Companies in Singapore are taxed on: 1) Singapore-sourced income i.e. income generated from activities in Singapore; and 2) on a very limited types of certain income generated from activities outside of Singapore i.e. foreign-sourced income.
This article clarifies the rules regarding the tax treatment of foreign-sourced income in Singapore and covers the following topics:
- What foreign sourced income is considered taxable
- Tax Incentives on foreign-sourced income
- Tax relief through Singapore’s tax treaties and credits
What foreign-sourced income is considered taxable
To position itself as the leading business hub for globalizing companies, Singapore has implemented tax policies designed to avoid the double taxation of foreign-sourced income. This is accomplished through a) tax exemptions on qualifying foreign-sourced income; and b) an extensive network of double-tax avoidance treaties.
The Inland Revenue Authority of Singapore (IRAS) generally defines foreign-source income as profits that arise from a trade or business carried on outside of Singapore.
This includes profits derived from investments (such as dividends) from holding shares in foreign based companies, interest income or rental income–as well as income earned from royalties, premiums and other profits from foreign property.
Furthermore, to be considered taxable, foreign-sourced income must be ‘received in Singapore’.
‘Received in Singapore’ explained
According to Singapore law, foreign-sourced income will be considered received in Singapore if it meets any of the following conditions:
- The income is remitted, transmitted or brought into Singapore: This refers to funds transferred to a Singapore bank account or brought into Singapore as a cheque, money order or in cash.
- The income is used to pay off any debt incurred in Singapore: This refers to money held overseas that is used to pay down or settle a debt in Singapore, including debt to suppliers, banks or as a result of legal proceedings.
- The income is used to purchase any moveable property brought into Singapore: This refers to overseas funds used to buy equipment or raw materials connected to the business in Singapore.
Tax exemption on taxable foreign-sourced income
Under Singapore tax law, the following types of foreign-sourced income are tax exempt when received in Singapore:
- Foreign-sourced dividends: According to Singapore tax law, dividends are considered foreign sourced if they are paid by a company incorporated in a jurisdiction outside of Singapore.
- Foreign branch profits: In order for profits to be considered foreign-sourced the foreign branch of a Singapore company must be located outside of Singapore.
- Foreign-sourced service income: Service income is considered foreign sourced if the services are provided through a “fixed place of operation” in a foreign country. To be considered a fixed place of operation, the location must meet the following conditions:
- The location should have features of permanence. For example, a permanent staff that uses the location for on-going business activities is considered a feature of permanence.
- The location should be used on an on-going basis i.e. the location cannot be solely used on a temporary basis.
- The location should be used for primary business activities i.e. the location cannot be used solely for auxiliary or preparatory activities.
- The location should be at the disposal of the taxpayer on an on-going basis. In general, if a taxpayer merely visits a location, then the location will not be considered at the taxpayer’s disposal. For example, XYZ Pte. Ltd. is a Singapore based company that travels to a major client’s office in Jakarta to provide consulting services. In this case, the client’s office in Jakarta would not be considered at the disposal of XYZ Pte. Ltd. because the company is only visiting. Therefore, the client’s office would not be considered a fixed place of operation.
Conditions for tax exemption
Foreign-sourced income must meet the following conditions to be exempt from taxation:
- The headline tax rate of the foreign jurisdiction should be at least 15% at the time the foreign income is received in Singapore.
- The Singapore government is satisfied that the tax exemption would be beneficial to the person resident in Singapore.
- The foreign income was “subject to tax” in the foreign jurisdiction. In this case, the rate at which the foreign income was taxed can be different from the headline tax rate. The actual tax rate paid on the foreign income can be zero or can even be negative.
IRAS will consider the income “subject to tax” even if the income is exempt from tax in the foreign jurisdiction (e.g. income that qualifies for tax incentives in the foreign jurisdiction). Therefore, the actual tax paid in the foreign jurisdiction may be zero (or even negative) yet it will be considered subjected to tax and qualify for tax exemption in Singapore.
No specific documents are required to claim the tax exemption. IRAS only requires companies to include the following information on their income tax return:
- The nature and amount of income received from a foreign jurisdiction
- The jurisdiction from which the income is received
- The headline tax rate of the foreign jurisdiction
- Confirmation that tax has been paid in the foreign jurisdiction
- Confirmation that the income is subject to tax in the foreign jurisdiction if no tax was paid
In order to take advantage of the “subject to tax” condition, a company does not have to submit any supporting documents with its income tax return. However, the following documents should be retained in the company’s records:
- A declaration that the specified foreign income is exempt from tax in the foreign jurisdiction due to tax incentives.
- A copy of the tax incentive certificate or approval letter issued by the foreign jurisdiction
- For foreign-sourced dividends, companies should keep a dividend voucher (when available) stating that the dividend is exempt from tax in the foreign jurisdiction due to tax incentives.
Double taxation relief on foreign income
To prevent double taxation on foreign income, Singapore has signed numerous Avoidance of Double Taxation Agreements (DTAs) with an extensive network of countries. Furthermore, if a foreign jurisdiction is not covered by a DTA, Singapore provides a Unilateral Tax Credit (UTC) for income sourced from such jurisdictions.
Under a DTA or UTC, companies can claim a tax credit on income that was taxed in a foreign jurisdiction, therefore, reducing or eliminating the taxes paid on such income in Singapore.