On 8 December 2023, the Inland Revenue Authority of Singapore (IRAS) published an e-Tax Guide (hereafter referred to as the “Guide”) on the tax treatment of gains or losses from the sale of foreign assets. The Guide explains the new provision introduced in the Income Tax Act 1947 (ITA) aimed at taxing specific gains from the sale of foreign assets that occurs on or after 1 January 2024. This article offers a summary of the key details covered in the Guide.
Background
Before 1 January 2024, Singapore does not impose tax on gains from the sale of foreign assets that are capital in nature. Foreign assets refer to movable or immovable property situated outside Singapore. Common foreign assets include:
- immovable property situated outside Singapore
- equity securities and debt securities registered in a foreign exchange
- unlisted shares issued by a company incorporated outside Singapore
- loans where the creditor is a resident in a jurisdiction outside Singapore
- Intellectual Property Rights (IPRs) where the owner is a resident in a jurisdiction outside Singapore.
To address international tax avoidance risks relating to non-taxation of disposal gains in the absence of real economic activities, Singapore has amended its foreign-sourced income regime to tax foreign-sourced disposal gains under specific circumstances.
Where the sale or disposal of a foreign asset occurs on or after 1 January 2024, gains from the sale of the foreign asset received in Singapore will be taxed under section 10(1)(g) of the ITA if the gains fall within the scope of the new foreign-sourced disposal gains tax regime provided in section 10L of the ITA.
Scope of Foreign-Sourced Disposal Gains Tax Regime
The new regime involves taxing gains from the sale of foreign assets that were not subject to tax under section 10(1) of the ITA or exempted from tax under the ITA. These gains, termed “foreign-sourced disposal gains”, will be chargeable to tax if the gains are:
- received in Singapore from outside Singapore by a covered entity, and
- derived by an entity without adequate economic substance in Singapore.
In addition, gains from the disposal of foreign IPRs may be subject to tax when they are received in Singapore from outside Singapore by a covered entity, regardless of its level of economic substance.
Section 10L of the ITA will not apply to gains from the sale or disposal of a foreign asset (not being a foreign IPR) when it is carried out:
- as part of, or incidental to, the business activities of certain financial institutions.
- as part of, or incidental to, the business activities or operations of an entity which are incentivised under certain tax incentives in Singapore in the basis period in which the sale or disposal occurred.
- by an entity that is able to meet the economic substance requirement in Singapore in the basis period in which the sale or disposal occurred.
Foreign-Sourced Disposal Gains Received in Singapore
The foreign-sourced disposal gains are regarded as received in Singapore and chargeable to tax if such gains are:
- remitted to, or transmitted or brought into, Singapore.
- applied in or towards the satisfaction of any debt incurred in respect of a trade or business carried on in Singapore.
- applied to the purchase of any movable property which is brought into Singapore.
Foreign entities not incorporated, registered or established in Singapore and not operating in or from Singapore are not within the scope of section 10L of the ITA.
Covered Entities
Section 10L of the ITA applies only to entities of relevant groups. An entity refers to any legal person (including a company, limited liability partnership), a general partnership or limited partnership, or a trust.
An entity is a member of a group of entities if its assets, liabilities, income, expenses and cash flows are:
- included in the consolidated financial statements of the parent entity of the group, or
- excluded from the consolidated financial statements of the parent entity of the group solely on size or materiality grounds or on the grounds that the entity is held for sale.
A group is a relevant group if the entities of the group are not all incorporated, registered or established in Singapore, or any entity of the group has a place of business outside Singapore. Therefore, a group with only Singapore entities operating only in Singapore will not fall within the scope of section 10L of the ITA. However, if any entity in the group has a place of business (e.g. a branch or a permanent establishment) in a foreign jurisdiction, the group is considered a relevant group for the purpose of section 10L of the ITA.
Economic Substance Requirement
The economic substance requirement is assessed at the entity level and not at the jurisdictional level for a group. With regards to a special purpose vehicle (SPV), the holding entity (be it an intermediate holding entity or the ultimate holding entity) that controls and benefits from the SPV’s activities and defines its strategies, would be subject to the economic substance requirement.
The Guide outlines certain criteria for the assessment of economic substance. For example, a pure equity-holding entity, solely holding shares or equity interests, must meet criteria like filing returns, being managed in Singapore, and having adequate human resources and premises in Singapore.
Assessment of the economic substance requirement for a non-pure equity-holding entity involves analysing its core income-generating activities in Singapore and the Guide provides certain sector-specific guidance. In addition, the Guide explains that a non-pure equity-holding entity’s operations must be managed and performed in Singapore with adequate economic substance considering its employee count, employees’ expertise, business expenditure and key business decision-making.
The adequacy of economic substance should align with the entity’s business model and scale of operations. Since business models and scales can vary widely within the same sector, the IRAS has not set any minimum thresholds to determine economic substance adequacy at this point.
Outsourcing arrangements, where an entity outsources some or all of its economic activities to third parties or group entities, may also be considered when evaluating the economic substance requirements provided certain conditions spelled out by the IRAS are met.
Gains from the Sale or Disposal of Foreign Intellectual Property Rights
The tax treatment of gains from the sale or disposal of foreign IPRs is different from that of other foreign assets.
Qualifying foreign IPRs, like patents or software copyrights, as defined in section 43X of the ITA follow a modified nexus approach to determine the extent of such gains that will not be taxable when received in Singapore. A transitional period of 3 years allows entities to adapt, applying a transitional nexus ratio before shifting to the modified ratio.
Non-qualifying IPR gains, however, are fully taxed upon receipt in Singapore, irrespective of the entity’s economic substance in Singapore.
Amount of Foreign-sourced Disposal Gains Subject to Tax
When determining the taxable gains, certain deductions are allowed. Only the net gains received or deemed received in Singapore are subject to tax. Permissible deductions cover spending on acquiring, creating, improving, safeguarding, or disposing foreign assets, as well as losses from other foreign asset sales. However, certain expenses are not deductible, such as those previously allowed against other incomes or specific capital expenses. Losses from foreign asset sales can offset taxable gains under specific conditions, with any remaining loss carried forward for future tax offsets against chargeable gains in Singapore.
If the sale price of a foreign asset is lower than its open market price, the Comptroller may adjust the amount of gains received in Singapore to take into account the open market price.
When the foreign-sourced disposal gains received in Singapore are also taxed in the foreign jurisdiction before the gains are received in Singapore, a Singapore tax resident entity may, subject to meeting certain conditions, claim foreign tax credits.
Tax Exemption for Individuals
Tax exemption under section 13(1)(zu) of the ITA will be given on the capital gains derived from the sale or disposal of a foreign asset where the gains are assessable as the income of an individual. The tax exemption will not be granted if the gains are business revenue gains.
Conclusion
The change in the foreign-sourced income regime aligns with the government’s dedication to combat tax evasion on a global scale, aligning with international initiatives. It also reflects Singapore’s focus on fostering genuine economic activities within its borders, emphasizing the need for substantive business operations rather than mere incorporation for tax purposes.
Although the IRAS has set out the conditions for entities to meet the economic substance requirement and provided a few examples to illustrate the conditions, no absolute thresholds have been prescribed to determine whether an entity possesses reasonable economic substance in Singapore. It appears that the IRAS will assess the economic substance requirement based on the facts or circumstances of each entity.
As a first step, an entity of a relevant group holding foreign assets should study the conditions, rules and examples detailed in the Guide to determine if it falls within the scope of section 10L of the ITA.
Entities within the scope of section 10L of the ITA must keep track of the gains/losses from disposal of foreign assets and accurately report their taxes when such gains are received or losses are utilised in Singapore. The relevant tracking information with respect to such gains/losses should be provided in their tax computations when submitting their annual income tax returns.
Since the economic substance requirements are to be met in the year the foreign assets are disposed, an entity falling within the scope of section 10L of the ITA should take proactive measures to meet the economic substance criteria. If there is uncertainty about the adequacy of economic substance, the entity has the option to apply for an advance ruling if the planned sale or disposal of foreign assets is anticipated to take place within one year from the date of the application. This ruling, valid for up to five Years of Assessment, will provide clarity on the sufficiency of economic substance.
Disclaimer:
This article should be used as a general guide only. No reader should act solely upon any information found in this article. We recommend that professional advice be sought before taking action on specific issues and making significant business decisions. Crowe Horwath First Trust LLP (“Crowe Singapore”) expressly disclaims all and any liability to any person in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of the above article. While every effort has been made to ensure the accuracy of the information contained herein, Crowe Singapore shall not be responsible whatsoever for any errors or omissions in it. This article was originally published by Crowe Horwath First Trust LLP.
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