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A Presentation on Singapore Tax System and Formation of Companies & Trusts in Singapore Presented By Kenny Lim, Tax Director Asia Pacific Business First Island Fiduciary Consultants Pte Ltd Services Pte Ltd . Main Topics. Overview of Singapore Tax System

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Presentation Transcript
slide1

A Presentation on

Singapore Tax System and

Formation of Companies

& Trusts in Singapore

Presented By

Kenny Lim, Tax Director

Asia Pacific Business First Island Fiduciary Consultants Pte Ltd Services Pte Ltd

slide2

Main Topics

  • Overview of Singapore Tax System

- Taxation of Individuals

- Taxation of Partnerships and LLPs

- Taxation of Companies

  • India-Singapore DTA – CECA
  • Singapore – Tax Planning Strategies
  • Trust and Settlements

- Tax Treatment of Business/Foreign Trusts

  • Formation of Companies/Licensed Trust Cos
  • Q & A
slide3

Overview of Singapore Tax System

Types of Taxes

  • Corporate Income Tax
  • Personal Income Tax
  • Goods and Services Tax (GST)
  • Stamp Duty
  • Property Tax
  • Customs Duty (liquor, petrol, tobacco & MV)
  • Estate Duty
  • Withholding Tax
  • NO Capital Gains Tax
comparison of highest personal tax rates
Comparison of Highest Personal Tax Rates

Hong Kong

Hong Kong

Singapore

Singapore

Malaysia

Malaysia

India

India

Philippines

Philippines

Indonesia

Indonesia

Thailand

Thailand

Korea

Korea

Taiwan

Taiwan

China

China

Vietnam

Vietnam

0

10

20

30

40

50

slide6

Basis of Assessment

Year of Assessment (YA)

- the tax year runs from 1 January to 31 December annually

Preceding Year Basis

- the calendar year preceding the YA

(income and gains derived from trade, business, profession or vocation assessable on preceding accounting year basis)

Eg: YE 2004 business income would be assessable in YA 2005

slide7

Concept of Tax Residence

Qualitative v Quantitative Test

  • A Singaporean is a tax resident in Singapore if he normally resides in Singapore except for temporary absences that are consistent with the claim to be a resident.
  • A foreigner will be regarded as resident in Singapore  if he was physically present or exercised an employment in Singapore for 183 days or more during the year preceding the Year of Assessment. This is other than a director of a company.
slide9

Area Representative

Who qualifies as an area representative?

4 criteria:

  • Employed by a non-resident employer;
  • Based in Singapore for geographical convenience;
  • Required to travel outside Singapore in the course of duties; and
  • Remuneration paid by foreign employer and not charged directly or indirectly to the accounts of a PE in Singapore.
slide10

Area Representative

  • Taxability of an Area Representative (AR)
  • An AR will be taxed on the amount of his
  • remuneration attributable to the number of days
  • spent in Singapore.
  • If treated as a Singapore tax resident, the higher of
  • this amount or the remittance of employment
  • income will be taxed. However, foreign sourced
  • Employment income received by a resident individual
  • on or after 1.1.04 will be exempt.
slide11

Dual Employment

An individual employed in Singapore will generally be

assessable to tax on his full income, notwithstanding

that he may occasionally travel overseas in performing

official duties on behalf of the overseas company.

However, it is possible to draw up separate contracts

where his employment is provided by more than 1

company and he has to travel extensively in performing

duties for an overseas company.

slide12

Dual Employment

  • Conditions
    • Salary expense cannot be recharged to its Singapore entity;
    • Foreign income must not be received or remitted
    • into Singapore; and
    • Overseas employment under the separate contract must be exercised exclusively outside Singapore.
    • Duties performed outside Singapore are separate and distinct from duties performed in Singapore.
    • Income attributable to Singapore employment
    • must commensurate with responsibilities in
    • Singapore.
slide13

Not Ordinarily Resident (NOR)

  • Who qualifies as an NOR
  • A taxpayer can opt for the NOR scheme commencing
  • from YA 2003, if the following criteria are met:
  • He is resident of Singapore for income tax purposes for that YA; and
  • He is not a resident of Singapore for income for 3 consecutive YAs immediately before that YA.
  • Once successful, he will be accorded NOR status for 5
  • years.
slide14

Not Ordinarily Resident (NOR)

Tax concessions

1. Time apportionment of Singapore employment income

The NOR taxpayer must spend at least 90 days outside Singapore for business

reasons pursuant to his Singapore employment and his tax on his total

Singapore employment income must be greater than 10% of the total Singapore

employment income.

2. Tax exemption of pre-assignment income remitted to Singapore

3. Tax exemption of employer’s contribution to non-mandatory overseas

pension fund or social security scheme

Tax exemption is granted to a resident NOR Singapore employee on any

contribution made by his employer to any non-mandatory overseas contribution

scheme.

slide15

Taxation of Other Sources of Income

  • Dividends
  • Interest
  • Net Rent / Net Annual Value
  • Annuity
  • Charge
  • Pension
  • Royalties
  • Overseas Remittances
slide16

Personal Reliefs & Allowable Deductions

  • Types of Personal Reliefs
    • Earned income relief
    • Wife/Child/Parents relief
    • Relief for delivery & hospitalisation expenses for 4th child
    • Handicapped brothers or sisters relief
    • Provident fund/life insurance relief
    • Course fees relief
    • Relief for foreign maid levy
    • NSmen (self/wife/parent) relief
    • Relief for CPF cash top-up/SRS Contributions
slide17

Personal Reliefs & Allowable Deductions

  • Allowable Deductions
    • Donations
    • Subscriptions to professional bodies
    • Travelling expenses
    • Entertainment expenses
    • Capital Allowances (for businesses only)
    • Unabsorbed tax losses, capital allowances and
    • donations (for businesses only)
taxation of partnerships
Taxation of Partnerships

What constitutes a partnership

  • Partners may consist of resident individuals, non-resident individuals as well as companies.
  • A joint venture between 2 companies or between a company and an individual can also be classified as a partnership.
  • An association of persons would not constitute a partnership unless they carry on a business in common with a view to profit.
taxation of partnerships19
Taxation of Partnerships
  • Not a person and not treated as a separate legal entity.
  • Tax is not imposed on the partnership. Instead partners are assessed individually on their respective share of profits/losses of the partnership.
taxation of partnerships20
Taxation of Partnerships

Partnership allocation of Profits

  • Income of partnership is computed in the same way as that of a person carrying on a trade or business.
  • Adjustments are made for partners’ salaries, interest on capital contributed and other personal expenses
  • Residual profit (also known as divisible profits) would be allocated in accordance to agreed profit sharing ratios.
taxation of partnerships21
Taxation of Partnerships

Partnership allocation of profits (cont’d)

Net Profit xxx

Add/(Deduct):

Non-deductible expenses xxx

Salaries to partners xxx

Interest on capital xxx

xxx

Adjusted Profit(Loss) xxx

Less: Appropriation (except share of profit)

Salaries of partners xxx

Interest on capital xxxxxx

Divisible Profit/(Loss) xxx

===

slide22

Income Tax Treatment of LLPs

Background

  • Limited Liability Partnership (LLP) Act 2005 comes into operation on 11 April 2005.
  • Essentially partnership with limited liability.
  • Option of limited liability entity with internal flexibility of a partnership.
slide23

Income Tax Treatment of LLPs

Features

  • Partnership with limited liability.
  • Regarded as “bodies corporate” in law.
  • Function as a partnership but status of separate legal person.
  • Not affected by changes in partners.
  • At least 2 partners.
slide24

Income Tax Treatment of LLPs

Features (Cont’d)

  • Claims can be made against LLP to full extent of its assets.
  • Claims can be made against negligent partners and their personal assets.
  • Innocent partners’ liability limited to amount they contributed to the LLP.
slide25

Income Tax Treatment of LLPs

Tax Treatment

  • Treated as a partnership and accorded taxtransparent treatment.
  • Each partner taxed on share of profits, based on its own tax rate:
  • - Individual based on personal income tax rate; - Company based on corporate tax rate (20%).
slide26

Taxation of Companies

  • Features of Corporate Tax System in Singapore
  • Tax Rates and Tax Incentives in Singapore
  • New Corporate Tax Regime – Partial Tax Exemption
  • Full Tax Exemption for New Companies
  • One-Tier Corporate Tax System
  • Tax Loss CF, Group Relief &Tax Loss CB System
  • Taxation of Foreign Income
  • Common Tax Planning Techniques
slide27

Features of Corporate Tax System

  • Territorial Basis of Taxation
  • No capital gains tax
  • Preceding Year Basis
  • Tax Exemption on Certain Foreign Source Income
  • Foreign Tax Credit System
  • Comprehensive Tax Treaty Network
  • Tax Losses can be C/F indefinitely, C/B 1 year
  • Group Relief from YA 2003
  • No thin capitalisation rules
  • Advance Ruling System from 2006
  • CorporateTax Rate of 20%
new corporate tax regime wef ya 2002 partial tax exemption
New Corporate Tax Regime – wef YA 2002 - Partial Tax Exemption
  • 75% discount for 1st S$10,000 taxable income (TI).
  • 50% discount for next S$90,000 TI.

Effectively, this means:

Tax rate for 1st S$10,000 TI = 5%

Tax rate for next S$90,000 TI = 10%

Tax rate for TI in excess of 100,000 = 20%

slide30

Full Tax Exemption for New Companies

  • New companies allowed full tax exemption on first $100,000 of normal chargeable income (excluding Singapore dividends) for any of their first 3 consecutive YAs falling within YA 2005 to 2009, subject to meeting all 4 qualifying conditions.
  • Partial exemption will still be granted for companies that do not meet the qualifying conditions.
slide31

Tax Exemption for New Companies

Qualifying conditions:

  • Incorporated in Singapore;
  • Tax resident in Singapore for that YA;
  • No more than 20 shareholders throughout basis period for that YA; and
  • All shareholders are individuals throughout basis period for that YA.
slide32

Tax Exemption for New Companies

Impact of Tax Changes:

  • Potential tax savings of up to $28,500 over 3 years.
  • Set up multiple companies?
  • Exemption scheme to be reviewed close to 2006.
slide33

Tax Exemption for New Companies

Date of

Incorporation

1.3.07

Example 1

1.1.04 31.12.04 31.12.05 31.12.06 31.12.07 31.12.08

YA 2008 YA 2009

slide34

Tax Exemption for New Companies

Date of

Incorporation

1.3.02

Example 2

1.1.02 31.12.02 31.12.03 31.12.04 31.12.05 31.12.06

YA 2005

one tier corporate tax system
One-Tier Corporate Tax System

Replaces the imputation system from 1 Jan 2003

  • Corporate tax paid by company is a final tax.
  • Dividends received by shareholders are tax-exempt.
  • Unlimited flow-through of exempt dividends.
utilisation of tax losses
Utilisation of Tax Losses
  • Tax losses can be carried forward indefinitely within the same entity, subject to no substantial change in shareholders.
  • Tax losses can be transferred to another group entity wef YA 2003 (See Group Relief System).
  • Tax losses can be carried back for 1 year wef YA 2006 (See Tax Loss Carryback).
utilisation of tax losses group relief system
Utilisation of Tax Losses - Group Relief System
  • With effect from YA 2003, companies in a group (comprising Singapore incorporated company and its Singapore incorporated group members) may transfer current year unutilised capital allowances, trade losses and donations to other company in the group.
utilisation of tax losses group relief system38
Utilisation of Tax Losses - Group Relief System
  • 2 Singapore incorporated companies are in the same group if they have the same accounting year and:-

@ at least 75% of the ordinary share capital is beneficially held directly or indirectly by the other; or

@ at least 75% of the ordinary share capital in each of the two companies is beneficially held directly or indirectly by a third Singapore incorporated company.

group relief system illustrations
Group Relief System - Illustrations

(1) Direct(2) Common Parent(3) Indirect

Parent

(Local)

Parent

(Local)

Parent

(Local)

75%

75%

90%

Sub. A

(Local)

Sub. A

(Local)

Sub. B

(Local)

75%

75%

90% / 80%

Sub. A

(Local)

Sub. B

(Local)

group relief system further illustrations
Group Relief System – Further Illustrations

(4) Indirect (5) Common Parent(6) Indirect

Parent

(Local)

Parent

(Foreign)

Parent

(Local)

100%

100%

75%

100%

75%

Sub A

(Foreign)

Sub. B

(Local)

Sub. A

(Local)

Sub. B

(Local)

Sub. A

(Local)

100%

45%

30%

Sub B

(Local)

Sub. C

(Local)

group relief system specific exclusions
Group Relief System - specific exclusions
  • Losses of foreign branches
  • Loss items resulting from a trade/activity, the income of which is tax exempt (e.g. loss from pioneer trade).
  • Loss items not allowed for set off against income from other activities under existing law (e.g. income from finance leases).
  • Current year unabsorbed losses and capital allowances for 10E companies, i.e. only absorbed donations can be transferred to members of the same group, but the company is eligible to claim loss items from another group member.
slide42

Tax Loss Carry-back System

Current

Loss carry-back (CB) not available

Proposed

A one-year loss CB scheme introduced to carry-back current year unutilised CAs and trade losses to the preceding YA wef YA 2006.

slide43

Loss Carry-back System

  • Features of the scheme:
    • Available to all businesses, i.e. companies, partners of partnerships (including LLPs), sole proprietorships and bodies of persons (clubs and associations, trustees of trusts and executors of estates).
    • Only current year unutilised CAs and trade losses are allowed for carry-back for one YA immediately preceding the YA in which the CAs were granted or the trade losses incurred.
slide44

Loss Carry-back System

  • Features of the scheme:
    • An aggregate amount of up to $100,000 of current year unutilised CAs and trade losses (excluding donations) can be CB. Any excess over this limit can still be carried forward.
    • The “shareholding test” and “business continuity test” will continue to be applied to the loss CB.
slide45

Loss Carry-back System

  • General Conditions
  • “Business continuity test” for unabsorbed CAs, none for unabsorbed trade losses.
  • - Can CB unabsorbed trade losses, but not unabsorbed CAs for new businesses commencing from YA 2006.
  • Quantum of qualifying deductions
  • - lower of actual amount of such deductions or assessable income of immediate preceding year, subject to $100,000 cap.
slide46

Taxation of foreign income

Foreign income liable to tax if received in Singapore, ie

  • Remitted to, transmitted or brought into Singapore;
  • Applied towards satisfaction of any debt incurred

in respect of a trade/business carried on in Singapore;

  • Applied to purchase any movable property which is

brought into Singapore.

slide47

Taxation of foreign income - exemption

Granted to all tax residents who remit income

from the following sources from 1 June 2003:

  • Foreign sourced dividends
  • Foreign branch profits
  • Foreign sourced service income
slide48

Taxation of foreign income - exemption

Conditions:

  • Foreign income is subject to corporate tax in the foreign

jurisdiction from which income is derived;

  • Headline tax of the foreign jurisdictions from which

income is received is at least 15% in the year the

income is remitted to Singapore’ and

  • Comptroller is satisfied that the tax exemption would

be beneficial to the person resident in Singapore.

slide49

Taxation of foreign income - exemption

“Headline tax” refers to the highest corporate tax rate

of a foreign jurisdiction and need not be the actual rate

of tax imposed.

“Service income” excludes employment-related income

and refers to professional, technical, consultancy or

other services provided by a person in the course of its

trade, profession or business.

slide50

Tax Exemption for Foreign Income

    • Illustration – elimination of incremental tax
  • Old System New system
  • Adjusted profit for year 100,000 100,000
  • Less dividend from HK 50,000 50,000
  • 50,000 50,000
  • Add dividend from HK 50,000 Exempt
  • Chargeable income 100,000 50,000
  • Tax @ 20% 20,000 10,000
  • Less: UTC (50,000 X 17.5%) 8,750
  • Net tax payable 11,250
slide51

Taxation of foreign income - FTC

  • Double taxation relieved/eliminated through granting
  • of foreign tax credit (FTC) in the following forms:
  • Double Taxation Relief(DTR) for treaty country.
  • Unilateral Tax Relief (UTR) for non-treaty country.
  • Commonwealth Tax Relief (CTR) for

Commonwealth country.

slide52

Taxation of foreign income - DTR

  • IndonesiaHong Kong
  • Foreign profits 100 100.0
  • Corporate Tax 30 17.5
  • 70 82.5
  • Dividend WHT 7 Nil_
  • 63 82.5
  • Dividend taxable in Singapore 100 100
  • Singapore tax (20%) 20 20.0
  • DTR (20) @ (17.5)
  • Singapore tax liability Nil _2.5_
  • @ Limited to the lower of Singapore or foreign tax
slide53

Taxation of foreign income - UTR

UTR is available only for the following foreign income

received by a S’pore tax resident from a non-treaty country:

  • Income derived from services to all non-treaty countries;
  • Dividend Income;
  • Employment Income;
  • Branch profits of a company resident in Singapore.
slide54

Changes to the India-Singapore DTA

  • Comprehensive Economic Cooperation

Agreement (CECA)

  • Effective 1 August 2005
  • A flat rate of 10% withholding tax on Royalties

and Fees for Technical Services

  • Capital Gains from alienation of property
slide55

Changes to the India-Singapore DTA

  • Capital gains from alienation of shares in a

company which owns principally directly or

indirectly immovable property are no longer

taxable in the country in which the immovable

property is situated but in the country of

residence of the vendor

  • Gains from alienation of shares in other types

of companies are no longer taxable in the

country of residence of the companies whose

shares are sold but in the country of residence

of the vendor

slide56

Changes to the India-Singapore DTA

  • Not applicable if the arrangements were made with

the primary purpose of taking advantage of the

benefits

  • Not applicable to a tax resident shell/conduit company
  • Shell/conduit company – total annual operating

expenditure less than S$200,000 or RS5 million in the

24 months preceding the gains (except for company

listed on the recognised stock exchange of the

Contracting State)

singapore tax planning strategies
Singapore - Tax Planning Strategies
  • Low tax rate – 10% for the first S$100,000 and

20% for taxable income above S$100,000

  • No Capital Gains Tax
  • No Thin-Capitalisation Rules
  • No Dividend Withholding Tax
  • No Foreign Exchange Controls Restriction
singapore tax planning strategies58
Singapore - Tax Planning Strategies
  • Foreign income not subject to tax unless remitted

to Singapore

  • Tax exemption on certain foreign income –

dividend, branch profits, etc

  • DTAs with more than 50 countries
  • Tax incentives and exemptions
tax incentives and exemptions
Tax Incentives and Exemptions
  • Monetary Authority of Singapore (MAS).
  • International Enterprise Singapore (IES).
  • Economic Development Board (EDB).

e.g. headquarters tax incentives

trusts and settlements
Trusts and Settlements

A Trust is an arrangement under which a donor or settlor transfers property to trustees to deal with such property for the benefit of third parties called beneficiaries

Income derived from the trust will be assessed on the trustee at the prevailing corporate tax rate.

Expenses incurred in production of trust income are deductible but admin expenses (e.g. trustee fees) are not deductible.

trusts and settlements61
Trusts and Settlements

Normal income tax treatment of a trust:

  • A trustee is chargeable with tax on income arising from the trust property;
  • Beneficiary of the trust is taxable on his entitled share of the trust income; and
  • Beneficiary is allowed to claim a credit for the tax paid by the trustee.
trusts and settlements62
Trusts and Settlements

In practice, Comptroller usually assess the beneficiary on his income from the trust directly when the beneficiary is:

  • A non-resident
  • His entitlement or identity is not known
  • Collection of tax from beneficiary proves to be difficult
tax treatment of business trusts
Tax Treatment of Business Trusts

As the economic purpose, structure and operation of a trust which is registered under the new Business Trusts Act 2004 (“Business Trust”) are similar to those of a company, a Business Trust will be treated as follows for income tax purposes:-

  • Like a company;
  • Under the one-tier system; and
  • Allowed partial tax exemption for 1st $100,000 of chargeable income (excluding dividends).
tax treatment of business trusts64
Tax Treatment of Business Trusts

Tax on a Business Trust chargeable as follows:

  • The trustee of the Business Trust will be chargeable with tax on the income of the Business Trust;
  • Unitholders are not taxable on their entitled share of the statutory income of the Business Trust regardless of whether such income is distributed or not; and
  • No credit will be allowed to the unitholders for the tax paid on income of the Business Trust.
tax treatment of foreign trusts
Tax Treatment of Foreign Trusts
  • Most investment income of Foreign Trusts are tax exempt if the trusts are administered by licensed trust companies in Singapore
  • 2006 Budget proposes that the tax exemption extends to investment income of Foreign Trusts administered by private trust companies (PTCs) in Singapore
  • 10% concessionary tax rate on the trustee fees derived by licensed trust companies in Singapore from the administration of the trusts will also be extended to PTCs .
formation of company
Formation of Company

Types of Company:

  • Private Company – not more than 50 shareholders
  • Private Exempt Company – A private company with not more than 20 individual shareholders
  • Public Company – more than 50 Shareholders and its shares are offered to the public
  • Branch of foreign company
  • Administered by the Registrar of Companies & Businesses (ACRA)
formation of company67
Formation of Company

Directors’ and Shareholders’ Requirements:

  • A company must have at least 1 Director who is an ordinarily resident in Singapore; ie. A Singapore citizen, a Singapore Permanent Resident or an Employment/Dependent Pass holder.
  • A company must have at least 1 Shareholder who can either be an individual of any nationality or a corporate person.
  • A company must have at least 1 Secretary who must be a natural person whose principal place of residence is in Singapore.
formation of licensed trust company
Formation of Licensed Trust Company
  • Licence Administered under the Trust Companies Act 2005 (effective 1 Feb 2006)
  • A Trust Business Licence is required for:

- the provision of services with respect to the creation of an express trust

- acting as trustee in relation to an express trust

- arranging for any person to act as trustee in respect of an express trust

- the provision of trust administration services in relation to an express trust

formation of licensed trust company69
Formation of Licensed Trust Company
  • Approval by the Monetary Authority of Singapore
  • General Criteria:

- physical presence in Singapore, management expertise, financial soundness

- ability to meet minimum financial requirements and professional indemnity insurance requirements

- strength of internal compliance systems and processes

- competence and integrity

formation of trust company
Formation of Trust Company
  • Paid up capital or qualifying assets of at least S$250,000
  • Min. 2 Resident Managers. All RMs must have acceptable qualifications; at least 1 RM must have at least 5 years of relevant working experience, all the others with at least 3 years of experience
  • The annual PII cover must be at least S$1million or 2.5x the turnover of the trust business, whichever is higher, and the excess is not more than S$10,000 (PII cover is S$1million) or not more than 3% of the turnover
  • Letter of Responsibility from the parent is required
formation of company71
Formation of Company

Set-Up Costs For A Private Company in Singapore

formation of company72
Formation of Company

Set-Up Costs For A Private Company in Singapore (cont’d)

  • A refundable security deposit of USD2,500 is required for the provision of Director
  • Statutory requirements such as preparation of accounts, audit and preparation & filing of annual tax return will be based on time costs. Generally, between USD4,000 to USD6,000 for an investment holding company’s accounts and tax return.
  • Some banks require an initial deposit for each bank account opened and physical attendance by Principal
company formation advisory
Company Formation & Advisory

For assistance, please contact us at:

slide74

THE END

Question and Answer Session