Singapore has emerged as a credible and attractive jurisdiction from which to base international holding companies, both as a result of its status as a major financial centre and through the introduction of income tax legislation encompassing specific tax exemptions and concessions.
Taxation of Dividends:
The Singapore tax system is territorial and foreign source income is only taxed if it is remitted into Singapore. Foreign source income that is retained outside Singapore is not taxed in Singapore. Dividends received by Singapore resident companies are taxable, however credit is allowed for foreign tax paid. There is no dividend withholding tax levied on dividends paid by Singapore companies.
Section 44 - Additional tax charge:
Singapore adopts an imputation system of taxation that is designed to eliminate double taxation on dividend income. When a dividend is paid by a Singapore company the underlying corporate tax is available to the shareholder as a credit against the income tax chargeable on such dividend. If the company has not paid sufficient tax to frank the dividend then it must pay additional tax to cover the shortfall (a "Section 44 charge"). Where the Singapore tax payable on foreign source income received by a Singapore resident company is wholly or partially eliminated by foreign tax credits the Section 44 credit will not be sufficient to fully frank the dividend paid out of such income. Shareholders would therefore be prevented from receiving the benefit of the foreign tax credit granted to the company, i.e. the foreign source income will be taxed again as dividend income when received by the shareholder.
Tax Exemption on Foreign Source Dividends:
This problem has been overcome by amendments made to the Singapore Income Tax Act in 1992, 1993 and 1995. As a result of those amendments, dividends paid by Singapore resident companies out of foreign source income are exempt from Singapore tax if the foreign tax credits in respect of such income wholly or partially eliminate the Singapore company tax chargeable on that foreign source income. Consequently where the foreign tax credits are equal to or exceed the Singapore tax assessable on the relevant foreign source income, the gross foreign income, net of the foreign tax, can be distributed to shareholders as exempt income. (Where the foreign tax credit is lower than the Singapore tax assessable on the foreign income a proportionate exemption is allowed). The exemption also applies to a holding company that pays dividends out of tax exempt dividends received from another Singapore resident company in which it holds a beneficial interest of at least 50%.
The tax credits that are allowed include foreign tax paid on the underlying corporate profits out of which the foreign source dividend has been paid. The foreign tax credit is limited to the amount of Singapore tax assessable on the foreign source income. Consequently it is not possible to mix foreign income streams and apply excess foreign tax credits against foreign source income from lower tax jurisdictions.
Advantages of the Singapore Resident Holding Company :
These exemptions make a Singapore resident company an attractive entity for holding foreign investments. If the foreign source income has borne tax at a rate of 26% or more, then the Singapore resident holding company will not pay any Singapore tax on such income and may distribute dividends out of such income to its shareholders on a tax exempt basis.
Under the 1992 and 1993 amendments the exemptions were restricted to foreign source income derived from countries that had tax treaties with Singapore. The exemptions now apply irrespective of the application of double tax treaties. The reduction of dividend withholding taxes under treaty arrangements make the Singapore resident holding company particularly attractive for investment into countries that have tax treaties with Singapore.
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.
The Alternative - the Singapore Non-resident Holding Company:
Singapore non-resident companies, i.e. companies that have their central management and control located outside Singapore, can also offer attractions as international holding companies. Non-resident companies are not liable to Singapore income tax on foreign source income nor are they subject to the imputation system described above. They can be used as tax effective holding companies particularly where treaty benefits are not applicable nor material. Non-resident companies are not entitled to the benefits of double tax treaties.
The content of this article is intended to provide general information on the subject matter. The reader should therefore obtain professional advice specific to their circumstances.
Asiaciti Corporate Services Pte Ltd, 24 Raffles Place, #26-05 Clifford Centre, Singapore 048621. E-mail : asiaciti@singnet.com.sg Tel: 65 5332611 Fax:65 5325092
