Tax Exemptions on Foreign Income for Singapore-Based Companies
SINGAPORE – According to the Inland Revenue Authority of Singapore (IRAS), a Singapore tax resident can enjoy tax exemption on specified foreign income that is remitted into Singapore. This tax ruling has been in effect since June 1st, 2003.
Prior to June 1st, 2003, resident taxpayers would be taxed on all foreign-sourced income received in Singapore. They could also be taxed on the same foreign income in the countries of origin. To enhance Singapore’s attractiveness as a business hub and to boost its services export, it was decided that tax exemption may be granted on certain foreign-sourced income.
The three categories of foreign income permissible for exemption are:
- Foreign-sourced dividends;
- Foreign branch profits; and
- Foreign-sourced service income.
These taxpayers must also meet certain qualifying conditions to obtain tax exemption. Cited under Section 13(9) of the Income Tax Act, foreign income will only be exempt from taxation if all three of the following conditions are met:
- “The income is subject to tax of a similar character to income tax (by whatever name called) under the law of the territory from which the income is received;
- At the time the income is received in Singapore by the person resident in Singapore, the highest rate of tax of a similar character to income tax (by whatever name called) levied under the law of the territory from which the income is received on any gains or profits from any trade or business carried on by any company in that territory at that time is not less than 15 percent; and
- The Comptroller [of Income Tax] is satisfied that the tax exemption would be beneficial to the person resident in Singapore.”
In other words, the highest tax rate (headline tax rate) of the country from which the foreign income is received must be at least 15 percent, and the foreign income must be subject to tax in that same country from which it is received. This is known as the “subject to tax” condition. Notably, the rate at which foreign income is taxed can be different than the headline tax rate.
In some instances, countries give tax exemption on the income of investors who carry out substantive business activities in their country as tax incentive. These investors would be liable to tax if not for the tax exemption. As a concession, specified foreign income given such tax exemption may be regarded as having met the “subject to tax” condition.
The IRAS says resident taxpayers do not need to submit any documents with their income tax returns to show that their specified foreign income qualifies for exemption. It is recommended that supporting documents be retained however, should the Comptroller of Income Tax ever make a request for verification. To claim the tax exemption, taxpayers only need to declare in their income tax returns that their specified income qualifies for exemption, and provide the following information:
- Nature and amount of the specified foreign income;
- Country from which the income is received;
- Headline tax rate of that country; and
- Confirmation that foreign tax has been paid in that country.
This information is to ensure that the “subject to tax” condition is met.
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