Tax Due Diligence for Singapore Acquisitions: Risks to Review Before Signing

Foreign investors acquiring a Singapore company should examine its historical tax liabilities, GST compliance, cross-border transactions, and existing tax benefits before signing a share purchase agreement. In a share acquisition, historical tax obligations generally remain with the target company and can affect the buyer’s financial exposure.

Singapore’s rules on tax loss continuity and share transfer stamp duty introduce additional considerations that can influence the acquisition’s financial terms.

What corporate income tax risks should buyers review in Singapore?

Buyers should review the target company’s previous corporate income tax returns, including Form C-S, Form C-S (Lite), Form C, or the applicable return for dormant companies. They should also examine supporting tax calculations, financial statements, and tax assessments issued by the Inland Revenue Authority of Singapore (IRAS).

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These records should be checked for differences between reported profits and taxable income, including incorrectly claimed expenses, tax allowances, or income that was not reported.

Buyers should also check whether the company has any ongoing tax enquiries, audits, disputes, or unpaid tax assessments involving IRAS.

Any problems identified should be reviewed to determine whether the company could face additional taxes or penalties, considering previous payments and amounts already recorded in its accounts.

Could historical GST errors create additional liabilities?

Singapore’s Goods and Services Tax (GST) is currently 9 percent. Businesses generally must register when taxable turnover exceeds SGD 1 million under the applicable retrospective or prospective registration tests.

Failure to register on time can create liabilities for periods during which the target should have accounted for GST, even if it did not collect the tax from customers.

Beyond registration, buyers should examine whether transactions were correctly classified as standard-rated, zero-rated, or exempt. Exports of goods and qualifying international services may be zero-rated, while certain financial services and residential property transactions are exempt. Incorrect classification can result in underpaid GST or excessive input tax claims.

Historical transactions require particular attention because Singapore increased GST from 7 percent to 8 percent in January 2023 and to 9 percent in January 2024. Transactions spanning these changes should be checked against the applicable rates and transitional rules.

Input tax claims must also satisfy Singapore’s eligibility and documentation requirements. Companies making both taxable and exempt supplies may face restrictions on recoverable input tax.

For businesses purchasing services from overseas suppliers, buyers should determine whether reverse charge rules apply, particularly where the target is not entitled to full input tax recovery.

What cross-border tax risks should foreign buyers investigate?

Transfer pricing compliance

Singapore requires related-party transactions to follow the arm’s-length principle. Buyers should examine whether intercompany loans, management fees, royalties, and service arrangements reflect commercially reasonable terms.

The review should also establish whether the company was required to prepare transfer pricing documentation under Singapore’s applicable thresholds and exemptions. Where documentation is required, the records should support the pricing methods used.

If related-party pricing does not comply with the arm’s-length principle, IRAS may make adjustments. A 5 percent surcharge generally applies to the adjustment amount, even where no additional tax becomes payable.

Withholding tax on overseas payments

In addition to transfer pricing, certain payments to overseas recipients, including interest, royalties, and technical or management service fees, may attract Singapore withholding tax.

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For certain services provided by overseas companies, withholding tax generally applies to the portion attributable to work performed in Singapore. Services performed entirely outside Singapore may fall outside these requirements.

Buyers should establish whether the target correctly withheld and paid the tax to IRAS, including whether exemptions or reduced rates under Singapore’s double taxation agreements were properly applied.

Will the acquisition affect Singapore tax losses and incentives?

Singapore generally allows companies to carry forward unused tax losses only if they meet certain ownership requirements. At least 50 percent of the company’s shares must be held by the same shareholders at the relevant comparison dates. In some cases, the ownership of the ultimate parent company is also considered.

A change in ownership following an acquisition could prevent the company from using these losses to reduce future taxes. However, buying a majority stake does not automatically mean the losses will be lost. The outcome depends on when the ownership changes and how the company is owned.

If the company fails the ownership test, it may request permission from the Inland Revenue Authority of Singapore (IRAS) to retain its unused losses. Approval may be granted where the ownership change has genuine business reasons rather than being intended to obtain a tax advantage. Restrictions may still apply.

Similar ownership rules apply to unused capital allowances, which are tax deductions for qualifying business assets. The company must also generally continue operating the same business to use these allowances.

Buyers should consider these restrictions before including unused tax losses or capital allowances in the target company’s valuation.

Existing tax incentives also require attention. Companies receiving tax benefits under schemes administered by the Singapore Economic Development Board or other authorities may need to maintain certain business activities, investment levels, or employment commitments.

Buyers should review the company’s incentive approval documents to determine whether the acquisition requires notification or approval and whether the company can continue meeting the conditions afterward.

What stamp duty costs could arise from acquiring a Singapore company?

Singapore generally imposes stamp duty on transfers of shares in Singapore-incorporated companies at 0.2 percent of the higher of the purchase price or the value of the shares.

For private companies incorporated more than 18 months before the transfer, share value is generally determined using the company’s net assets based on accounts dated within 24 months before the transfer. Where the company owns property, its market value must be used if the recorded value does not reflect that amount.

Different rules apply to companies incorporated for 18 months or less. Where the company does not own property, share value is generally based on the price at which the shares were originally issued. If it owns property, management accounts are required to determine the company’s net assets, with property values reflecting market value.

Where the company owns residential property, additional conveyance duties may apply if the buyer, together with related parties, acquires or already holds a significant ownership interest in a qualifying property-holding company. These duties are calculated based on the residential property’s market value and the ownership interest being transferred.

How should Singapore tax due diligence findings affect the purchase agreement?

Purchase price adjustments

Identified tax liabilities may justify purchase price adjustments, provided the amounts have not already been reflected in the target’s accounts.

Where a liability cannot be reliably calculated, the parties may need a separate arrangement to determine who bears the financial risk.

Tax warranties and indemnities

Beyond pricing adjustments, tax warranties may cover the accuracy of historical returns, payment of taxes, disclosure of outstanding IRAS matters, and compliance with withholding tax obligations.

Specific indemnities can address identified exposures, such as additional tax arising from a historical transaction under review.

The agreement should establish responsibility for taxes relating to periods before completion, together with applicable claim procedures, limitations, and deadlines.

Conditions before completion

Some tax issues may need to be resolved before the acquisition is completed. If the company has outstanding tax assessments from IRAS, the buyer may require the seller to settle them or provide financial protection.

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The buyer may also withhold part of the purchase price or place funds in a separate account until the outstanding issues are resolved.

However, these arrangements do not remove the company’s responsibility to pay any tax owed to IRAS. Buyers should also consider whether the seller can afford to cover any additional tax liabilities.

If the potential costs are too uncertain or the seller cannot provide sufficient protection, the buyer may need to delay or reconsider the acquisition.

Protect your Singapore acquisition with Dezan Shira & Associates

Dezan Shira & Associates assists foreign investors with tax due diligence, identifying potential liabilities and assessing their implications for Singapore acquisitions. Contact our team for transaction advisory support.

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