The number of businesses setting up a presence in Singapore continues to grow, in large part due to the country’s tax-friendly environment. Singapore welcomes global businesses and startups, offering a number of tax-relief, and incentive programs.
Even with low tax rates and a straightforward tax system, there are a few things you should keep in mind when setting up your Singapore company. As each business and situation is unique, you should seek professional, holistic advice in order to create a business structure that will be appropriate for you and your company in the long run. Below we will discuss some such factors that you should consider before incorporating your company.
Top 10 tax tips
Singapore’s corporate tax rate is already one of the lowest in the world market, i.e. 17%. But most companies do not pay 17% on chargeable income; they pay a lot less than that through careful planning. This is due to various tax incentive programs for startups (as well as well-established companies), tax relief programs, and corporate tax rebates that allow you to reduce your company’s effective corporate tax rate significantly. Understand these incentive programs and incorporate appropriately.
A company will have tax obligations in the country where it is a tax resident. The concept of tax residence is important, as it affects tax treatment and hence tax planning. This is particularly true if you conduct business in multiple jurisdictions and have some flexibility in planning your financial flows between them. For instance, tax rates on certain types of income may differ significantly, certain tax programs are available only to Singapore tax residents, a tax treaty with a specific country may determine the optimal jurisdiction for recognizing income, etc. Evaluate these factors before you finalize your business structure.
Singapore-sourced payments made to non-residents are generally subject to withholding tax in Singapore. But there are circumstances where such withholding can be prevented, reduced or credited back. This depends on the nature of relationship between the payer and payee and the reason for payment. You should understand these rules before you finalize your business structure.
Here is an important point — a company incorporated in Singapore is not automatically considered a tax resident of Singapore. Most foreign executives do not understand this concept because in most other countries this is not the case. Singapore treats a company as a tax resident if it is “controlled and managed” in Singapore, which usually means that its board meetings are held in Singapore (depending on your situation, there may be some other factors too). In other words, a company can be incorporated in Singapore, conduct all of its business in Singapore but still not be considered a Singapore tax-resident. By properly using this feature and making your company a tax resident of a tax-friendly country, significant net tax savings can be achieved.
For residents of high-tax jurisdictions, obtaining Singapore tax residency for their company can enable tax optimization. Singapore resident companies can enjoy tax reliefs and exemptions (i.e. pay no tax) on certain types of foreign-sourced income received in Singapore (including dividends, branch profits, and service income) by utilizing the Double Tax Agreements (DTAs) and incentive programs. Furthermore, tax residents of Singapore are not taxed on foreign income that is not remitted to and received in Singapore. Moreover, a company does not have to conduct most of its business in Singapore in order to become a Singapore tax resident. Thus, depending on your specific situation, these features can be utilized to create a business structure that is extremely tax efficient.
Here is another often overlooked feature of Singapore’s tax system. Singapore imposes no tax on capital gains, dividends, gifts, or inheritance even if these payments are made to foreigners. Thus, a company’s shareholders will not pay capital gains tax from the sale of their equity in a Singapore company. Similarly, if a Singapore resident makes a gift or inheritance to anyone else (foreigner or Singapore resident), the recipient will not pay any tax in Singapore. This is an extremely powerful feature that can be used for wealth building and inter-generational wealth transfer. Specifically, consider capital gains tax as part of the exit strategy for your business. By incorporating in Singapore, a foreigner can dramatically increase his or her net payout at exit, thus preserving wealth. However, some of these benefits may not be available if a foreigner’s home country imposes taxes on world-wide income. In those situations, other strategies may be appropriate and should be discussed with a competent tax advisor.
Note that Singapore provides wide latitude in what is considered to be capital gain but certain complex transactions may not be treated as capital gains. In such situations, the determination of whether the inflows received are income or a capital gain is done on a case-by-case basis relying on the specific facts and circumstances. Therefore, proper upfront advice and tax planning is paramount.
In Singapore, a company is taxed in a given year for income that the company earned in the preceding financial year. The preceding financial year is called the basis period and the year in which the tax is calculated and paid is called the Year of Assessment (YA). Thus, the basis period for any Year of Assessment (YA) generally refers to the financial year ending (FYE) in the year preceding the YA. For example, in 2021 you will be filing corporate tax returns for your company’s financial year that ends anytime between January 1, 2020 to December 31, 2020. In this example, 2021 is the Year of Assessment and the 12-month ending anytime during 2020 will be the basis period. Other countries use different methods for determining the basis and assessment periods. This difference allows for some tax arbitrage opportunities, with a properly planned business structure.
Singapore does not impose any restrictions on foreign repatriation of profits. Under Singapore’s one-tier tax system, all post-tax company profits may be distributed as tax-free dividends. Once you have paid corporate income tax on the profits of your company, the post-tax profits can be distributed to shareholders tax-free (whether residents or non-residents).
As a company owner and director, should you pay yourself a salary, a director’s fee, or just receive dividends as income? A careful planning and structuring can result in further tax savings for you.
The above factors are not comprehensive but they will give you a sense of the wide latitude available to foreigners in using Singapore as part of their global tax optimization strategy. Keep in mind that all of these tools are completely legal but they have to be used appropriately. With well-designed structure, the net take-home income a foreign investor or entrepreneur receives from a Singapore company can be improved significantly. But it requires proper planning and a careful consideration of:
- Tax rules of your home country,
- Existence of a DTA between Singapore and your home country,
- Nature of your relationship with the company,
- Nature of services you provide to the company (if any),
- Cross-border fund flows between Singapore company and any foreign entities,
- Financial year-end relationship between parent and subsidiary companies,
- Ability to provide inter-company loans between your corporate structure,
- Pricing strategy between various components of your business structure,
- Singapore incentives available to your industry,
- Other factors unique to your situation.
If you are seeking a place for your business, Singapore may be the best place for you. It offers a very favorable tax environment if your business is structured properly. Furthermore, there is no burdensome bureaucracy on business compliance and set-up procedures, and a company can be incorporated in a few days! If you are considering opening a business in Singapore and seek professional tax advice, we will be glad to help. Contact us for more details.
A few recommendations are provided below.
Issues to consider while choosing the most favorable entity structure for your business
Each business structure has its own features; the choice is dictated by the activities you intend to carry on in Singapore and by tax considerations. Depending on funds and the parties involved, there are various ways to structure a business in Singapore: as a company (i.e. company limited by shares, company limited by guarantee, variable capital company), a partnership, a branch, a representative office, or a business trust.
The majority of businesses in Singapore are registered by foreigners as private limited companies (i.e. private companies limited by shares). A Singapore private limited company allows for 100% foreign shareholding with up to 50 shareholders (who can be private individuals or corporations), whose liabilities are limited to the amount invested in share capital. This entity type is more suitable for small to medium-sized businesses, as the ownership can be easily transferred through the sale of shares and you can raise additional capital by issuing new shares without having to change the corporate structure. This may be the best structure for your business in the long run. Also, unlike some other business entities, a private limited company may qualify for tax exemption programs, reducing its effective corporate tax rate.
If you have an existing business overseas and want to establish your business presence in Singapore, you can establish one of the following entities: a subsidiary company (i.e. a Singapore private limited company owned by a corporate shareholder), a branch office, or a representative office. It is important to understand the advantages and disadvantages of the different business entities to make the right choice.
To benefit from Singapore’s numerous incentive and tax relief programs, you should bear in mind that some forms of tax relief may not be available if you establish a company as a branch office. Since a branch is not a legal entity separate from the head office, it will be considered as controlled and managed in the country where the management is located. Therefore, a Singaporean branch of a foreign company would, in most cases, be treated as a non-resident for tax purposes. A subsidiary, on the other hand, acts as a separate legal entity and is treated as a locally established entity. In this case, your parent company will be protected from the subsidiary’s liabilities. Also, it is important to note that more than 50% of shares of a subsidiary company should be held by the parent company. For more information on the differences between a subsidiary and a branch office, refer to this article.
You can also consider another option for your foreign entity under which you can establish your presence in Singapore — Inward Re-domiciliation Regime. Under this regime, foreign entities are able to transfer their company’s registration to Singapore and become a Singapore company limited by shares. Note that re-domiciliation does not create a new legal entity in Singapore, however, you would need to comply with local laws and regulations. This option may be suitable for foreign corporations that already have a presence or operations in Singapore, as it will allow them to relocate their headquarters to Singapore while still retaining their brand.
Consider Singapore’s tax incentive programs
The Singaporean government supports entrepreneurship by providing startup-friendly regulations in a variety of areas, including tax credits, grants for first-time entrepreneurs, talent placements, and co-investment opportunities. There is a long list of tax incentive programs, exemptions, and relief programs that companies in Singapore can potentially enjoy. These programs offer eligible taxpayers either a reduced tax rate or a complete, or partial tax exemption on their qualifying income.
Note that some of these programs are available to all newly incorporated companies, while others only to companies that offer one or more of the following: promote a specific industry segment, generate employment growth in Singapore, improve productivity, establish a specific skill-base in the country, or substantially contribute to the country’s economy. Furthermore, if you are planning to establish an investment holding company or a company that undertakes property development for sale or investment, some of the incentives may not be available.
Understanding the existing tax laws and identifying appropriate opportunities for tax savings through proper use of incentive programs is essential before developing your tax planning strategy.
Just as an example, consider the most common incentive program for startups. It is the tax exemption program for newly incorporated startups. Qualifying Singapore-based startups will be excluded from paying 75% of the tax on the first S$100,000 of normal chargeable income for the first three years. Furthermore, a startup will be free from paying 50% of the tax on the next S$100,000 in regular chargeable income. Even after the first three years, you can decrease your effective tax rate, e.g. by applying for partial tax exemption programs through Singapore’s various tax incentive programs.
There are other simple strategies available to you as well. For example, consider tax residency by arranging board meetings in Singapore or outside Singapore; decide if having individual shareholders instead of corporate shareholders is appropriate for your situation.
Tax treaty between Singapore and your home country
To enhance the country’s global tax competitiveness, the Singapore government has developed an extensive network of tax treaties. These agreements operate to reduce (or exempt) taxes paid by a company resident in a treaty country or Singapore and ensure that any such companies are not taxed twice. For example, if a Singapore-based company has already paid tax for its operations overseas, it should not be further taxed in Singapore and vice versa.
Singapore imposes withholding tax on certain categories of payments made to non-residents, including interest, royalties, rent for movable property, and technical assistance fees. But with double-tax treaties in place, this tax can be reduced significantly, even to 0% in some situations. However, excess credits cannot be carried forward to future years or used to defer tax on income from another source, or from a similar source in a different jurisdiction. In other words, you cannot use the Tax Treaty framework to create negative taxes for yourself but you can get all the way to zero.
If there is no tax treaty in place between your country and Singapore, there is another framework that will help reduce your tax burden with respect to foreign income. Singapore provides a unilateral tax credit to its tax residents for foreign tax paid in countries without a double-tax agreement with Singapore. The unilateral tax credit is generally granted on a source-by-source, country-by-country basis. For claiming this tax credit, you must be a tax resident in Singapore and satisfy all other conditions set by the tax authority. Again, it is strongly advised that you should consider a competent tax advisor before finalizing your business structure.
Foreign entrepreneurs have many reasons to consider Singapore for setting up a business: it is a doorway to all Asian markets, it is a very well run country, and it has a competitive tax system. For a company to efficiently manage its tax obligations, developing a proper tax strategy is essential. Our Singapore corporate services team will be glad to help you.
Headquartered in Singapore, CorporateServices.com, empowers global entrepreneurs with information and tools necessary to discover Singapore as a destination for launching or relocating their startup venture and offers a complete range of company incorporation, immigration, accounting, tax filing, and compliance services in Singapore. The company combines a cutting-edge online platform with an experienced team of industry veterans to offer high-quality and affordable services to its customers. Contact Us if you need assistance with setting up a new Singapore company or if you would like to transfer the administration of your existing company to us.
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