Singapore: Corporate Investment
Foreign Investment Regimes
The Government of Singapore provides a comprehensive package of tax concessions and incentives to businesses, whose very nature reflects the direction in which the state is trying to steer economic development. Singapore is a densely populated country with a high standard of living, a shortage of land and a high cost, highly skilled labor force and accordingly the country's comparative advantage lies in the development of high value, export orientated service industries.
In Malaysia by contrast a surplus of land, a large labor pool and low labor costs have resulted in the development of a low value, labor intensive, export orientated manufacturing economy. The result has been that labor-intensive components industries have moved to Malaysia, whereas Singapore has seen the growth of industries engaged in financial services, research & development, the production of computers & robots and computer aided design & manufacturing.
The government plays a key role in driving Singapore's economic development through the granting of fiscal incentives. The allocation of an incentive depends primarily on such considerations as the amount of investment involved, the technical output, the export potential, the employment opportunities and the general conduciveness to Singapore economic activity.
For resident corporations Singapore is not particularly tax-friendly: The corporation tax rate is 17% in 2010 and it is charged on all income derived from sources in Singapore, together with income from sources outside Singapore if received in Singapore .
For qualifying start-up companies, a 3-year tax exemption on the first $100,000 of chargeable income will be available. From the year of assessment 2008, a further exemption of up to S$100,000 out of the next S$200,000 of chargeable income is available.
There are however a number of beneficial tax regimes available to the international investor, described below, both in respect of local operations and in respect of the use of Singapore as an international investment base.
For a country to be an attractive location in which to set up a holding company 4 criteria must be satisfied:
- Withholding Taxes on Incoming Dividends: Incoming dividends remitted by the subsidiary to the holding company must either be exempted from or subject to low withholding tax rates in the subsidiary jurisdiction. This is usually achieved by having in place a double taxation treaty to which the subsidiary and holding company jurisdictions are parties. An extensive network of double taxation treaties reduces the rate of withholding taxes levied on dividends remitted by the foreign subsidiary to the Singaporean holding company from a standard rate of 17% to a rate which stands at between 10%-15%. Singapore has approximately 70 double taxation treaties in place.
- Corporate Income Tax on Dividend Income Received: Dividend income received by the holding company from the subsidiary must either be exempted from or subject to low corporate income tax rates in the holding company jurisdiction. The amount of corporate income tax payable on dividend income received by a Singaporean holding company from a foreign subsidiary depends on whether or not the dividend remittances come from a subsidiary resident in a jurisdiction with which Singapore has signed a double taxation treaty.
- Capital Gains on the Sale of Shares: Profits realized by the holding company on the sale of shares in the subsidiary must either be exempt from or subject to a low rate of capital gains tax in the holding company jurisdiction. In Singapore capital gains tax is only levied on real estate purchased and sold within 3 years, the profitable sale of assets whose purchase and re-sale is so short-term as to be deemed speculative, and companies whose business activity consists in the repeated purchase and sale of capital assets for profit. Where assets are owned by a company and their sale is effected by transferring ownership of the shares in the company a capital gains tax charge may also arise. In practical terms this is likely to mean that no capital gains tax is levied on the profitable sale by a Singaporean holding company of its shares in a foreign subsidiary.
- Withholding Taxes on Outgoing Dividends: Outgoing dividends paid by the holding company to the ultimate parent corporation must either be exempt from or subject to low withholding tax rates in the holding company jurisdiction. In Singapore there are no withholding taxes levied on dividends. Instead dividends are taxed at 20%, with a tax credit being given for any corporate tax levied on the profits out of which dividends are paid. Where there is a shortfall between the tax credit and the 20% charge, the shortfall must be made up by the company paying the dividend and not by the shareholder receiving it. Where a dividend is paid out by a Singaporean company to a foreign parent corporation no further taxes will be levied in most circumstances.
Regional/International Headquarters Awards (HQ Awards)
To qualify for this scheme the company must have a sizeable network of overseas companies in the south-east Asian region and be well established both in its home country and in its industry. The HQ must provide "qualifying" management, treasury or other approved headquarter related services to its subsidiaries, associated or related companies in other jurisdictions. In order to be eligible to apply for incentives under the Headquarters Programme, the applicant company should meet the general criteria below:
- The applicant should be, or belong to a group that is, well established in its respective business sector or industry and has attained a critical size in terms of equity, assets, employees and business share.
- The applicant should be the nerve centre in terms of organisation reporting structure at senior management levels for its principal activities with clear-cut management and control for the activities.
- The applicant should have a substantial level of headquarters activities in Singapore that may include:
- Strategic Business Planning and Development
- General Management and Administration
- Marketing Control, Planning and Brand Management
- Intellectual Property Management
- Corporate Training and Personnel Management
- Research, Development and Test Bedding of New Concepts
- Shared Services
- Economic or Investment Research and Analysis
- Technical Support Services
- Sourcing, Procurement and Distribution
- Corporate Finance Advisory Services
- The personnel employed by the applicant for its headquarters operations should be based in Singapore, and would include management, professionals, technical personnel and other supporting staff.
Currently (2010), the Regional Headquarters Award offers a concessionary tax rate of 15% for up to 5 years on incremental qualifying income from abroad. If applicant company satisfies all the minimum requirements by Year 3 of the incentive period, it will enjoy the 15% concessionary tax rate for an additional 2 years on qualifying income.
The applicant company must satisfy all of the following minimum requirements by the milestone indicated and maintain till the end of the incentive period:
- paid-up capital of SGD0.2 million and SGD0.5 million by the end of Year 1 and Year 3 of the incentive period respectively.
- 3 he adquarters services to network entities in 3 countries outside Singapore by the end of Year 1. Network entities refer to any entity within the group, including subsidiaries, sister companies, branches, joint ventures and representative offices as well as franchises.
- 75% skilled staff throughout the incentive period. Skilled employment refers to at least an NTC2 Certificate qualification.
- additional 10 professionals in Singapore by the end of Year 3. Professionals refer to at least a diploma qualification.
- average remuneration per worker of SGD100,000 per annum for the top 5 executive designations by the end of Year 3.
- additional SGD2 million in annual total business spending in Singapore by the end of Year 3. Total business spending refers to total operating costs minus the costs of work subcontracted outside Singapore, royalties and know-how fees paid overseas, raw materials, components and packaging.
- additional SGD3 million in total business spending cumulatively for the first 3 years of the incentive period.
- The level at Year 3 – Year 0
- The level at (Year 3 + Year 2 + Year 1) – 3 x (Year 0)
Finance And Treasury Centres (FTC)
The Tax Incentive Scheme for Finance and Treasury Centres, introduced in 2004, was designed to encourage multi-national corporations to use Singapore as a base for conducting treasury management activities.
The scheme provides a concessionary tax rate (10% at the time of writing) on all fee income received by the FTC from its subsidiaries, related companies and associates outside Singapore (approved network companies) for the provision of qualifying FTC services and qualifying activities conducted on own account, and on interest, dividend and gains from transactions in foreign currency denominated stocks and bonds, foreign exchange trading, interest rate swaps, financial futures and options.
There is exemption from withholding tax on interest payments on foreign currency denominated borrowings by the FTC from overseas banks and approved network companies, provided the funds raised are used for the conduct of qualifying FTC activities. Borrowings from network companies exclude funds borrowed by network companies from sources other than banks.
The FTC must meet the following minimum criteria: Annual total business spending (TBS) of SGD750,000; 3 professional staff employed by the FTC; and 3 qualifying FTC services to 3 or more network companies.
Financial Sector Incentive Scheme
In 2008, the Financial Sector Incentive (FSI) scheme was extended for a period of five years from 1 January 2009 to 31 December 2013, in order to promote the city as a financial centre, particularly in the area of Islamic finance.
The enhanced FSI scheme will:
- Give a 5% concessionary tax rate on income derived from performing specific Shariah compliant activities;
- Include trading of Qualifying Debt Securities and Qualifying Project Debt Securities as a qualifying activity under the FSI-Bond Market enhanced-tier award with effect from 16 February 2008; and
- Include trading of exchange-traded financial derivatives as a qualifying activity under the FSI-Derivatives Market enhanced-tier award with effect from 16 February 2008; and
- Enhance the offshore insurance business incentive scheme to give a 5% concessionary tax rate to an insurer (other than a captive insurer, a marine and hull liability insurer or an insurer underwriting specialised insurance risks) on income derived from offshore Islamic insurance (takaful) or reinsurance (retakaful) business for a five year period from 1 April 2008.
Accelerated Depreciation Allowances
Accelerated depreciation allowances enable a company to reduce its taxable profits, strengthen its asset base and improve its cash flow. The normal rate of annual depreciation for capital expenditure at the time of writing is an initial 20% allowance with the balance being written off at the rate of between 5-20% per annum.
However in certain circumstances accelerated depreciation allowances are available which allow companies to set off 33% per annum of the cost of all plant and machinery for each of 3 years subsequent to purchase. In the case of prescribed automation equipment, robots and certain environmental related equipment (e.g. energy saving equipment) 100% of the assets cost can be set off in the first year.