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.
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.
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.
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.
By these criteria Singapore is a relatively attractive jurisdiction in which to set up a holding company although not the most attractive.
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Withholding Taxes on Incoming Dividends
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 the standard rate to a rate which stands
at between 10%-15%. As of the beginning of 2008, Singapore
had approximately 65 double taxation treaties in place,
and an additional 5 agreements that had been signed
but not ratified. The greater a country's network
of double taxation treaties the greater its leverage
to reduce withholding taxes on incoming dividends.
An elaborate network of double taxation treaties is
thus a key factor in the ability of a territory to
develop as an attractive holding company jurisdiction.
Although
there is an agreement in place with the USA, the United
States will not agree to grant tax-sparing credits
to income remitted from a Singaporean subsidiary to
a USA parent corporation, and accordingly the treaty
signed between both countries only covers air and
shipping matters, although a Free Trade Agreement
signed between the two countries in 2003 removed tariff
barriers in most cases.
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Corporate Income Tax on Dividend Income Received
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:
- Double
Taxation Treaty: If the dividend remittances come
from a jurisdiction with which Singapore has signed
a double taxation treaty they receive the following
fiscal treatment:
-
Exemption Method: Depending on the terms of
the double taxation treaty the dividends may
be completely exempted from an assessment to
corporate income tax in Singapore. Exemption
is only granted in respect of certain categories
of income.
-
Credit Method: If the dividend income is not
fully exempted from corporate income tax under
the terms of the double taxation treaty then
corporate income tax is payable in Singapore
but the amount is reduced or eliminated altogether
through tax credits. Singaporean corporate income
tax is payable on the full value of the foreign
profits out of which the dividends were paid.
Against this Singaporean corporate income tax
liability must be credited the full value of
the tax paid in the foreign jurisdiction. If
the foreign tax credit exceeds the Singapore
tax liability then no further corporate income
tax is payable in Singapore on the value of
the dividends remitted. Where a double taxation
treaty has been signed the tax credit is composed
of the full value of all the withholding taxes
and corporate income taxes paid in the foreign
jurisdiction on the dividends remitted. The
result is that for all intents and purposes
dividend income is often tax-free in the hands
of the Singaporean holding company.
- No
Double Taxation Treaty: When the dividends are remitted
from a jurisdiction with which Singapore has not
signed a double taxation treaty tax credits are
only available if the Singaporean holding company
owns at least 25% of the shares of the foreign corporation.
Furthermore the tax credits only include the corporate
income tax paid in the foreign jurisdiction. Thus
the amount of corporate income tax payable on dividends
received by a Singaporean holding company from a
foreign subsidiary depends largely on whether or
not the subsidiary is resident in a jurisdiction
with which Singapore has signed a double taxation
treaty.
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Withholding Taxes on Outgoing Dividends
In Singapore
there are no withholding taxes levied on dividends.
Instead dividends are taxed at the standard rate,
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 standard rate 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 the following circumstances:
- No
Shortfall: Dividends will not suffer any further
Singaporean taxes on remittance to a foreign jurisdiction
if 18% corporate income tax has already been levied
on the profits out of which the dividends are being
paid.
- Double Taxation Treaty: If the dividends are flowing to a jurisdiction with which Singapore has a double taxation treaty then the Singaporean company is exempted from the need to make up any shortfall arising.
- Concessionary Tax Regime: If the dividends are flowing from a Singaporean company which is subject to a concessionary tax regime then the resident company is exempted from the need to make up any shortfall in so far as the shortfall relates to the concessionary tax regime.
- Foreign Source Profits: If the dividends are from income earned and taxed abroad prior to being remitted to Singapore (e.g. the foreign branch profits of a Singaporean resident company) then even if there is a shortfall no tax is payable on the shortfall when the Singaporean company remits dividends to its foreign parent corporation.
- Foreign Tax Credits: Where the dividends have flowed from a foreign subsidiary to a Singaporean holding company and the foreign tax credits exceed the Singaporean corporate income tax liability no further taxes are payable in Singapore on dividends remitted to the foreign parent corporation.
(N.B.
Tax Sparing Provisions: Most of Singapore's tax treaties
contain tax sparing provisions, meaning that the foreign
parent corporation of the Singapore subsidiary treats
income received from its Singapore subsidiary as if
the full amount of corporate income tax had been paid
in Singapore (i.e. 18%) even though the subsidiary
was subject to a number of favorable fiscal concessions
which meant it paid little (usually 10%) or no corporate
income tax. As previously mentioned, the USA will
not sign a full tax treaty with Singapore principally
because of its refusal to accept tax-sparing credits).
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