Tax residency of a company in Singapore
4 minute read
With the recent travel bans and restrictions imposed by governments around the world in its consolidated effort to control the spread of the Coronavirus Disease 2019 (“COVID-10”) has inevitably impacted on how businesses operate.
In this article, we will discuss the impact and changes in determining the tax residency of a company.
Factors determining the tax residency of a company
The concept of tax residency for companies in Singapore is determined based on the location of the “control and management”, broadly defined as the location where the company’s Board of Directors meetings are held and during which decisions on strategic matters are made. A board director that takes on an executive role (e.g. Chief Executive Officer, Chief Operations Officer, Chief Financial Officer, Managing Director, etc), that is not a nominee director and is involved in the running of daily operations is one of the key factors in determining where the control and management is exercised.
Therefore, depending on the circumstances, the tax residency of a company may change every year.
What are some of the scenarios whereby the control and management of a business is considered to be not exercised in Singapore?
- There is no board of directors meeting held in Singapore. Instead, the directors’ resolutions are merely passed by circulation
- The local director is a nominee director while the rest of the directors are based outside Singapore
- No strategic decision made by the local director in Singapore
- No key employees are based in Singapore
Application of a Certificate of Residence
A Certificate of Residence (COR) is a letter certifying that a company is a tax resident of Singapore, i.e. the control and management of its business is exercised in Singapore for the purpose of claiming tax benefits under the Avoidance of Double Taxation Agreements (DTAs) or Limited Treaties.
Changes to the tax residency status following the COVID-19 travel bans and restrictions
In view of the recent travel bans and restrictions, the Inland Revenue Authority of Singapore (IRAS) shall consider a company as a Singapore tax resident for YA 2021 if all of the following conditions are met:
1) The company is a Singapore tax resident for YA 2020;
2) There are no other changes to the economic circumstances of the company, which includes:
- The principal activities and business model of the company;
- The nature of the business operations and the conduct of the business in Singapore and elsewhere; and
- The usual locations in which the company operates;
3) The directors of the company have to attend the Board of Directors meeting held outside Singapore or if the meeting is held via electronic means (e.g. video/tele-conferencing)
How should I support the claim to be treated as a tax or non-resident company?
Companies should keep relevant documentations and records such as the minutes of meetings to the board meetings, indicating reasons why the directors were attending board meetings remotely from various locations. These documentations and information shall be provided to IRAS upon request.
What are the differences between a tax resident and a non-resident company?
Tax resident and non-resident companies in Singapore are generally taxed in the same manner, with the following exceptions that are only available to tax resident companies:
- Tax benefits provided under the Avoidance of Double Taxation Agreements (DTAs) Singapore has concluded with other jurisdictions;
- Tax exemption on foreign-sourced dividends, foreign branch profits, and foreign-sourced service income under Section 13(8) of the Income Tax Act; and
- Tax exemption for new start-up companies, provided that the following conditions are met:
- The company must be incorporated in Singapore;
- The company must be a Singapore tax resident for that YA;
- The company’s total share capital 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.
Misconception #1: Non-resident companies are not entitled to any tax exemptions and rebates?
All companies (resident and non-resident) in Singapore are able to enjoy the partial tax exemption scheme. From YA 2020 onwards, the tax exemption is as follows:
- 75% exemption on the first S$10,000 of chargeable income; and
- A further 50% exemption on the next S$190,000 of chargeable income
In addition to the partial tax exemption, all companies are entitled to receive a corporate income tax rebate of 25% capped at S$15,000 for YA 2020.
Misconception #2: Non-resident companies do not need to pay tax in Singapore?
Singapore operates on a territorial basis of taxation. This means that a company is liable to pay tax in Singapore on income that is:
1) Accrued in or derived from Singapore; or
2) Received in Singapore from outside Singapore
This applies to Singapore companies who are regarded as non-resident companies.
For Singapore tax purposes, taxable income refers to:
- Gains or profits from any trade or business;
- Income from investment such as dividends, interest and rental;
- Royalties, premiums and any other profits from property; and
- Other gains that is revenue in nature
Misconception #3: Non-resident companies are taxed at a different tax rate other than 17%?
With effect from YA 2010, a company is taxed at 17% on its chargeable income regardless of whether it is a resident or non-resident company.
Misconception #4: All Singapore incorporate companies are tax resident companies?
The country of incorporation is not necessarily indicative of the tax residence of a company. A company is considered to be a Singapore tax resident company for a particular Year of Assessment (YA) if the control and management of its business was exercised in Singapore in the preceding calendar year. If the control and management of the company is not exercised in Singapore, then the company is regarded as a non-resident for the YA.
Are foreign-owned investment holding companies incorporated in Singapore, considered as a tax resident company?
No, foreign-owned investment holding companies, defined as companies with 50% or more shareholdings held by foreign individuals and/or corporate shareholders with purely passive sources of income or receiving only foreign-sourced income are regarded as non-resident companies. This is because the company acts upon the instructions of its foreign individual and/or corporate shareholders. However, foreign-owned investment holding companies may be treated as tax residents if certain conditions are met:
- The control and management of the company’s business is exercised in Singapore; and
- The company has valid reasons for setting up an office in Singapore.