Singapore is set to implement taxation on foreign-sourced disposable gains starting January 1, 2024, with the advent of Section 10L of the Income Tax Act.
Section 10L quips that capital gains resulting from the sale of foreign assets will be taxable in Singapore if received in the country and if the pertinent entity lacks ‘economic substance’ within Singapore. The determination of ‘economic substance’ for the entity will be evaluated on an individual basis.
Section 10L aligns with global standards like BEPS and the EU Code of Conduct Group Guidance demonstrating Singapore’s commitment to international tax norms.
This blog will explore the legislative impetus, outline critical features, and provide initial insights into potential taxpayer impacts.
Inside This Article:
What is “Economic Substance” in the context of Section 10L?
“Economic substance” refers to the tangible and measurable activities, operations, and presence of an entity within a specific jurisdiction. In the context of Section 10L in Singapore, having economic substance means that the relevant entity engaging in the sale or disposal of foreign assets must have substantial and meaningful activities in Singapore. This includes factors such as having employees, making key business decisions, incurring business expenditures, and overall, contributing to the economic ecosystem of Singapore. The determination of economic substance is made on a case-by-case basis, considering various criteria outlined in the legislation and the specific circumstances of the entity.
What is a Relevant Entity under Section 10L?
Section 10L targets entities within consolidated multinational entities (MNE) groups, specifically those where at least one group member operates outside Singapore. Entities doing business solely in Singapore and gains received by individuals are exempt.
Certain exclusions apply, including:
- financial institutions,
- entities with tax-exempt income* and
- entities meeting ‘excluded entity’ criteria.
*Entities with tax incentives (e.g., Approved Royalties Incentive, Investment Allowances) may not be automatically excluded. They may be subject to Section 10L unless they qualify as an ‘excluded entity’ in the disposal year.
What is an Excluded Entity under Section 10L?
Entities are determined as ‘excluded entities’ based on their classification as a ‘pure equity-holding entity’ or other entities. These entities are excluded from the purview of section 10 L.
What is a Pure Equity-Holding Entity?
A ‘Pure Equity-Holding Entity’ follows the following conditions:
- The entity must consistently submit regular accounts or statements.
- The entity’s operations must be conducted in Singapore.
- The entity should have sufficient human resources in Singapore.
What is ‘Other Entity’ or ‘Not-Pure-Equity-Holding Entity’ under section 10 L?
The following criteria should be considered for an entity not falling under the pure equity-holding category:
- The entity engages in a trade or business profession in Singapore.
- Operations are actively managed and executed in Singapore by its employees or other individuals.
- The entity demonstrates reasonable economic substance in Singapore, considering key factors such as:
- The number of employees (or those managing/performing operations) in Singapore.
- The qualifications and expertise of these individuals in Singapore.
- Business expenditure incurred in Singapore and abroad relative to the entity’s income.
- Determining whether pivotal business decisions are made by individuals situated in Singapore.
Following the given evaluation, a distinct scenario where investment-holding entities would not meet the criteria as ‘excluded entities’ under Section 10L is if (i) their main job is to own assets like cryptocurrency, real estate, or debt securities instead of shares and (ii) they don’t conduct business activities in Singapore.
How do you classify ‘Foreign Assets’ under section 10L?
Section 10L outlines the criteria for identifying an asset located outside Singapore as a ‘foreign asset’:
- Shares in a company or securities issued by a company are deemed to be located where the company is incorporated.
- Immovable property and intangible movable property are considered to be situated where the physical presence of the property exists.
- Secured or unsecured debt is categorized based on the residence of the creditor.
- Intangible movable property is positioned where the property’s ownership rights can be most effectively upheld.
What is BEPS 2.0 in Singapore?
In addition to harmonizing with the COGC, Singapore is set to implement a minimum effective tax rate of 15 per cent for multinational corporations starting January 1, 2025. This move aligns with the Base Erosion and Profit Shifting initiative, BEPS 2.0, a global framework designed to ensure equitable distribution of tax rights for significant multinational entities. BEPS involves companies exploiting gaps in tax regulations to shift profits to locations with lower or no taxes. The collaborative effort, involving 130 jurisdictions, including Singapore, since October 2021, aims to counter tax evasion. Consequently, MNEs with annual revenues exceeding EUR 750 million (US$797 million) must adhere to a 15 per cent tax rate on profits from 2025 onward.
In summary, Singapore’s introduction of taxation on foreign-sourced disposable gains from January 1, 2024, signifies a paradigm shift. This move expands the tax ambit beyond the conventional revenue-based foreign income taxation, covering capital gains. We help you navigate the nuances of Section 10L, which becomes imperative to guide businesses through the evolving landscape of taxation of foreign source income in Singapore. As the country aligns with international tax standards, we are poised to play a crucial role in assisting multinational corporations in understanding and optimizing their tax positions amidst these transformative changes in Singapore’s treatment of foreign-sourced income.
FAQs About Taxation on Foreign-Sourced Income
- Starting in 2024, Singapore plans to raise the primary personal income tax rate to 24 per cent. Income falling within the range of S$500,000 (US$370,000) to S$1 million will incur a tax rate of 23 per cent, and any income exceeding S$1 million (US$741,000) will be subject to a 24 per cent tax rate.
- For non-residents, the tax rates in Singapore vary based on the number of days spent in the country. Individuals staying for 60 days or fewer incur a 0% tax rate. Those staying between 61 and 182 days can choose between a flat rate of 15% or a progressive tax rate, capped at 22%, whichever results in a higher amount.
- Singapore taxes foreign income when remitted and received in the country. If the foreign income stems from a trade or business in Singapore, it is taxable upon accrual. To mitigate double taxation, Singapore provides relief for tax residents, including exemptions or reductions for specified foreign income from jurisdictions with Double Taxation Agreements, tax exemptions for certain foreign-sourced income, and foreign tax credits against Singapore tax liabilities on the same income.
- Singapore tax resident companies may qualify for tax exemption on specified foreign-sourced income when remitted into Singapore. This exemption applies to foreign-sourced income that does not arise from a trade or business conducted in Singapore. The three categories of specified foreign-sourced income eligible for exemption are foreign-sourced dividends, foreign branch profits, and foreign-sourced service income.
- Singapore addresses taxation on foreign income by offering relief through mechanisms like Double Tax Relief (DTR) under Avoidance of Double Taxation Agreements (DTA), enabling residents to claim credits for foreign taxes paid. Additionally, the Unilateral Tax Credit (UTC) is provided for foreign-sourced income from jurisdictions lacking DTAs, easing the burden of double taxation for Singapore tax residents.
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