Singapore’s reputation as a business-friendly hub with a stable political and economical presence has made it an attractive destination for foreign entrepreneurs to consider. For foreign company owners and directors, understanding Singapore’s income tax regulations is essential to ensure compliance and make informed financial decisions.
The overall view is that with a corporate tax rate of just 17%, further diminished by tax exemptions and no capital gains tax, Singapore remains as one of the lowest and most straightforward tax systems globally.
However, before one sets up shop, it is important to understand the concept of tax residency and determine eligibility.
Tax Residency and Scope
In Singapore, as per the Inland Revenue Authority of Singapore (IRAS) website, tax residency is determined by where the business is controlled and managed.
Essentially, this means that the real control and management of your company – and not just the everyday business operations – must be in Singapore for it to qualify for corporate tax residency. To determine this is tricky as it involves scrutiny of the high-level decision-making board that matters, but if the company board meetings take place in Singapore and has a Singaporean resident, it is likely to qualify.
Why is tax residency for a company so important?
There are multiple benefits to corporate tax residency. As extracted from the IRAS website, they include:
- Exemption or reduction in tax imposed on specified foreign income that is derived in a jurisdiction that has an Avoidance of Double Taxation Agreement (DTA) with Singapore.
- Tax exemption on specified foreign income such as foreign-sourced dividends, foreign branch profits, and foreign-sourced service income under Section 13(8) of the Income Tax Act 1947.
- Foreign tax credit for the taxes paid in the foreign jurisdiction against the Singapore tax payable on the same income.
- Tax exemption for new start-up companies.
The above can amount to generous reliefs, which can allow business owners to optimise earnings. The first step to this is applying for an official Certificate of Residency (COR) from IRAS.
How is corporate tax calculated?
In Singapore, income taxes are imposed on your company’s net profits. This means you should calculate your earnings minus permitted deductions to arrive at the total tax you owe. In Singapore, this is usually termed “chargeable income”.
It is helpful to know that alongside this tax rate, businesses might qualify for other multiple tax reductions. These reductions could lower your actual company tax rate from the usual 17% to approximately 15%.
For example, the initial SG$10,000 of your company’s chargeable income is 75% not subject to tax. The following SG$190,000 is 50% not subject to tax. Although not exactly the same as having an initial tax-free amount, this essentially is similar to similar tax relief.
These perks are especially obvious in the first three years to attract interest. Start-up companies that meet the criteria (excluding property development and investment holding firms) can access even greater tax exemptions during their initial three years of operation. Instead of the above example, these companies enjoy the same percentages but respectively up to amounts of SG$100,000 and subsequent thereafter.
Personal taxation
For those who act as foreign company owners or directors, it is important to note one’s own tax duties when in Singapore. Generally, individuals who physically spend 183 days or more in Singapore are considered tax residents. Tax residents are subject to Singapore taxation on their global income, including income earned outside of Singapore.
Non-residents, on the other hand, are only taxed on income derived from or accrued in Singapore. So foreign owners and directors of companies will be taxed only on the income they make from their roles that are tied to their operations in Singapore.
One can look out too for options like the Not Ordinarily Resident (NOR) scheme, which provides qualifying individuals with reduced tax rates on their employment income for a specified period – especially advantageous for foreign executives and directors who relocate to Singapore for work.
Other facts worth noting
It is important for foreign owners and directors to leverage the workings of Singapore’s tax schemes to optimise their business earnings. Some of them include:
Capital tax exemptions: One can sell capital assets located and utilised in Singapore without facing any tax implications. But bear in mind that this rule generally applies to assets held for a minimum of two years as a general way to determine if the acquisition was based on profit or use for the company.
Carrying forward tax losses: If your company faces a tax loss, you can typically move this forward to lower the taxable income in the upcoming tax years. This is usually approved if there has been no significant change to the shareholding or business activities. There are also instances where one can apply for up to SG$100,000 in eligible deductions from the past year’s profits if certain specifications are met.
GST increase: Any business with a turnover exceeding S$1 million is obligated to enrol for GST. The current 8% is slated to rise to 9% starting from 1 January 2024.
Need help?
It’s better to build the business structure around Singapore’s tax policies to best benefit from their attractive corporate tax laws, than to set up shop and attempt to navigate the paperwork and criterias after operations have taken root.
Maintaining compliance and making informed financial decisions around the regulations can make a huge difference in your taxation, so to ensure you have the most relevant and accurate information, it’s recommended to consult with tax professionals or IRAS to ascertain your plans.
Stay informed of the corporate tax laws to maximise your profits when doing business in Singapore.Let the seasoned consultants at PLCO assist you with your plans.
