How is Foreign-Sourced Income Taxed in Singapore?
Companies in Singapore are taxed on: 1) income generated directly from activities of the Singapore company; and 2) on certain type of income generated from overseas activities via foreign subsidiaries and branches (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 is Foreign-Sourced Income?
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 (generally through operating subsidiaries in other jurisdictions). This includes profits derived from investments (such as dividends) from holding shares in foreign based companies, interest income or rental income, income earned from royalties, premiums and other profits from foreign operations.
Very often, people confuse foreign-sourced income with foreign income. Just because trade income is generated from business activities outside Singapore (i.e. foreign income), it doesn't mean that the income is foreign-sourced income. A simpler way to understand foreign-sourced income is that the source income must have been subjected to tax somewhere and if that's not the case, Singapore tax will likely apply. In other words, to think that you can have a Singapore company where you can generate profits but not pay taxes anywhere - will likely not work in Singapore.
How is Foreign-Sourced Income Taxed?
- Foreign-sourced dividend;
- Foreign branch profits; and
- Foreign-sourced service income.
Qualifying Conditions for Tax Exemption
Under Section 13(9) of the Income Tax Act, tax exemption will be granted for the above foreign-source income when all of the following three conditions are met :
- The foreign income had been subject to tax in the foreign jurisdiction from which they were received (known as the "subject to tax" condition). The rate at which the foreign income was taxed can be different from the headline tax rate;
- The highest corporate tax rate (foreign headline tax rate condition) of the foreign jurisdiction from which the income is received is at least 15% at the time the foreign income is received in Singapore; and
- The Comptroller is satisfied that the tax exemption would be beneficial to the person resident in Singapore.
IRAS will consider the income “subjected to tax in a foreign jurisdiction” 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.
By default, no specific documents are required to claim the tax exemption (although IRAS has the right to ask for justification and evidence on demand). 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 “subjected 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.
Note that double tax treaty benefits are available to Singapore resident companies only.
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