Singapore Group Structure Tax Advice

Singapore Group Structure Tax Advice | Bestar

Singapore Group Structure Tax Advice

Singapore is a popular jurisdiction for establishing group structures due to its attractive tax regime and extensive network of double tax treaties. When considering a group structure in Singapore, several key tax aspects should be evaluated for optimal tax efficiency and compliance.

Here's a breakdown of essential tax advice for Singapore group structures:

1. Corporate Income Tax (CIT) System and Rates:

• Flat Rate: Singapore has a flat corporate income tax rate of 17%.

• One-Tier System: Singapore operates a one-tier corporate tax system, meaning profits are taxed only at the corporate level. Dividends paid by Singapore resident companies are tax-exempt in the hands of the recipient, and there is no withholding tax on dividends, even when paid to non-resident shareholders.

• Partial Tax Exemption: A partial tax exemption applies, where 75% of the first S$10,000 of normal chargeable income and 50% of the next S$190,000 are exempt from tax.

• Start-up Tax Exemption: Qualifying new private companies can receive further exemptions for their first three consecutive Years of Assessment (YAs), with 75% of the first S$100,000 and 50% of the next S$100,000 of normal chargeable income being exempt. This typically applies to Singapore-incorporated, tax-resident companies with no more than 20 shareholders (where at least one shareholder is an individual directly owning at least 10% of ordinary shares). Investment holding companies generally do not qualify for this.

2. Group Relief System:

• Purpose: Singapore's group relief system allows eligible Singapore-incorporated companies within the same group to transfer current year unutilized losses, unabsorbed capital allowances, and unabsorbed donations to another qualifying company in the same group. This can help reduce the overall tax burden for the group.

• Conditions: To qualify for group relief, the transferor and claimant companies must:

  • Be Singapore incorporated companies.

  • Belong to the same group of companies (at least 75% ordinary shareholding threshold).

  • Have the same financial year end.

  • Beneficial ownership of at least 75% of residual profits and assets upon winding-up.

3. Holding Company Benefits:

• No Capital Gains Tax: Singapore generally does not impose capital gains tax on the sale of shares or assets. However, be aware of exceptions: if gains are from frequent or short-term trading, or if capital gains are the company's primary income source, they might be reclassified as ordinary income and taxed. Also, as of January 1, 2024, gains from the sale of foreign assets received in Singapore by a relevant entity may be taxable unless specific foreign-sourced income exemptions apply.

• Dividend Tax Exemption: Dividends received by Singapore holding companies from their foreign subsidiaries may be exempt from corporate tax, provided certain conditions are met (e.g., the foreign jurisdiction has a headline tax rate of at least 15% and the income was subject to tax in that foreign jurisdiction).

• Extensive DTA Network: Singapore has an extensive network of Double Taxation Agreements (DTAs) (over 90 countries), which can minimize withholding taxes on dividends, interest, and royalties received from treaty countries and prevent double taxation.

• No Controlled Foreign Corporation (CFC) Rules: Singapore does not enforce CFC rules, meaning profits retained in foreign subsidiaries are generally not taxed in Singapore unless distributed and received as taxable income.

• No Thin Capitalization Rules: While there are no formal thin capitalization rules, transfer pricing rules still apply to intercompany debt.

4. Foreign-Sourced Income Exemption:

• Foreign-sourced dividends, foreign branch profits, and foreign-sourced service income received in Singapore by a Singapore tax resident company are generally exempt from tax if:

  • The income was subject to tax in the foreign jurisdiction from which it was derived.

  • The headline corporate tax rate of the foreign jurisdiction is at least 15% in the year the income is received.

  • The Comptroller of Income Tax is satisfied that the tax exemption would be beneficial to the Singapore resident company.

5. Withholding Tax:

• No Withholding Tax on Dividends: As mentioned, Singapore does not levy withholding tax on dividends paid by Singapore companies.

• Other Payments: Withholding tax applies to certain payments made to non-residents (companies and individuals), such as interest, royalties, technical/management fees, and director's fees. Rates vary depending on the payment type (e.g., 15% for interest, 10% for royalties on immovable property, 17% for technical/management fees, 24% for non-resident directors' fees). These rates may be reduced or exempted under applicable DTAs.

6. Transfer Pricing (TP):

• Arm's Length Principle: Singapore's tax authority (IRAS) adheres to the arm's length principle, meaning transactions between related parties must be priced as if they were conducted between independent parties.

• Documentation Requirements: Companies with gross revenue exceeding S$10 million for the basis period are generally required to prepare and keep contemporaneous transfer pricing documentation.

• Surcharge: A 5% surcharge may be imposed on any transfer pricing adjustment made by IRAS, regardless of whether additional tax is payable.

• Intercompany Loans: IRAS provides indicative margins for related party loans not exceeding S$15 million. It is crucial to ensure intercompany loan terms (interest rates, tenor) are arm's length.

• Routine Support Services: A 5% cost mark-up is indicative for routine support services provided to related parties.

7. Tax Residency:

• Control and Management: A company is considered a tax resident in Singapore if its control and management are exercised in Singapore. This is typically evidenced by the physical presence of the Board of Directors and key strategic decision-making occurring in Singapore.

• Certificate of Residence (COR): A COR is essential for claiming benefits under Singapore's DTAs. IRAS issues CORs to companies that meet the tax residency criteria.

• Impact of Global Events: Companies need to ensure they maintain their tax residency, even with virtual meetings. For example, if virtual board meetings are held, at least 50% of the directors or the Chairman should be physically present in Singapore.

8. Anti-Base Erosion and Profit Shifting (BEPS 2.0) - Pillar Two:

• Global Minimum Tax (GloBE Rules): Singapore is implementing the Income Inclusion Rule (IIR) and a domestic minimum top-up tax (DTT) from financial years starting on or after January 1, 2025. These rules aim to ensure large multinational enterprise (MNE) groups with annual revenues of at least €750 million pay a minimum effective tax rate of 15% on their income in each jurisdiction where they operate. The Undertaxed Profits Rule (UTPR) will be considered at a later stage.

• Impact on Group Structures: MNE groups falling under these thresholds will need to assess the impact of Pillar Two on their Singapore group structure and overall tax liabilities.

9. Stamp Duty:

• Reconstruction or Amalgamation Relief: Reliefs from Buyer's Stamp Duty (BSD) and Seller's Stamp Duty (SSD) may be available for the transfer of undertakings or shares in the context of company reconstructions or amalgamations, provided specific conditions are met (e.g., substantial continuity of ownership, transfer to a limited liability company, retention of shares/assets for a minimum period).

Considerations for Optimal Group Structure:

• Business Activities and Value Creation: Structure your group to align tax outcomes with where economic activities and value creation occur.

• Intercompany Transactions: Implement robust transfer pricing policies and documentation for all intercompany transactions (e.g., sales, services, loans, intellectual property licensing) to ensure arm's length pricing and avoid disputes with IRAS.

• Repatriation of Profits: Leverage Singapore's one-tier tax system and DTA network to efficiently repatriate profits.

• Holding IP: Consider structuring IP holdings in Singapore to potentially benefit from tax incentives related to IP.

• Substance Requirements: Ensure your Singapore entities have sufficient economic substance (e.g., qualified personnel, physical presence, genuine business activities) to support their tax residency and avoid challenges from tax authorities, both in Singapore and other jurisdictions.

• Regular Review: Tax laws and regulations can change. Regularly review your group structure and tax strategies with professional advisors to ensure ongoing compliance and optimize tax efficiency.

How Bestar can Help

Bestar plays a crucial and multifaceted role in helping businesses establish and manage their group structures in Singapore, ensuring tax efficiency, compliance, and strategic alignment with overall business objectives. Here's how Bestar can help:

1. Strategic Tax Planning and Structure Optimization:

• Initial Setup: Advise on the most tax-efficient group structure for Singapore, considering the nature of the business activities, the locations of subsidiaries, and the ultimate goals (e.g., holding company, regional headquarters, manufacturing hub, IP holding). This includes recommendations on the type of entities to establish (e.g., private limited company, branch, partnership) and the optimal shareholding structure.

• Jurisdictional Analysis: For international groups, we analyze the interplay between Singapore's tax laws and those of other relevant jurisdictions (e.g., where the parent company is located, where revenue is generated, where IP is developed) to minimize overall global tax leakage. This involves leveraging Singapore's DTA network.

• Tax Incentives and Exemptions: Identify and advise on applicable tax incentives and exemptions available in Singapore (e.g., start-up tax exemption, partial tax exemption, foreign-sourced income exemption, specific industry incentives) and assist with the application process to maximize tax savings.

• Profit Repatriation Strategies: Design efficient strategies for repatriating profits within the group, minimizing withholding taxes and ensuring compliance with tax laws in all relevant jurisdictions.

2. Compliance and Risk Management:

• Corporate Tax Compliance: Prepare and file annual corporate income tax returns (Form C/C-S), Estimated Chargeable Income (ECI), and other required tax forms with the Inland Revenue Authority of Singapore (IRAS) accurately and on time, avoiding penalties.

• GST Compliance: Advise on Goods and Services Tax (GST) implications, including registration requirements, filing of quarterly GST returns, and optimizing GST recovery.

• Withholding Tax Management: Determine applicable withholding tax rates on various payments to non-residents (e.g., interest, royalties, service fees) and assist with timely remittance to IRAS, considering DTA provisions.

• Transfer Pricing Documentation and Policy:

  • Develop and implement robust transfer pricing policies that adhere to the arm's length principle for all intercompany transactions (e.g., sale of goods, provision of services, intercompany loans, IP licensing).

  • Prepare comprehensive transfer pricing documentation (master file, local file) as required by IRAS, demonstrating compliance and mitigating transfer pricing risks.

  • Conduct benchmarking studies to support arm's length pricing.

• IRAS Queries and Audits: Act as a liaison with IRAS, responding to queries, assisting with tax audits, and negotiating settlements if necessary. We can help prepare necessary documentation and arguments to support the company's tax positions.

• Economic Substance Requirements: Advise on maintaining sufficient economic substance in Singapore to support tax residency and avoid challenges from tax authorities, particularly in the context of international tax rules like BEPS.

3. International Tax Advisory:

• Double Taxation Avoidance: Help companies understand and apply Double Taxation Agreements (DTAs) to prevent or minimize double taxation on cross-border income. This includes assisting with Certificate of Residence (COR) applications.

• BEPS 2.0 (Pillar Two) Assessment: For large multinational groups, Bestar can assess the impact of Pillar Two (Global Anti-Base Erosion - GloBE rules) on their Singapore group structure, including the Income Inclusion Rule (IIR) and domestic minimum top-up tax (DTT), and advise on necessary adjustments.

• Cross-Border Transactions: Provide guidance on the tax implications of specific cross-border transactions, such as mergers, acquisitions, divestments, and international supply chain arrangements.

4. Ongoing Advisory and Support:

• Changes in Tax Laws: Keep clients updated on changes in Singaporean tax laws and regulations, and advise on how these changes might impact their existing group structure and tax strategies.

• Ad-hoc Tax Advice: Provide ongoing ad-hoc advice on various tax matters that arise during the course of business operations, ensuring proactive management of tax affairs.

• Training and Education: Educate internal finance teams on tax compliance requirements and best practices.

Benefits of Engaging Bestar:

• Risk Mitigation: Reduce the risk of non-compliance, penalties, and costly tax disputes with IRAS.

• Tax Savings: Identify and leverage all available tax incentives, exemptions, and planning opportunities to legally minimize tax liabilities.

• Peace of Mind: Allow management to focus on core business activities by entrusting complex tax matters to experts.

• Strategic Advantage: Integrate tax planning with overall business strategies, ensuring tax efficiency supports growth and profitability.

• Expert Knowledge: Access to up-to-date knowledge of Singapore's dynamic tax landscape, including international tax developments.

• Efficiency: Streamline tax processes and ensure timely and accurate filings.

In summary, for any business establishing or operating a group structure in Singapore, engaging a qualified tax advisor is not just about compliance; it's a strategic imperative to ensure tax efficiency, manage risks, and support long-term business success in a complex global tax environment.

Tax advisory service on optimal group structure SINGAPORE

Subject: Tax advisory service on optimal group structure and related tax implication

We are exploring potential international structuring options for our group and the associated tax implications.

Our primary focus is on structuring hardware and software sales into the U.S. in a tax-efficient manner while managing cross-border risk exposure.

We are currently considering establishing entities in *Ireland and Singapore*, held under a BVI holding company, with two proposed scenarios:

• Case 1: Hardware sales by a Singapore entity; software subscription sales by an Ireland entity.

• Case 2: Both hardware and software sales by an Ireland entity.

We are open to retaining IP outside Ireland (e.g., in HK /Singapore) but would appreciate your guidance on the pros and cons of these alternatives

We would value your insights on the following areas:

• Access to U.S.â€"Ireland tax treaty benefits and IP protection considerations, especially where IP is not transferred to Ireland.

• Structuring strategies to optimize overall tax efficiency across Singapore, Ireland, and the U.S.

• U.S. sales tax exposure, particularly in light of ex-works shipping terms.

• Economic substance and intercompany compliance requirements to support

  either structure.

Scope of Advice Requested:

We would appreciate a fee estimate and timeline for providing a written advisory covering:

• Review and comparison of the two proposed structures (U.S. and Irish tax perspectives).

• Analysis of treaty eligibility and LOB (Limitation on Benefits) requirements.

• Guidance on IP structuring and protection without transferring IP to Ireland.

• High-level assessment of U.S. federal and state tax exposure.

• Review of U.S. sales tax considerations under the current sales model.