Incorporating a new company in Singapore is full of challenges. When you bring an unfamiliar tax regime into the mix, it can get even more overwhelming. That is not to say that Singapore's corporate tax regime is difficult to navigate; the country’s corporate tax regime is one of the friendliest in the region. However, entrepreneurs are often at a loss about where to begin and how to proceed.
This comprehensive guide aims to address that. This guide will explain:
- Tax residency in Singapore
- Singapore corporate tax rate
- Corporate taxation framework
- And, how to avoid double taxation
What is Singapore Corporate Tax?
Singaporean resident companies are subject to tax on both their domestic and international profits. For this purpose, a company’s chargeable income (taxable revenues less allowable plus other allowances) determines the tax amount. Singapore boasts the world's third-lowest marginal tax rate. Yet, with government incentives, subsidies, and programs, the effective tax rate drops even more.
For instance, a company can avoid paying Singapore corporate tax on profits of up to S$28 million per year thanks to the Singapore government's Productivity and Innovation Credit (PIC) Scheme.
What is Tax Residency?
Tax residency rules for Singapore companies are straightforward. The Singapore tax law determines a company’s tax residency from where it controls and manages its business.
- A company is a Singapore tax resident for a given Year of Assessment (YA) if it has controlled and managed its business in Singapore in the previous year. For instance, a company becomes a tax resident for YA 2023 if it has controlled and managed its business for the whole of 2022 from Singapore.
- A company doesn’t become a Singapore tax resident (or remains a non-resident) if it has not controlled and managed its business from Singapore.
Singapore tax law defines control and management of business operations as making decisions on strategic as well as policy matters. In other words, the law recognises the location where a company’s Board of Directors meetings take place as the location from where the company controls and manages its business.
However, there are some exceptions where having Board of Directors meetings in Singapore isn’t enough to classify a company as a Singapore tax resident. For instance:
- The director's resolutions were passed by circulation in the meetings, as opposed to the execution of strategic and policy decisions.
- The nominee director is a local director, with all other directors being from outside Singapore.
- The local director in Singapore is not involved in strategic decisions.
- The company has no major stakeholders or key employees in Singapore.
In these cases, IRAS will evaluate the company's submission of additional information to determine whether or not the company has controlled and managed its business from Singapore in the previous year.
What is the Singapore Corporate Tax Rate?
The Singapore Corporate Tax Rate for both local and foreign companies is a flat 17% of their chargeable income. A company’s chargeable income (taxable revenues less allowable plus other allowances) determines the tax amount.
Moreover, a company is liable to pay tax on its income from the preceding financial year. The IRAS considers incomes and expenses during that particular financial period, which becomes the “basis period”. To simplify this better:
Incomes from 2023 will be taxed in 2024, the year 2024 will become the Year of Assessment (YA), and 2023 will become the basis period.
Example of Basis Periods Based on Different Financial Year Ends
The 12-month period or the financial year-end immediately preceding the YA, typically becomes the basis period.
Unlike several other countries’ corporate tax regimes, the IRAS does not mandate a company to follow a specific financial year-end. Companies can have different financial year-ends depending on their business operations and strategies.
Different basis periods apply to different financial year-ends. Following are the examples of basis periods based on different financial year ends in Singapore:
1. For the financial year ending on 31 March every year.
- Year of Assessment: 2023
- Basis period for YA 2023: 01 April 2021 – 31 March 2022
2. For the financial year ending on 30 Jun every year.
- Year of Assessment: 2023
- Basis period for YA 2023: 01 July 2021 – 30 June 2022
3. For the financial year ending on 30 September every year.
- Year of Assessment: 2023
- Basis period for YA 2023: 01 October 2021 – 30 September 2022
4. For the financial year ending on 31 December every year.
- Year of Assessment: 2023
- Basis period for YA 2023: 01 January 2022 – 31 December 2022
If a company changes its financial year-end, it must update the information with the IRAS by filing the change with the ACRA (Accounting and Corporate Regulatory Authority).
Corporate Taxation Framework in Singapore
The Singapore corporate tax framework is territorial. It applies to both domestic and foreign earnings. Companies are liable to pay taxes on:
- Incomes generated in Singapore
- Incomes generated outside Singapore but received in Singapore.
Taxable income
- Profits earned from business activities
- Earnings from investments, including dividends, interest, and rentals.
- Income from rent, mortgage payments, insurance premiums, and other sources of property ownership
- And other profits or gains.
Non-Taxable Income
- Dividends: Dividends paid to shareholders by a Singapore resident company are exempt from taxation under Singapore's single-tier corporate tax system.
- Capital gains: Singapore does not impose a tax on gains from the sale of properties or assets. But if you flip investments or properties frequently, your profits could be subject to taxation.
- Unutilised losses and allowances: Losses and allowances that aren't used in one year can be carried over to subsequent years to reduce the taxable income in those years.
- Group relief: Unused capital allowances, trade losses, and charitable donations of one company in a group can be deducted from the taxable income of another company in the group thanks to “group relief”. Listed below are the requirements companies must meet in order to be eligible for group relief:
-Both the transferor and the claimant must be Singaporean corporations.
-The transferor and the claimant must be in the same group.
-Both companies must have the same financial year-end.
Withholding Tax
There are some payments that could be subject to a withholding tax, such as payments made to non-resident companies, payments against services, and other incomes in Singapore. The Singapore corporate tax regime also mandates companies to withhold a portion of these payments and send it to the IRAS. Some of the payments include:
- Management fees and related payments
- Royalty, rent, or any payments related to any movable property
- Payments for using scientific, technical, industrial, or commercial knowledge or information, or for assistance or service in applying or using such knowledge or information.
- Interests, commissions, and fees against any type of loan or indebtedness.
What Are the Different Tax Exemption Schemes Under Singapore Corporate Tax Law?
Singapore has earned its stripes as a world-class spot for starting a business, thanks to its welcoming vibe for entrepreneurs and a knack for innovation and tech. What makes it stand out? It's the perfect playground for new business ventures. The city offers a fantastic business environment, friendly tax rates, and a bunch of tax breaks to get entrepreneurs off to a running start.
Start-up Exemption Scheme
IRAS implemented the Start-up Tax Exemption Scheme in 2005 to encourage business start-ups. Under this scheme, new businesses are exempt from paying taxes for the first three years following their incorporation, provided they meet certain conditions. The scheme aims to increase the number of new businesses and offer a competitive advantage to Singaporean companies.
To become eligible for Start-up Tax Exemption Scheme under Singapore Corporate Tax Law, companies must satisfy three conditions:
- They must be tax residents in Singapore
- There cannot be more than twenty shareholders, or there has to be one shareholder who owns at least 10% of the total shares.
- They must not be investment-holding companies.
The government announced revisions to the scheme in 2018 as the country has put into motion several other support systems and incentive programs for newly incorporated companies.
The scheme provides the following tax exemptions to qualifying companies:
Tax exemptions for YA 2019 or before
- Full tax exemption on the first $100,000 of normal chargeable income
- 50% tax exemption on the next $200,000 of normal chargeable income
For instance, if a company has a chargeable income of $300,000, the maximum exemption for the YA would be:
- $100,000 exemption on the first $100,000 (100%)
- $100,000 exemption on the next $200,000 (50%)
- Maximum exemption for each YA would be $200,000.
Tax exemptions for YA 2020 or onwards
- 75% tax exemption on the first $100,000 of normal chargeable income
- 50% tax exemption on the next $100,000 of normal chargeable income
For instance, if a company has a chargeable income of $200,000, the maximum exemption for the YA would be:
- $75,000 exemption on the first $100,000 (75%)
- $50,000 exemption on the next $100,000 (50%)
- Maximum exemption for each YA would be $125,000.
Partial Tax Exemption Scheme
Partial tax exemption (PTE) under Singapore Corporate Tax Law was announced in 2018 and is available to all companies, including those limited by guarantee, except for new start-up companies.
PTE allows companies to enjoy the following tax exemptions:
Tax exemptions for YA 2019 or before
- 75% tax exemption on the first $10,000 of normal chargeable income; and
- 50% tax exemption on the next $290,000 of normal chargeable income
For instance, if a company has a chargeable income of $300,000, the maximum exemption for the YA would be:
- $7,500 exemption on the first $10,000 (75%)
- $145,000 exemption on the next $290,000 (50%)
- Maximum exemption for each YA would be $152,500.
Tax exemptions for YA 2020 or onwards
- 75% tax exemption on the first $10,000 of normal chargeable income
- 50% tax exemption on the next $190,000 of normal chargeable income
For instance, if a company has a chargeable income of $200,000, the maximum exemption for the YA would be:
- $7,500 exemption on the first $10,000 (75%)
- $95,000 exemption on the next $190,000 (50%)
- Maximum exemption for each YA would be $102,500.
Corporate Income Tax Rebate
Singapore's government also offers corporate income tax (CIT) rebates to companies to encourage their business.
The Corporate Income Tax (CIT) rebate for YA 2017 is 50%, with a cap of $25,000. For YA 2018, the CIT rebate stands at 40%, capped at $15,000. Moving to YA 2019, the rebate lowers to 20%, with a maximum of $10,000. Finally, from YA 2020 onwards, the CIT rebate is set at 25%, capped at $15,000.
It is always worth working with experts in the Singapore financial system to help you understand what CIT rebates, if any, are available during the initial stages of your company’s operations in the city, as any available such funds would be a huge disadvantage to miss out on.
Pioneer Certificate Incentive (PC)
Companies with ambitious plans for growth and investment can apply for the Pioneer Certificate (PC). For qualifying companies, the tax rate can drop to as low as 5% for the first three years.
The PC is a tax incentive for companies that have been in operation for more than 10 years. In fact, the PC takes into account the company’s gross income and its total number of employees. The company must also maintain a certain level of employment locally in order to qualify for the PC.
Development and Expansion Incentive (DEI)
The Development and Expansion Incentive (DEI) is a policy that aims to encourage for investment. The DEI provides tax incentives to companies that invest in the country. Moreover, companies that qualify for DEI may be eligible for a reduced tax rate or a corporate tax exemption for a period of up to five years.
Double Taxation Agreement
Not all countries have the same policies when it comes to corporate taxes. Some countries impose double taxation on income earned by multinational corporations in other countries. Singapore is not one of those countries that charge twice on the same income and does not tax the income again.
Singapore has Double Taxation Agreements, or DTAs, with several other countries to relieve companies operating on Singaporean soil from double taxation of income. The most recent list of countries with which Singapore has DTAs is here.
What’s Next?
Navigating the intricacies of the Singapore Corporate Tax regime can be as complex as it is critical for your business success. That's where Grof steps in. We're here to ensure you capitalise on every exemption, rebate, and tax cut available, optimising your financial benefits. Keen to discover more about our approach? Get in touch with us today.
Remember, professional accounting doesn't just record history; it helps shape your business's future. With our competitive pricing and extensive suite of accounting services—from diligent bookkeeping to meticulous tax compliance—we're equipped to keep your finances streamlined and strategies sharp, driving you toward your business objectives.
