Tax Exemption for Foreign Sourced Income
Singapore has a progressive tax framework. Taxation in Singapore is based on territorial policy whereby individuals and companies are taxed on incomes generated in Singapore or foreign sourced income remitted into Singapore. With globalization blurring the borders across markets, Singapore has also made provisions for tax exemption on qualifying foreign sourced income remitted to Singapore. The exemption that came into effect since June 2003 has exalted the attractiveness of Singapore as a regional business hub.
Singapore has been progressively relaxing the taxation policy on foreign sourced income in order to encourage repatriation of incomes earned abroad. This has enhanced the competitiveness of Singapore, which has evolved into a hub for fund and wealth management industry.
The article below explains the tax treatment of foreign sourced income under the foreign-sourced income exemption (FSIE) scheme provided under Sections 13 (7A) to 13 (11) of the Income Tax Act (ITA) of Singapore.
Scope of application of FSIE:
It applies to all Singapore tax resident individuals and companies receiving foreign- sourced income in Singapore. From 1 January 2004 it is also applicable to resident individuals receiving the specified foreign income through a partnership in Singapore.
For the purpose of qualifying for tax exemption, considerable attention is paid to facts such as the nature of foreign income, what activities or services contributed to the earning of the income, how much of the activities or operations that earned the income was conducted outside Singapore and whether the specified tax payer has a permanent establishment abroad.
Foreign individuals and companies who are not residents of Singapore for the purpose of taxation are free to bring in money into their Singapore bank accounts without any fear of attracting any tax liability.
What constitutes foreign sourced Income
Income that does not arise from a trade or business carried on in Singapore is considered as foreign sourced income. The act also clearly specifies what categories of incomes are entitled to exemption under the FSIE scheme
The specified foreign incomes are:
- Foreign-sourced dividend – a dividend is a foreign-sourced dividend, if it is paid by a non-Singapore tax resident company.
- Foreign branch profits – profits generated by business operation of a Singapore company registered as a branch in a foreign country. It excludes non-trade or non-business income of the foreign branch.
- Foreign-sourced service income – income generated by a resident taxpayer for services provided through a fixed place of operation in a foreign country.
Note: fixed place of operation inter alia includes a place of management, an office, or a certain amount of floor space at the disposal of the specified resident taxpayer. Such a place must also have features of permanence.
If the taxpayer cannot prove that the service income is earned through such a fixed place of operation in the foreign country, then it will be treated as Singapore sourced income and subjected to local taxes, although in reality the income originated outside Singapore.
When Foreign Sourced Income Is Considered ‘Received’ Into Singapore
Foreign sourced income is considered to be received in Singapore if
- Any income earned outside Singapore is remitted to, transmitted or brought into Singapore;
- Any income earned outside Singapore is applied in or towards satisfaction of any debt incurred in respect of a trade or business carried on in Singapore;
- Any amount from any income earned outside Singapore is applied to purchase any movable property, which is brought into Singapore.
Note: In the case of foreign sourced dividends the dividends may be temporarily deposited into a foreign custodian account before its remittance into Singapore. However such remittance must be made within one year from the date it was deposited into the foreign custodian account and any interest earned on such deposit must not be included in the dividend, for which FSIE is sought.
What Qualifies Specified Foreign Sourced Income For Tax Exemption
Section 13(9) of the Income Tax Act, provides the criteria to be met to qualify for tax exemption. The qualifying conditions are as below:
- The foreign income had been subjected to tax in the foreign country from which they were received (known as the “subject to tax” condition).
- The headline tax rate of the foreign country from which the income is received is at least 15%.
- The Comptroller is satisfied that the tax exemption would be beneficial to the person resident in Singapore.
Key Aspects of ‘Subject to Tax’ Condition
Under the ‘subject to tax’ conditions there are some special concessions.
Some tax jurisdictions give tax exemption on the income of investors who carry out substantive business activities in their country as tax incentive. Such cases, where the incomes are not subjected to tax under some incentive schemes of the foreign source country, will be regarded as having met the ‘subject to tax’ condition.
For the purpose of this condition, in the case of foreign sourced dividends both dividend tax and underlying tax are taken into consideration. While dividend tax is the tax levied by the foreign source country on dividends paid by a company, underlying tax is the tax levied by the source country on incomes out of which a company pays the dividends. The recipient of such foreign-sourced dividend must prove to the satisfaction of the Comptroller of Income Tax that the ‘subject to tax’ condition has been met.
Key Aspects of ‘Headline Tax’ Rate Condition
The foreign headline tax rate refers to the highest corporate tax rate of the foreign country in the year the specified foreign income is received in Singapore. According to the FSIE qualifying conditions, it must be at least 15%.
Effective from 31 May 2006, the headline tax rate is the highest stipulated tax rate in the special legislation instead of the highest tax rate in the main tax legislation.
The rate at which the foreign income was taxed can be different from the headline tax rate.
Key Aspects of Beneficial Exemption Condition
Comptroller of Income Tax must be satisfied that the tax exemption would be beneficial to the specified resident taxpayers. Where the tax exemption is deemed to be not beneficial to them, the taxpayers can claim reliefs against double taxation under the following provisions:
- Unilateral tax credit under Section 50A of the ITA for income remitted from countries with which Singapore does not have a Double Taxation Agreement (DTA);
- Double Taxation Relief under Section 50 of the ITA for income remitted from countries with which Singapore has a DTA
Resident taxpayers seeking tax exemption on their foreign sourced income must declare that their specified foreign income qualifies for the tax exemption in their income tax returns and provide the following particulars:
- Nature and amount of the specified foreign income;
- Country from which the income is received;
- Headline tax rate of that country; and
- Amount of foreign tax paid/payable in that country
In case of tax exemption or concession enjoyed in the foreign country then the return must be accompanied by
- A declaration that the foreign country has exempted the foreign income from tax because of substantive business activities carried on by the company in that country; and
- A copy of the tax incentive certificate/ approval letter issued by the foreign country
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