This guide takes you through the tax system related to foreign-sourced income.
Singapore has a territorial tax system so that only income sourced in Singapore is subject to tax. Taxation of foreign-sourced income (income earned offshore) by a Singapore resident company is not subject to tax unless the income is received in Singapore or deemed remitted to Singapore.
What is foreign-sourced (offshore) income
Foreign sourced income is income earned by a Singapore company in a jurisdiction outside of Singapore. This type of income is only taxable if it is received in Singapore. Received in Singapore includes:
- Remitted to, transmitted or brought into Singapore
- Used to satisfy any debt incurred in respect of a trade or business carried on in Singapore
- Used to purchase any moveable property (such as equipment, raw material etc.) that is then brought into Singapore
The IRAS have stated that the taxation of foreign income received in Singapore will only apply if the income belongs to a resident or entity located in Singapore. Hence, non-resident individuals and foreign businesses which are not operating in or from Singapore can remit their foreign income to Singapore without being taxed on the income. This practice of the IRAS should remove concerns that this part of the Singapore tax law will discourage foreigners and foreign businesses from using Singapore’s banking and fund management facilities.
As an administrative concession, foreign income which is applied towards overseas investments without being repatriated to Singapore will not be treated as having been received in Singapore at the point of reinvestment. This means that the taxing point of the foreign income is deferred until the time that the investment is realised and the proceeds are brought into Singapore. This is in line with the government’s effort to promote the regionalisation of Singapore’s businesses.
An interesting question arises where income is earned in a foreign jurisdiction, but as a result of business activities carried on in Singapore. Although an examination of the facts of each case should be conducted, it is likely that if there is no business presence overseas, the IRAS will look to treat the profits earned offshore as sourced in Singapore. This means that the profits will be taxable in Singapore even if the funds are not remitted to Singapore. It will then be up to the company to counter that argument.
Taxation of foreign-sourced income
Certain types of foreign income received in Singapore will not be subject to tax. To be non-taxable, the income needs to satisfy the following tests:
- The foreign income had been subject to tax in the foreign jurisdiction from which it was received (known as the “subject to tax” condition). The rate at which the foreign income was taxed can be different from the headline tax rate;
- The highest corporate tax rate (foreign headline tax rate condition) of the foreign jurisdiction from which the income is received is at least 15% at the time the foreign income is earned in Singapore; and
- The IRAS is satisfied that the tax exemption would be beneficial to the person resident in Singapore
In looking at the subject to tax condition, where a dividend is received from overseas, any withholding tax on the dividend plus the underlying tax on the income out of which the dividend is paid will be taken into account. For example, if a dividend is received from a company in Hong Kong, there is no withholding tax. However, if the income has been subject to tax in Hong Kong (which has a headline rate of 16.5%), then the subject to tax test would be satisfied.
The IRAS will also regard the subject to tax condition satisfied if the income is exempted from tax in the foreign jurisdiction due to tax incentive(s) granted for substantive business activities carried out in that jurisdiction. Documentary evidence of the tax exemption must be provided to the IRAS.
The foreign headline tax rate condition refers to the jurisdiction of tax residence of the company from which the income is sourced. For example, a dividend may be paid by a company listed on the stock exchange in one jurisdiction (for example, Hong Kong) but tax resident in another jurisdiction (for example, Cayman Islands). Hence, it cannot be presumed that the jurisdiction of listing of the dividend-paying company is where the dividend is sourced.
Where a dividend-paying company is incorporated outside the jurisdiction where it is listed, the IRAS may treat the dividends as not sourced in the jurisdiction of listing unless there are facts to show otherwise. In such a circumstance, the headline tax rate condition will be considered as not met if the jurisdiction in which the dividend-paying company is incorporated has a headline tax rate of less than 15%.
Foreign tax credits
If the income does not meet the conditions outlined above, the income will be taxable in Singapore. A credit will be available, however, against the tax payable on that income for any tax paid overseas.
For example, if a Singapore company receives interest income from a subsidiary in Malaysia to which it has lent money, the Malaysian company will need to deduct withholding tax at the rate of 10% from the payment. The company in Singapore will be subject to tax at a rate of 17% and the tax paid in Malaysia will be available as a credit, so less tax is paid in Singapore. The available tax credit is limited to the tax paid in Singapore on the income. So if the Singapore company is only paying tax at a rate of, say, 7% on its income (because of the concessions on the first $200,000 of income), the tax credit will be limited to the 7% tax payable in Singapore.
Taking into account the tax payable in Singapore on any foreign income, any expenses incurred in Singapore that are attributable to that income need to be deducted from the income before calculating the net amount that is subject to tax and therefore the amount of tax that is payable on that income.
Double tax treaties
Singapore has concluded nearly 100 double tax treaties with countries around the world which govern the taxing rights of the governments in those jurisdictions on income earned by a Singapore taxpayer there. For more information on Singapore’s double tax treaties, please click on the link here.
As taxation on foreign-sourced income in Singapore is exempted, it has been an effective method by the government to promote regionalisation in Singapore. However, not all income is counted as foreign-sourced, as stated above, the business would have to comply with the outlines in order to be non-taxable. It is advised to engage with the services of a reputable corporate services firm, like Acclime, to guide and assist about taxation of foreign-sourced income.
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