Tax Exemption Schemes
You Need to Know
10 minute read
Have you been thinking about starting a business in Singapore? Is the idea of becoming an entrepreneur, planning and directing your very own operations, marketing and sales attractive to you?
If so, you should know that your startup may be able to get a tax exemption. A tax exemption can act as a very important boost that could help you get your business off the ground quickly.
The Singapore government introduced these schemes in 2005 and has been consistently strengthening and supporting the business environment. This article lists various tax exemption schemes for new start-up businesses that support entrepreneurship and innovative ideas.
Common Tax Reliefs
Singapore has various common tax reliefs which include:
- New start-up tax exemption scheme for newly-incorporated companies in Singapore
- Partial tax exemption for all companies
- Deduction of expenses incurred before the commencement of business
Singapore first introduced the tax exemption scheme in 2005 with the aim of supporting entrepreneurship and the local business scene.
Companies are given the following tax exemption for the first 3 consecutive years of assessment (YAs) following the date of incorporation:
- 75% exemption applies on the first $100,000 of normal chargeable income*, thereby bringing down the effective tax rate to be 4.25% on the first S$100,000 of chargeable income; and
- In addition, a further 50% exemption is applied on the next $100,000, thereby bringing down the effective tax rate to be 8.5% on the next S$100,000 of chargeable income
*Note that normal chargeable income refers to income which is taxed at the prevailing corporate tax rate.
Let’s take a look at some examples that should help you understand the exemptions better.
Exemption on first $200,000 (where any of the first 3 YAs falls in or after 2020)
Which companies qualify for tax exemptions?
Companies will qualify for the New Start-up Tax Exemption (“SUTE”) Scheme if the following conditions are met:
- The company was incorporated in Singapore;
- The company is a tax resident in Singapore for that YA;
- The company’s total share capital is beneficially held directly by no more than 20 shareholders throughout the basis period for that YA where:
- all of the shareholders are individuals; or
- at least one shareholder is an individual holding at least 10% of the issued ordinary shares of the company.
However, the tax exemption is not applicable to the following types of businesses:
- A business primarily dealing with investment holdings and earning investment income.
- A business undertaking new property development for sale and/or investment.
The rationale behind the exception is because investment holding companies derive passive incomes such as dividend and interest income while property developers usually incorporate a new company for each new property development. Therefore, the SUTE is not meant for such companies since it only aims to encourage entrepreneurship. These startup companies will be provided with partial tax exemption instead.
How do I determine the first three consecutive Years of Assessment?
The first YA is the YA relating to the basis period during which the company is incorporated. The first YA of a business depends on the financial year-end chosen and the closing date of the first set of accounts.
Therefore, the first YA of a business may differ from the first YA of other businesses that were incorporated at the same time.
Let’s go through some examples that will help you understand this better.
Scenario 1: the first set of accounts = 12 months
Scenario 2: the first set of accounts < 12 months
Scenario 3: the first set of accounts > 12 months
The first set of accounts covers a period of eighteen months. Usually, the company’s profit/losses have to be attributed and declared under two YAs as the basis period for each YA should not exceed 12 months. The first YA is 2020, not 2021.
What happens from the fourth year onwards?
The start-up tax exemptions scheme is available for the first three years and it is not possible to apply and enjoy the benefits of this scheme after that. However, after the fourth year onward, a business may be eligible for the Partial Tax Scheme for Companies (PTE).
Partial Tax Exemption Scheme for Singapore companies.
Companies that do not qualify for the SUTE either in the first 3 YAs or companies that are in the fourth YA onwards will qualify for the Partial Tax Exemption (“PTE”) Scheme, as follows:
- 75% exemption applies on the first $10,000 of normal chargeable income, thereby bringing down the effective tax rate to be 4.25% on the first S$10,000 of chargeable income; and
- In addition, a further 50% exemption is applied on the next $190,000, thereby bringing down the effective tax rate to be 8.5% on the next S$190,000 of chargeable income
How to claim tax exemptions?
All businesses are required to file corporate tax returns on an annual basis. The tax exemptions will be applied accordingly when the tax computations and the relevant tax form (Form C-S Lite/C-S/C) is prepared.
All relevant corporate tax documents have to be filed annually by 30 November each year.
Tax exemption for foreign sourced income
Various types of foreign-sourced income are tax exempt:
- Foreign sourced dividends
- Foreign branch profits
- Foreign sourced service income
To be eligible for this exemption, foreign-sourced income has to be remitted to Singapore and it should meet these requirements:
- The headline tax rate of the foreign jurisdiction is at least 15% at the time the foreign income is received in Singapore.
- The foreign sourced income was taxed in the foreign jurisdiction (note, the rate at which the foreign income was taxed can be different from the headline tax rate).
- The Singapore government is satisfied that the tax exemption would be beneficial to the Singapore tax resident.
Want to know more about corporate tax exemptions? Read our 5-minute guide for new companies here.
What other expenses are deductible?
It is good to know that only revenue expenses incurred following the start of your business operations are deductible for tax purposes.
Revenue expenses incurred one year before the first day of the financial year in which you earn your first money will be tax-deductible.
Business expenses incurred before the business operations started are not tax-deductible since they are deemed to be incurred before the generation of income.
Capital allowances (CA)
It is possible to claim CA on fixed assets bought and used in your trade or business. CA is given in place of depreciation which is not tax-deductible. For instance, this could cover your office equipment or electronic equipment, furniture, and fixtures.
Renovation and refurbishment (R&R) expenses
Your business can claim a deduction on qualifying business expenses on your R&R works. For example, this could cover money spent on buying doors, windows, fixed partitions, general electrical installations and lighting, flooring, and wall covers.
A deduction shall be granted on a straight-line basis over three consecutive YAs and subject to an expenditure cap of $300,000 for every three consecutive basis periods.
IRAS takes a firm stand against businesses that attempt to abuse the various tax exemption schemes with the intent of evading taxes.
In 2019 alone, more than 200 companies were audited to check for possible abuse of the tax exemption scheme for new companies, and as a result, tax recovery and penalties of more than $25 million were charged.
Always remember that tax evasion is a criminal offense punishable under the law and the Court imposes serious penalties for such offenses.
A party that wants to take advantage of the tax exemption scheme for new startups and engages in abusive tax arrangements such as setting up shell companies, or individuals who assist others with abusive tax arrangements should disclose such an offense right away.
IRAS will treat this as a mitigating factor when considering the legal charges.
Hopefully, these schemes can be of use to you and your business.
Entrepreneurs that have just started out can make good use of these schemes, as every penny counts in the first few months of operation, and these dollars saved can surely make a difference.
Just remember to keep everything within the legal borders because IRAS will not take abuse of the system lightly.
If you need further information, head on over to our ultimate guide on how to start a business, and make sure to check out our video below that briefly explains these tax exemption schemes!