Repatriating business profits from Singapore: Tax-efficient strategies
Singapore has long been recognised as a global business hub, drawing multinational companies and investors with its favourable tax policies, stable political environment, and robust infrastructure. As companies grow and accumulate profit, the matter of repatriating this money inevitably arises. To maintain tax compliance and efficiency when repatriating profits, businesses can use a variety of strategies to take advantage of Singapore’s tax system.
This article provides an overview of the methods and requirements of profit repatriation from Singapore-based businesses.
- Multinational companies in Singapore can repatriate profits through dividends, interest, and royalties.
- Singapore does not impose foreign exchange restrictions.
- Singapore has extensive double-tax agreements which protect multinationals from excessive tax burdens.
How companies can repatriate profits from Singapore
Companies have several options to repatriate profits from their Singapore-based operations:
Declaring dividends and distributing them to shareholders is the most common way to repatriate profits. The declaration is made during the company’s annual general meeting (AGM) or an extraordinary general meeting (EGM).
The benefits of using dividend payments to repatriate business profits are:
- Dividends can be paid in cash or shares, giving companies flexibility in how profits are repatriated.
- Dividend payments are public information that can enhance a company’s transparency and accountability.
- Profits can be repatriated easily through dividends, saving the company money and time.
There are, however, certain disadvantages to using dividend payments to repatriate profits:
- Dividend payments are subject to several compliance requirements.
- Dividend payments reduce a company’s retained earnings, which can limit its capacity to invest in expansion projects or acquisitions.
To repatriate profits as interest, a company needs to initiate an intercompany loan or debt arrangement between associated entities, such as a holding company or subsidiary. A Singapore subsidiary can lend funds to its parent company through intercompany loans, allowing the parent company to bring back profits from the subsidiary.
Benefits of repatriating profits through interest payments include:
- Interest payments have fewer limitations compared to dividends and royalties.
- Repatriating profits through interest is a more tax-efficient strategy, as the withholding tax may be lower than the corporate income tax.
- Interest can be paid in regular payments or a lump sum.
- Companies are required to file a withholding tax return with the Inland Revenue Authority of Singapore (IRAS), which promotes transparency.
Disadvantages of interest payments are:
- Interest payments add to the company’s debt load and can make borrowing money in the future more difficult.
- The company could be at credit risk.
- Depending on the lender’s location, the company may be subject to additional taxes.
Multinational companies commonly repatriate profits through royalties that transfer profits from subsidiaries to their parent companies or associated entities. A Singapore subsidiary pays a royalty to its parent company in exchange for using intellectual property (IP) or other assets.
The advantages of using royalties to repatriate profits are:
- Royalty payments are not subject to corporate income tax.
- Royalties are taxed at a lower rate than interest payments.
- Royalty payments are made in USD.
- Compared to interest and dividend payments, companies have more control over how royalties are used. For example, a company can use royalties to fund R&D, invest in new projects, or purchase new assets, while dividends are usually distributed to shareholders.
- Royalty payments must be at arm’s length, meaning that the royalty rate must be based on the fair market value of the IP or other assets. If the IRAS finds that the royalty rate is not fair and at arm’s length, the company can be penalised.
- If the IP owner fails to meet the requirements in the licence agreement, the company might not be able to continue using the IP and cannot generate royalties.
- The company must have a written agreement, and the royalty payments must comply with the agreement. The IRAS can question the royalty payments if the company does not have an agreement.
Royalty payments must be reported to the IRAS. Failure to report could lead to penalties.
Double tax agreements
Singapore has one of the world’s most comprehensive double tax agreement (DTA) networks. DTAs benefit Singapore companies that earn income in foreign companies where a treaty exists and ensure that the Singapore company is not subject to double taxation.
Under the DTAs, there are provisions regarding the exemption or reduction of withholding tax imposed on dividends, interest, and royalties.
Countries that have a DTA with Singapore include:
Withholding taxes on profit repatriation from Singapore
Dividends in Singapore are not subject to withholding tax.
Interest payments are subject to a withholding tax rate of 15%, but the rate can be reduced through a DTA. For example, the rate on interest to the UK can be reduced to 5%.
Interest will be subject to a 17% rate if the income used to make payments comes from non-residents conducting business in Singapore.
The withholding tax rate for royalty payments is 10% and can be reduced to 8%, 6%, 5% or 3% depending on the country through a DTA. For example, the withholding tax rate in Malaysia is 8%, while the rate in Germany is 5%.
Royalty income earned by a non-resident in Singapore is subject to a rate of 17%.
Profit repatriation process
Foreign-owned companies in Singapore can repatriate profits after completing certain pre-remittance compliance requirements. These requirements are as follows:
- Filing of annual audited financial statements with Singapore’s Accounting and Corporate Regulatory Authority (ACRA).
- Payment of all applicable taxes, including corporate income tax, goods and services tax (GST), and payroll taxes.
- Obtaining approval from the Ministry of Trade and Industry (MTI) if the company is foreign-controlled.
After the pre-remittance compliance requirements have been met, the company can repatriate profits by following these steps:
- Open a foreign currency account with a bank in Singapore.
- Authorise the bank to make the remittance on the company’s behalf.
- Submit the necessary documentation to the bank, including the company’s audited financial statements, tax clearance certificate, and MTI approval letter (if applicable).
- The bank will then process the remittance and transfer the funds to the company’s foreign currency account.
The repatriation process can take several days to complete. However, the timeframe could be reduced if all the requirements are met and the necessary documents are submitted.
Foreign exchange restrictions
Singapore has no foreign exchange restrictions, allowing companies to freely transfer funds out of the country. This is one of the benefits of repatriating business profits from Singapore, as some countries have strict foreign exchange control regulations.
How Acclime can help
Multinationals operating in Singapore have several methods to repatriate their business profits, including through dividends, interest, and royalties. Due to Singapore’s extensive DTA network, companies can benefit from provisions for reducing and exempting withholding tax on these types of income.
Acclime’s professional Singapore-based team provides comprehensive support to navigate this complex process and ensures companies across various industries can successfully and efficiently repatriate their profits while complying with all legal and regulatory requirements.
We are a premier provider of professional formation, accounting, tax, HR & advisory services in Singapore, focusing on providing high-quality outsourcing and consulting services to our international clients in Singapore and throughout the region.