BDO Corporate Tax News

Starting on 1 January 2024, gains derived from the sale or disposal of foreign assets by certain entities and that are received—or deemed to be received—in Singapore will be treated as income chargeable to tax if the entity lacks adequate economic substance in Singapore or the gains arise from the disposal of foreign intellectual property rights (IPRs).

New Section 10L of the Singapore Income Tax Act imposes tax on such foreign-source disposal gains received in Singapore and is in line with Singapore’s commitment to fostering domestic economic substantive activities while mitigating the risk of international tax avoidance. The Inland Revenue Authority of Singapore (IRAS) released clarifying guidance on the rules on 8 December 2023.

Overview of the requirements

The following aspects of the rules should be understood in determining the tax treatment of gains or losses from the sale/disposal of foreign assets:

• Covered entities;
• Covered income;
• Specific exclusions;
• Economic substance requirements (ESRs);
• Gains on the disposal of foreign IPRs; and
• Ascertainment of gains chargeable to tax, the open market price and the foreign tax credit.

Covered entities

Section 10L only applies to entities of “relevant” groups. A group is considered relevant if it has entities that are not incorporated, registered or established in Singapore, or if any entity of the group has a place of business outside Singapore. 

Covered income

Covered income generally refers to gains from the sale/disposal of movable or immovable property situated outside Singapore. Examples of such assets include:

• Immovable property situated outside Singapore;
• Equity/debt securities registered on a foreign exchange;
• Unlisted shares issued by a foreign-incorporated entity;
• Loans where the creditor is a resident in a foreign jurisdiction; and
• IPRs where the owner is a resident in a foreign jurisdiction.

Specific exclusions

Section 10L will not apply to the following entities where the gains are derived as part of, or incidental to, the business activities of:

• Financial institutions;
• Entities benefiting from certain tax incentive schemes (e.g., aircraft leasing scheme, development and expansion incentive; finance and treasury centre incentive, etc.), provided the sale/disposal occurs during the incentivised period. Note that entities availing themselves of Singapore fund tax incentive schemes are not specifically excluded from the scope of Section 10L; and
• Entities that meet the ESRs in Singapore in the basis period in which the sale/disposal takes place.

Economic substance requirenents

Foreign-sourced gains arising on the sale/disposal of a foreign asset (other than an IPR) will not be brought to tax in Singapore if the entity has adequate economic substance in the basis period in which the sale or disposal takes place. According to the IRAS guidance, the ESR generally will be applied at the entity level rather than at a jurisdictional level for a group. The guidance addresses the criteria for determining economic substance in areas such as holding companies, outsourcing, special purpose vehicles (SPVs) and real estate investment trusts (REITS).

The guidance distinguishes between a pure equity-holding entity (PEHE) and a non-pure equity-holding entity (non-PEHE):  
 

	PEHE	Non-PEHE
Definition	An entity whose primary function is to hold shares or equity interests in other entities; and that has no income other than — dividends or similar payments from the shares or equity interests; gains on the sale/disposal of the shares or equity interests; or income incidental to its activities of holding shares or equity interests in other entities	An entity that is not a PEHE
ESR	The entity is required to: comply with all obligations to submit a regular return, statement or account under the law under which it is incorporated or registered; have its operations managed and performed in Singapore (whether by its employees or other persons); and Have adequate human resources and premises in Singapore	The entity is required to carry on a trade, business or profession in Singapore; have its operations managed and performed in Singapore (whether by its employees or other persons); and have reasonable economic substance in Singapore. Factors considered in determining economic substance include: the number of full-time employees of the entity (or other person managing or carrying out the entity’s operations) in Singapore; the qualifications and experience of such employees; the amount of business expenditure incurred in and outside Singapore relative to the amount of the entity’s income; and whether the key business decisions of the entity are made by persons in Singapore

The above specific exclusions do not apply to the sale/disposal of foreign IPRs, which are subject to different rules (see below). 

As a general rule, outsourcing some of all of an entity’s economic activities to a third party or other group entity may be taken into account in determining whether the ESRs are met if the following conditions are fulfilled:

• The economic activities are carried out by the outsourced entity in Singapore;
• The outsourced entity has direct and indirect control over the outsourced activities; and
• The outsourced entities sets aside dedicated resources to provide the services.

Examples of ESRs for different sectors are summarised as follows:
 

Entity/Sector	ESRs
PEHE	Meet an “adequate premises” criterion, i.e.: Have an office in Singapore for the use of its employees Share premises with an associated entity The outsourced service provider performing core income-generating activities of a PEHE has an office in Singapore
SPV	Assess the ESRs on the immediate holding company (IHC) to ensure that the IHC has effective control over the SPV, derives economic benefits from the activities carried out by the SPV and defines the core investment strategies of the SPV
Trust /S-REIT/Registered Business Trust (RBT)	Core income-generating activities are carried out by its trustee/REIT manager/trustee-manager in Singapore The trust deed outlines functions and responsibilities of the trustee/REIT manager/trustee-manager; and the ability of beneficiaries/unitholders to terminate the trustee/REIT manager/trustee-manager The trustee/REIT manager/trustee-manager allocates dedicated resources The trustee/REIT manager/trustee-manager charges an arm’s length fee for its services

Gains on the disposal of foreign IPRs

Gains on the sale/disposal of foreign IPRs are subject to different rules and conditions and a distinction is made between qualifying and non-qualifying IPRs:

• The source of gains from the sale/disposal of IPRs depends on the tax residence of the owner of the IPRs, license(s) or rights in respect of the IPRs.
• Gains from the disposal of qualifying IPRs is determined based on the OECD’s “modified nexus approach” that links tax benefits to the existence of a nexus between income from the IPRs and the expenditure contributing to that income. The modified nexus ratio determines the gains from the sale of IPRs not subject to tax when received in Singapore. Qualifying IPRs include patents, patent applications and copyrights in software as recognised under specific laws.

The full amount of gains derived from the sale/disposal of non-qualifying IPRs will be subject to tax when received or deemed received in Singapore.

Ascertainment of gains chargeable to tax, open market price and foreign tax credit

Gains chargeable to tax

The guidance sets out the deductions that may be allowed to determine the amount of gains from the sale/disposal of foreign assets chargeable to tax in Singapore.
 

Allowable expenditure	Non-allowable expenditure
Expenditure incurred to: Acquire, create or improve foreign assets; Protect or preserve the value of foreign assets; or Sell or dispose of foreign assets (including expenses incurred to finance the acquisition, creation and improvement of foreign assets)	Any expenditure that has been allowed as a deduction against any other income, whether or not such income is chargeable to income tax
Losses incurred on the sale or disposal of any other foreign asset	Capital expenditure (capex) computed as follows           D - E Where: D = amount of capex of the foreign asset for which a capital allowance has been claimed against any other income E = amount of any balancing charge made on the sale/disposal of the foreign asset

 

Net gains chargeable to tax  =

Total gains – Allowable expenditures + clawback of previously claimed capital allowance

Open market price

Gains are calculated based on the open market price, which is either:

1. The price the foreign asset could have been sold for in the open market on the date of its sale/disposal; or
2. The price the Comptroller deems to be reasonable in the circumstances where the Comptroller is satisfied by reason of the special nature of the foreign asset that it is not practicable to determine the price in (1).

When the disposal price is less than the open market price, an adjustment will be made to bring the difference to tax when there is an amount of gain received in Singapore. If no gain is received in Singapore, the difference will not be subject to tax.

Foreign tax credit

If the foreign gains are subject to foreign tax, a Singapore tax resident entity may claim double taxation relief, a unilateral tax credit or elect for the foreign tax credit pooling system to alleviate the foreign tax suffered on the foreign-sourced disposal gains.

Key takeaways

In light of the changes to the tax treatment of gains on the sale/disposal of foreign assets, affected companies should evaluate and review their investment structure, operation, and divestment plans to mitigate any adverse tax consequences under Section 10L. Notably, the nontaxation of capital gains under the statutory safe harbour made available under Section 13W cannot be relied on for the sale or disposal of foreign assets when the gains are received in Singapore.

Businesses with established economic substance in Singapore should not be impacted by the new rules. Nonetheless, it is advisable to assess the adequacy of economic substance, implement procedures to maintain economic substance, and ascertain the potential tax implications of any future disposal of foreign assets. When necessary, seeking an advance ruling from the IRAS may be considered.

With proper planning and proactive steps, Section 10L may not be as daunting as it seems. 

Evelyn Lim