Singapore has no capital gains tax. On the same note, Singapore also has no clear guidelines on how to categorise business activities as tax-free capital gains or taxable trading income. So how would you know? In this article, we will help you distinguish clearly whether you have to pay tax or not.
What is a capital gains tax?
A Singapore capital gains tax is applied to profits from sales of capital assets. This is derived by getting the difference between the asset’s higher selling price and its lower original purchase price.
Singapore has zero capital gains tax, but…
Yes, there is no income tax due on sales of shares, properties, and other intangible assets in Singapore, but they become taxable when your primary purpose in buying and selling is to make profits.
This especially applies to traders or dealers whose income is generated simply from conducting one’s business. Therefore, the nature and source of your business’s income need to be assessed. Gains can be considered as taxable income if the Inland Revenue Authority of Singapore (IRAS) regards your activities as a profit-generating trade.
When do companies pay capital gains tax in Singapore?
According to the IRAS, capital gains tax will apply to gains on the sale of assets based on the following criteria:
This is calculated from the initial date the capital asset was purchased until the date of sale. An example of this is when a company buys a building and sells it after 6 months for profit. To IRAS, this may be construed as a short-term profit-seeking activity and tax will be applied.
Frequency of buying and selling
A high frequency of transactions will be subject to capital gains tax. For example, buying five properties and selling three of them in one year is considered high frequency.
Purpose or reason of the transaction
The motive of your business’s transaction should answer the question ‘was the asset bought used for its intended purpose?’ If the answer is no, then it will be taxed accordingly. For example, your company bought a warehouse but was not used to store goods or simply kept vacant. The profits from its sale later will indicate a profit-generating motive.
Extent of enhancement work
A profit motive may show if the company has spent a considerable financial amount to renovate or enhance a property. When it is sold later, any gains will be subject to tax.
Reason for sale
The nature or background of sale will also be evaluated by the IRAS. If your property was sold because of the government’s forced acquisition or because of liquidation of assets due to business decline, capital gains tax will not be levied.
The “safe harbour” rule
Under the safe harbour role, companies selling shares in another company will not incur capital gains tax. However, the divesting company must:
- Have held more than 20% of the ordinary shares
- Have a holding period of more than 24 months
Any form of sale that does not meet the two conditions will be assessed by the IRAS against the six badges of trade criteria.
In conclusion, Singapore’s zero capital gains tax provides a huge strategic advantage. It allows for boosting the share prices, increases investment, and encourages entrepreneurship in the country. To ensure that you fully maximise the benefits of tax incentives but also maintain compliance, it is important to seek the assistance of a qualified tax professional such as Acclime. Our team of accountants and tax experts will help you focus on growing your business while we deal with local tax legislation.
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