In June 2023, the Ministry of Finance released a draft of the Income Tax (Amendment) Bill 2023. The contents of this Bill cover the announcements made in the 2023 Budget Statement and amendments which will bring the Singapore Tax Act inline with international standards.
A key proposal in this Bill is the introduction of taxation on capital gains made from the sale of foreign assets, after 1 January 2024, where the proceeds are received in Singapore without the company having sufficient economic substance in Singapore.
Section 10L, if enacted by parliament, is to align Singapore with the European Union Code of Conduct Group guidance in respect to these types of transactions.
Companies Affected by the New Legislation
Currently Singapore does not have a capital gain tax regime – meaning that profits derived from capital transactions, such as the sale of real estate, equipment, rights are exempt from taxation.
The absence of capital gains tax has made Singapore a popular location for companies to hold assets which are based outside of Singapore and exploited for the benefit of the consolidated group. It is important to note that this provision only applies to Singapore companies which are part of a wider consolidated group. Meaning that the use of Singapore as a jurisdiction to establish a special purpose vehicle company may still be appropriate.
The key points regarding the application of the provision are:
- The Singapore company which has disposed of the foreign asset must be part of a consolidated group. The company will be a member of a consolidated group if its financial accounts are consolidated by the parent entity.
- The group in question must have at least one member which operates its business outside of Singapore.
- The foreign capital gain is either:
- Remitted to a Singapore bank account; or
- Applied against any debt incurred in relation to the operations carried out in Singapore; or
- The value of any immovable property brought to Singapore which has been acquired using the proceeds from the capital gain.
- Provision for IRAS to apply the market value to a transaction where it deems that the disposal of the asset was not undertaken on an arm’s length basis.
Exclusion of Some Industries and Exemptions
As a major commercial hub in the world, the proposed Bill does provide for the exclusions of some industries (e.g. financial) and Groups which have been awarded concessionary or exempt tax status.
Where a company does not fall into these exemption categories, the Bill does define an “excluded entity”, which would not be subject to this change. This definitional exclusion is where the economic substance test comes into play.
The definition allows for pure equity holding companies, and non-pure equity holding companies. A pure entity holding company’s main function in the group is to hold shares and derive income from dividends and the disposal of shares.
If the company is a pure equity holding company, to be excluded from Section 10L, it must demonstrate that:
- The company complies with its annual lodgement obligations, and
- The operations are managed and performed in Singapore.
For a non-pure equity holding company, there are additional conditions to satisfy:
- The company carries on a trade in Singapore; and
- Operations are managed and performed in Singapore; and
- There is sufficient economic substance in Singapore taking into account:
- The number of employees in Singapore performing the operations;
- The qualifications and experience of the employees in Singapore;
- The amount of business expenditure incurred in Singapore relative to its income;
- Whether key business decisions are made in Singapore.
Should the Bill pass as drafted, a greater emphasis is required on multinational companies to ensure that they establish themselves appropriately in Singapore, with an office, employees, and senior management. Demonstrating the significance of the Singaporean operations will be key to ensuring that concession tax regimes are accessible.
It should be noted that the introduction of Section 10L is primarily an anti-avoidance measure and not a hindrance to the many businesses that choose to expand to or establish operations in Singapore.