Taxation of Foreign-Sourced Income in Singapore

In today’s interconnected global economy, businesses often generate income from various sources, including beyond their home country’s borders. Understanding the tax implications of such foreign-sourced income is crucial for companies operating in Singapore, which is renowned for its attractive tax regime and business-friendly environment.

What Is Considered Foreign-Sourced Income?

Singapore’s tax system is designed to be straightforward and business-friendly. Currently, Singapore only taxes foreign-sourced income that is received in Singapore, and this applies solely to income generated from revenue streams like dividends, royalties, and interest. Capital gains earned outside of Singapore are typically not taxed.

However, a recent amendment to the tax code, Section 10L, has introduced a form of capital gains tax for specific entities, which prompts a notable shift in Singapore’s tax policy. Under Section 10L, capital gains derived from the sale of foreign assets will be subject to tax if they are received in Singapore by an entity that lacks “economic substance” within the country. This essentially means that companies must have a genuine operational presence in Singapore to benefit from the exemption on foreign capital gains.

How Is Foreign-Sourced Income Taxed?

Singapore operates a territorial tax system. This means that, in principle, only income sourced within Singapore is subject to taxation. Foreign-sourced income — that is, income derived from activities or investments outside of Singapore — is generally not taxed, even if it is received in Singapore by a Singapore tax resident company.

However, while foreign-sourced income received in Singapore is generally exempt from tax, specific conditions may need to be met to qualify for this exemption.

Scope of Specified Foreign-Sourced Income

The tax exemption for foreign-sourced income applies to specific categories of income, as outlined in Section 13(8) of the Singapore Income Tax Act. The 3 categories of specified foreign-sourced income are:

• Foreign-sourced dividend: Dividends received from a non-resident company.

• Foreign branch profits: Profits earned by a Singapore company’s overseas branch.

• Foreign-sourced service income: Income derived from services performed outside Singapore.

Qualifying Conditions for Tax Exemption in Singapore

To qualify for tax exemption on foreign-sourced income, certain conditions must be met. These conditions, set under Section 13(9) of the Income Tax Act, are:

• Subject to tax condition: This condition requires that the foreign-sourced income has already been subjected to tax in the foreign country where it was generated. This prevents companies from claiming tax exemptions in both the foreign country and Singapore, effectively eliminating double non-taxation. The underlying principle is that income should be taxed at least once, either in the source country or the resident country.

• Headline tax rate condition: To qualify for the exemption, the headline corporate tax rate in the foreign country from which the income is derived must be at least 15% at the time the income is received in Singapore. This condition ensures that the income has been subject to a significant level of taxation in the source country, preventing companies from shifting income to low-tax jurisdictions to avoid Singapore taxes.

• Beneficial exemption condition: The final condition requires that the Comptroller of Income Tax is satisfied that granting the tax exemption would be beneficial to the Singapore tax resident. This condition gives the tax authorities discretion to deny the exemption in cases where it might be used for tax avoidance purposes or where it would not genuinely benefit the Singapore economy.

How to Claim Tax Exemption

To claim the tax exemption on qualifying foreign-sourced income, you must proactively declare it when filing your Corporate Income Tax Return (Form C). Here’s what you need to do:

• Declare the income: Clearly indicate the nature and amount of foreign-sourced income received in Singapore dollars. This includes specifying the type of income, such as dividends, foreign branch profits, or service income.

• Provide source details: Specify the foreign jurisdiction from which the income originates.

• Declare the foreign tax rate: State the headline corporate tax rate applicable in the foreign jurisdiction from which the income is derived.

• Provide evidence of foreign tax paid: Include supporting documentation to confirm that the income has been subjected to tax in the source country. This could include foreign tax assessments, withholding tax certificates, or other relevant documents.

If you’re filing Form C-S/ Form C-S (Lite) instead of Form C, you should include the above information in your company’s tax computation.

Remember to retain all supporting documents and information for at least five years from the relevant Year of Assessment. This will enable you to provide evidence to the Inland Revenue Authority of Singapore (IRAS) if they request it during a tax audit or review.

Double Taxation Relief

When your business operates across borders, you might find yourself facing the burden of double taxation — paying taxes on the same income in both Singapore and the foreign country where it was earned. Fortunately, Singapore has implemented measures to alleviate this issue and reduce corporate tax to promote cross-border business activities.

Singapore has an extensive network of Avoidance of Double Taxation Agreements (DTAs) with various countries. These agreements work by clarifying the taxing rights of each country and providing relief from double taxation through methods such as tax credits, exemptions, or reduced withholding tax rates. This means that if you’ve paid taxes on your income in a foreign country with a DTA with Singapore, you can claim credits through IRAS for those taxes against your Singapore tax liability, reducing your overall tax burden.

But what if your business operates in a country that doesn’t have a DTA with Singapore? In such cases, Singapore offers a Unilateral Tax Credit (UTC). This provision allows Singapore tax residents to claim a credit for the foreign tax paid on their foreign-sourced income, even without a DTA in place. The UTC is capped at the amount of Singapore tax payable on that income, ensuring that you don’t end up paying more tax than you would have if the income had been sourced in Singapore.

Navigating the Complexities of Foreign-Sourced Income

Understanding and navigating the complexities of foreign-sourced income taxation can be challenging. While Singapore offers a favourable tax environment and various tax relief measures, ensuring compliance with all regulations is crucial.

OneStop Professional offers comprehensive corporate tax services in Singapore to help businesses effectively manage their tax obligations, including those related to foreign-sourced income. Our team of experienced professionals can provide guidance on tax optimisation strategies, assist with claiming tax exemptions and double taxation relief, and ensure accurate and timely tax filings. We also offer payroll outsourcing services to streamline your payroll processes and ensure compliance with relevant regulations.

By partnering with OneStop Professional, businesses can confidently navigate the intricacies of Singapore’s tax system, optimise their tax liabilities and focus on their core operations and growth.