s tax rate is higher than Singapore’s, the entity will bear the source state’s higher tax rate.
The Exemption Method
Under the exemption method, business profits that have already been taxed in the source state will typically be exempted from taxation in Singapore altogether. If the source state’s tax rate is lower than Singapore’s, the exemption method would be preferable to the credit method as a lower overall tax liability would result.
Singapore’s domestic laws also exempt foreign-sourced dividends, branch profits, and service income remitted into Singapore from further taxation, provided that they have already been taxed in the source country and the highest corporate tax rate (also known as the “headline” tax rate) is at least 15 percent, even if that income has not been taxed at the headline rate.
Singapore’s DTAs: Final Thoughts
Singapore’s extensive DTA network mitigates the problems of double taxation to a large extent. DTA considerations are essential to ensuring that a business operating across multiple jurisdictions can meet its tax obligations in those countries without suffering an excessive tax burden. Singapore’s favorable DTAs have been key in allowing it to retain its status as an international investment hub, by enabling companies to stay competitive with local businesses in Asia.
This article is an excerpt from the March issue of Asia Briefing Magazine, titled “The Gateway to ASEAN: Singapore Holding Companies.” In this issue, we highlight and explore Singapore’s position as a holding company location for outbound investment, most notably for companies seeking to enter ASEAN and other emerging markets in Asia. We explore the numerous FTAs, DTAs and tax incentive programs that make Singapore the preeminent destination for holding companies in Southeast Asia, in addition to the requirements and procedures foreign investors must follow to establish and incorporate a holding company.
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam, in addition to alliances in Indonesia, Malaysia, Philippines and Thailand, as well as liaison offices in Italy and the United States.
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The Gateway to ASEAN: Doing Business in Singapore 2014 (Second Edition)
Dezan Shira & Associates’ Singapore business guide will provide readers with an overview of the fundamentals of investing and conducting business in Singapore. The 2014 edition explains the basics of company establishment, annual compliance, taxation, human resources, payroll and social insurance in the city-state, in addition to how a company established there can be used to conduct business in the wider ASEAN and Southeast Asian region.