Singapore has long been recognized as a strategic hub for holdings of both domestic and international investments. From a tax perspective, Singapore offers numerous advantages provided the holding structure is managed properly.
To ensure the holding structure works effectively, one of the key considerations should be the company's tax residency status. Establishing and maintaining tax residency in Singapore is essential, as failure to satisfy the relevant criteria can result in significant tax liabilities. Numerous cases have demonstrated the adverse consequences of investment holding companies failing the tax residency test, thus highlighting the importance of proper tax management.
In a typical investment holding structure, the investment holding company is expected to receive investment income, such as dividends and interest, as well as capital gains from future divestment. Under Singapore’s tax framework, a Singapore investment holding company is entitled to the following benefits:
Under the Singapore Income Tax Act, the tax residency of a company is determined by where the business is controlled and managed. A resident company is one whose control and management of the business is exercised in Singapore. Where control and management is exercised is a question of fact.
As tax residency is a crucial factor in determining eligibility for benefits under bilateral tax treaties, most countries have introduced stringent conditions to ensure tax benefits are available only to real beneficial owners. Singapore has likewise tightened its requirements to align with the evolving global tax landscape.
The Inland Revenue Authority of Singapore (IRAS) has provided guidance for determining the tax residency of a company:
Investment holding companies in Singapore that only hold virtual board meetings to meet regulatory requirements should be familiar with the tax residence requirements and address the issue proactively to avoid significant adverse tax consequences.
Evelyn Lim
BDO in Singapore
To ensure the holding structure works effectively, one of the key considerations should be the company's tax residency status. Establishing and maintaining tax residency in Singapore is essential, as failure to satisfy the relevant criteria can result in significant tax liabilities. Numerous cases have demonstrated the adverse consequences of investment holding companies failing the tax residency test, thus highlighting the importance of proper tax management.
Summary of Tax Residence Rules and Benefits
In a typical investment holding structure, the investment holding company is expected to receive investment income, such as dividends and interest, as well as capital gains from future divestment. Under Singapore’s tax framework, a Singapore investment holding company is entitled to the following benefits:
- Tax exemption on foreign dividend income received in Singapore (subject to conditions);
- Availability of a foreign tax credit for foreign tax paid to reduce the Singapore tax payable on the same foreign income;
- No Singapore capital gains tax on future divestment provided certain conditions are fulfilled;
- Potential exemption or reduction in the withholding tax rate on various types of income derived from applicable tax treaty countries; and
- Potential mitigation of capital gains tax in the foreign jurisdictions.
Establishing Tax Residence
Under the Singapore Income Tax Act, the tax residency of a company is determined by where the business is controlled and managed. A resident company is one whose control and management of the business is exercised in Singapore. Where control and management is exercised is a question of fact.As tax residency is a crucial factor in determining eligibility for benefits under bilateral tax treaties, most countries have introduced stringent conditions to ensure tax benefits are available only to real beneficial owners. Singapore has likewise tightened its requirements to align with the evolving global tax landscape.
The Inland Revenue Authority of Singapore (IRAS) has provided guidance for determining the tax residency of a company:
- Control and management of the business must be exercised in Singapore, which is evidenced by:
- The Board of Directors’ meetings being physically held in Singapore;
- Strategic decisions being made at the board’s meetings held in Singapore;
- Directors being based in Singapore;
- Strategic decisions being made by the local directors in Singapore; and
- Key employees being based in Singapore.
- If the board meetings involve the use of virtual meeting technology, at least 50% of the directors or the chairman of the board of directors must be physically present in Singapore (for prior coverage, see the item in the Bytes column of the February 2024 issue of Corporate Tax News).
- For a foreign-owned investment holding company, in addition to the factors under (1) above, the company must:
- Have valid commercial reasons for setting up office in Singapore;
- Have related companies in Singapore that are tax residents of Singapore or have business activities in Singapore;
- Receive support or administrative services from a related company in Singapore;
- Have at least one director based in Singapore who holds an executive position and who is not a nominee director; or
- Have at least one key employee based in Singapore.
Investment holding companies in Singapore that only hold virtual board meetings to meet regulatory requirements should be familiar with the tax residence requirements and address the issue proactively to avoid significant adverse tax consequences.
Evelyn Lim
BDO in Singapore