Singapore as an ideal location for intermediate holding company
Singapore adopts the territorial concept of taxation. It imposes income tax on incomes accrued in, derived from and received in Singapore from outside Singapore. Foreign sourced incomes are not taxable in Singapore until they are received or deemed as received in Singapore.
In recent years, the Singapore Government has begun to exempt foreign sourced incomes from taxation in Singapore in a drive to promote Singapore as an attractive location for investment holding and funds management. Instead of taking a sweeping approach of granting tax exemption for all foreign sourced income, the Singapore Government chose to grant tax exemption on selected income items.
In 2003, the Government announced the tax exemption for foreign sourced dividends, branch profits and service income received in Singapore, with conditions. Under the Singapore Income Tax Act ("SITA"), any foreign sourced dividends received in Singapore will be tax-exempt when the following conditions are met:
The dividends are taxed in the country of source or the dividends are paid out of profits after tax in the country of source ("subject to tax" condition);
At the time the dividends are received in Singapore, the highest corporate income tax rate in the country of source must be at least 15%; and
The Comptroller of Income Tax, Singapore is satisfied that the tax exemption would be beneficial to the person resident in Singapore.
Subsequent to 2003, the Inland Revenue Authority of Singapore ("IRAS") has issued several taxation circulars in relation to the implementation of the laws. Of which, the IRAS has granted a concession on the "subject to tax" condition.
One important aspect of the above tax exemption is that the Singapore taxpayer seeking to qualify for the treatment must be a tax resident of Singapore. This means that the Singapore intermediate holding company ("SIHC") must fulfill the requirements as a tax resident of Singapore to enjoy the tax exemption treatment highlighted above. To qualify as a tax resident company, the SIHC must have physical operations in Singapore and its directors meet regularly in Singapore and manage its business from Singapore.
We next address the Singapore tax implications on payment of dividends by the SIHC to its ultimate holding company. Singapore has implemented the one-tier corporate tax system since 2003. Under this system, corporate taxes paid by companies are final and dividends paid out of after tax profits are tax-exempt in the hands of the shareholders. As such, SIHC is able to pay tax-free dividends to its shareholder subject to the availability of revenue reserves and cash. Singapore also does not impose withholding tax on payment of dividends. As such, dividend declared and paid by SIHC will be received by the ultimate holding company free of any Singapore tax.
Under the current tax laws and regulations, Singapore is indeed an ideal location for setting up intermediate holding company to hold investments in the Asia region. The SIHC provides a tax-free channel for flow-through of after tax profits from the operating subsidiaries to the ultimate holding company.
For further information please contact tax director Mr Chng Chung Hing from our member firm HLB Loke Lum in Singapore:
Mr Chng Chung Hing
HLB Loke Lum
110 Middle Road
# 05-00 Chiat Hong Building
Phone: +65 6332 0088
Fax: +65 6333 9690
About HLB Loke Lum
HLB Loke Lum Consulting Group (LLCG) is a member of HLB International. HLB Loke Lum provides corporate consulting that includes tax planning and business services. Further services include financial advisory, stratetic business planning, profit engineering and pre-IPO related work. Please visit the firm's website for further information: http://www.llcg.com.sg/