Singapore Introduces New Tax Regime for Foreign-Sourced Income

Last Updated on 28 December 2024

The Singapore Parliament has recently passed the Income Tax (Amendment) Act 2023, which introduces a new Section 10L in the Income Tax Act 1947.

This new section aligns Singapore’s foreign source income exemption (FSIE) regime with international standards by taxing gains received in Singapore from the sale of foreign assets by businesses without economic substance in Singapore.

Background

Previously, only revenue-based foreign-sourced income, such as dividends, royalties, and interest, was taxed in Singapore, while capital gains were not.

However, in 2019, the European Union’s Code of Conduct Group (COCG) initiated a review of FSIE regimes worldwide, including Singapore and Hong Kong. The COCG raised concerns that tax systems without economic substance requirements could be considered “ringfencing” and therefore harmful.

In 2021, the COCG assessed Singapore’s FSIE scheme as not harmful, but Hong Kong was added to the EU’s “grey list” of non-cooperative jurisdictions for tax purposes. Hong Kong subsequently made amendments to its FSIE scheme, and Singapore followed suit.

New Tax Regime

Under the new Section 10L of the Income Tax Act, gains from the sale or disposal of foreign assets received in Singapore by businesses without economic substance in Singapore will be treated as income chargeable to tax.

This change has already been in effect since January 1, 2024.

Definition of Foreign Assets

Foreign assets include both movable and immovable property situated outside Singapore. The rules for determining the situation of these assets are as follows:

• Immovable property and tangible movable property are situated where the property is physically located.
• Secured or unsecured debt (other than judgment debt or securities) is situated where the creditor is resident.
• Shares in or securities issued by a company, and any right or interest in such shares or securities, are generally situated where the company was incorporated.
• Intangible movable property is situated where the ownership rights with respect to the property are primarily enforceable.

Relevant Entities and Exclusions

A relevant entity is an entity that is part of a group where at least one entity of the group has a place of business outside Singapore. Domestic groups and standalone entities are excluded.

Excluded entities are those that have adequate economic substance in Singapore. Pure equity-holding entities (PEHEs), which primarily hold shares or equity interests in other entities and have no other income besides dividends or similar payments, are also excluded.

Excluded entities are not required to carry on a trade, business, or profession in Singapore but must maintain reasonable economic substance in the country. They need to ensure that their operations are managed and performed in Singapore.

The Ministry of Finance (MOF) acknowledges that it would be impractical to establish minimum thresholds for economic substance in legislation due to the varying business models and scale of operations. Instead, the Inland Revenue Authority of Singapore (IRAS) will provide further guidance through an e-Tax Guide, which will include sector-specific examples.

Tax Deductions and Basis Periods

Section 10L requires foreign assets to be disposed of or sold at their open market value. The selling entity may claim a tax deduction for expenses incurred in acquiring, creating, improving, protecting, preserving, selling, or disposing of the property.

The entity can also deduct any “unused” losses incurred on the sale or disposal of other properties where the gain would have been chargeable under Section 10L.

If Section 10L gains are received in Singapore in different basis periods, the deductible expenses must be reasonably apportioned between the relevant basis periods.

Unilateral Tax Credits

From an international tax perspective, Section 50A of the Income Tax Act has been amended to provide that unilateral tax credits will be given for any foreign tax paid in respect of a gain treated as income under Section 10L.

Impact and Recommendations

Taxpayers should review their existing structures to assess the impact of the new Section 10L. It is particularly important to consider the nature of certain assets and the economic substance of relevant entities.