Tax on Foreign-Sourced Income
In most cases, Singapore does not impose a tax on income that is received by a Singapore resident company from outside Singapore. This is a significant feature of Singapore’s tax laws and it can be particularly useful in reducing the tax burden of resident companies who are engaged in international trade or commerce. This article provides an overview of Singapore’s tax treatment for income that is received by a Singapore company from outside the country (Foreign Sourced Income).
In Singapore, if the foreign income is not “received” in Singapore i.e. it is left in the foreign country, then it is not subject to tax by Singapore anyway. Thus, the analysis described in this article has to be performed only if the foreign income is deemed “received in Singapore”.
Furthermore if you are doing international business and have paid taxes in a foreign country, Singapore will not double tax your income. Singapore’s tax framework is built on the premise that double taxation hinders international business by unfairly penalizing companies engaged in cross-border trade. To prevent such double taxation, Singapore has entered into Avoidance of Double Tax Agreements (or DTAs) with an extensive network of such countries.
Exemption for Foreign Sourced Income
Foreign sourced income is exempted from taxation in Singapore
IRAS rules state that a Singapore company will enjoy tax exemption on the following types of foreign income remitted to Singapore on or after June 1, 2003:
- Foreign-sourced dividend
- Foreign branch profits
- Foreign sourced service income
The tax exemption is available as long as the following conditions are satisfied:
- The highest corporate tax rate (“headline tax rate”) of the foreign country from which the income is received must be at least 15% at the time the foreign income is received in Singapore;
- The foreign income so received should have been subjected to tax in the foreign country from which it was received (known as the “subject to tax” condition). The rate at which the foreign income was actually taxed can be different from the headline tax rate; and
- The Singapore Comptroller is satisfied that the tax exemption would be beneficial to the resident in Singapore.
Note that Singapore will consider the “subject to tax” condition as having been met even if the income is exempt from tax in the foreign country e.g. due to tax incentive granted for substantive business activities carried out in that country. Thus, the actual tax paid in the foreign company may be zero (or even negative) yet the “subject to tax” condition is considered satisfied as far as Singapore is concerned. This is a subtle but powerful feature and must be well understood to fully appreciate its beneficial effects. To avail the “subject to tax” concession in such a scenario, you do not have to submit any supporting documents with your Income Tax Return (Form C or Form C-S) but the documents should be retained in records.
Now that we know the basic rules for tax treatment of foreign sourced income, let us analyze their implications and practical applications.
What Qualifies as “Foreign Sourced” Income?
In order for the income to be considered “foreign sourced”, the income must originate outside Singapore. Singapore uses very rational tests for determining the locality test for various types of income, as follows:
- Dividends are considered foreign sourced as long as they are paid by a non-Singapore tax resident company.
- A foreign branch of a Singapore company must be located outside of Singapore for income from it to be considered “foreign sourced”.
- Service income is considered foreign sourced if the services are provided through a “fixed place of operation” in a foreign country.
The “fixed place of operation” test is an important one. If the income fails this test, it will be considered Singapore sourced. To meet this test, the place of operation in the foreign country must have the following attributes:
- It should have features of permanence.
- It should be at the disposal of the taxpayer on an on-going basis. If the taxpayer is merely visiting a place (such as a client’s factory), it does not mean that the place is at the taxpayer’s disposal.
- The taxpayer should use it on a regular basis to carry its business.
- The taxpayer should not use it only to perform auxiliary or preparatory activities rather the activities should be substantive to the business.
As illustrations, consider the following examples that have been provided by IRAS to clarify the “fixed place of operation” test:
- A Singapore engineering firm rents an office in a foreign country for the purpose of supplying information about its expertise but does not provide any engineering services in that office. The place is not considered a fixed place of operation because the services are auxiliary in nature.
- A Singapore law firm rents a temporary office in a foreign country to handle a single case there. Since the place is not permanent, it is not considered a fixed place of operation.
- A Singapore architect firm rents an office in a country. The office is used by its employees to provide architectural services for one project after the other in that country. It is considered a fixed place of operation.
When is Income “Received” in Singapore?
According to IRAS section 10(25), foreign-sourced income is considered to be received in Singapore when that income meets one of the following conditions:
- The income is “remitted to, transmitted to or brought into Singapore”. If the relevant funds are transferred to a Singapore bank account, or brought into Singapore in the form of a check, money order or cash, they will satisfy this criterion.
- The income is “applied in or towards satisfaction of any debt incurred in respect of a trade or business carried on in Singapore”. If the foreign income is used to pay a debt of the Singapore-based business then this condition will be met.
- The income is “applied to purchase any movable property, which is brought into Singapore”. Note that purchase of real estate will not qualify under this condition but purchase of raw materials, equipment or other types of movable property by the Singapore company will qualify. If the overseas funds are used to purchase the movable property abroad but then the property is shipped to Singapore under the control of the Singapore company, then the funds will meet the “received in Singapore” criterion.
Fall Back to DTA or UTA
In the unlikely situation that your foreign-sourced income does not meet the various conditions for tax exemption, Singapore’s Double Tax Treaties (DTA) or its Unilateral Tax Credits can come to the rescue. Using these, your company can receive a tax credit on the taxes that you paid to the foreign country so that you will not face double taxation in Singapore. Thus, one way or the other, your foreign sourced income is likely to escape additional taxation in Singapore.
For further details on DTAs, see our article Guide to Singapore DTAs.