Tax Treatment of a Company Limited by Guarantee that Carries on a Trade or Professional Association

under Section 11(2) of the Income Tax Act (“ITA”) and Qualifying Conditions for Company Limited by Guarantee to be Approved as a Mutual Concern to which the Provisions of Section 11(2) Apply

Companies limited by guarantee that carry on a trade or professional association may apply to be approved as a mutual concern to which the provisions of section 11(2) of the ITA shall apply. This approval is provided for under section 11(3) of the ITA.

The mutuality principle in common law is founded on the precept that a person cannot make profit by trading with himself. Thus, any surplus of a mutual concern derived through transactions with its members is not regarded as “gains or profits from trade or business” and thus not liable to tax.

Section 11 of the ITA stipulates the conditions for a mutual body of persons to be regarded as carrying on a trade or business for tax purposes.

A trade or professional association would be deemed under section 11(2) of the ITA to be carrying on a business if more than 50% of its receipts by way of entrance fees and subscriptions from Singapore members are from those who claim or are entitled to claim a deduction under section 14 of the ITA. In such cases, only the income from transactions with Singapore members and non-members will be subject to tax. The income from transactions with foreign members will not be subject to tax.

Where 50% or less of the receipts from Singapore members are from those who claim or are entitled to claim a deduction under section 14 of the ITA, only income from transactions with non-members will be subject to tax.

A company limited by guarantee that carries on as a trade or professional association can be treated as a mutual concern if the company meets the following prescribed conditions:

(a) it must be set up not for purposes of profit or gain and if the company derives any surplus, it must be used to carry out its not-for-profit objectives;

(b) it exists for the sole purpose of benefiting its members and is operated exclusively for the same purpose for which it was organized;

(c) the contributors to the common fund, as a class, should be identical to the participators in the mutual surplus;

(d) there must be arrangements which entitle the contributors to the common fund to control it; and

(e) the constituent documents must prohibit the company limited by guarantee from making any distribution, whether in money, property or otherwise, to its members.

The following illustrates how the 50% cap is computed:

Trade Limited is a trade association set up as a company limited by guarantee. In YA 2013, Trade Limited receives $10,000 of subscription fees from its members, of which $7,500 is from its Singapore members and $2,500 is from its foreign members. Of the subscription fees received from its Singapore members, $5,000 can be claimed as deduction under section 14 of the ITA by the members.

Receipts from Singapore members that is claimed or claimable as deduction under section 14

Total receipts from Singapore members

5,000 / 7,500 > 50%

Trade Limited breaches the 50% cap. Thus, it is deemed to be carrying on a business and the income from its Singapore members (i.e. $7,500) will be liable to tax. The $2,500 received from foreign members will not be taxed.

Application procedures for Companies Limited by Guarantee

To obtain approval as a mutual concern to which the treatment specified in section 11(2) is applicable, a company limited by guarantee that carries on a trade or professional association must make an application in writing to the Comptroller of Income Tax for such approval. The application is to be submitted to Corporate Tax Division - Services Branch, IRAS. In the application, the company is required to provide the following information:

(a) the company’s name and tax reference number (e.g. UEN);

(b) a written confirmation that the company meets all the prescribed conditions; and

(c) relevant documents (e.g. the company’s Memorandum and Articles of Association) to substantiate that the company meets the qualifying conditions.

Once an application is approved, it shall continue indefinitely unless revoked. IRAS reserves the right to revoke the approval if at any time the company limited by guarantee is found to

have failed to satisfy any of the prescribed conditions.

[IRAS]

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