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 60 comprehensive double taxation treaties
in place, and an additional 19 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. (N.B. from the 2009
tax year, a unilateral tax credit will be allowed
in respect of all foreign-sourced income received
from non-treaty countries).
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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 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 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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