Corporate tax exemption in Singapore

The overall corporate tax rate in Singapore is 17%. In order to make Singapore an attractive investment destination, income tax rates in Singapore have been steadily decreasing. In addition, thanks to the tax exemption and incentive programs offered by the Singapore government, the effective tax rate for businesses can be significantly reduced. Indeed, Singapore offers various benefits, tax exemptions and subsidies, especially to ease the burden on companies at the start-up stage of their business and to encourage investors to expand their business in Singapore.

All companies are required to file corporate tax returns on an annual basis. Tax exemption will be applied accordingly when calculating tax and preparing the relevant tax form (Form C-S Lite/C-S/C). All corporate tax documents must be filed annually by November 30 of each year.

First of all, there is the tax exemption regime for start-up companies: Start-Up Tax Exemption – SUTE. Indeed, this regime allows to reduce the amount of corporate tax that new companies must pay on their taxable income, during the first years of their incorporation.  This scheme was introduced in the 2005 assessment year by the Inland Revenue Authority of Singapore (IRAS) to encourage entrepreneurship and support local businesses.

On the one hand, it is necessary to define the scope of the scheme: the SUTE will apply for the first 3 consecutive years of the business. The exemption of taxes starts to run from the first year, even if the company has not yet realized any taxable income. Therefore, if the company does not start earning taxable income until its third year of operation, it will only be able to benefit from one year of tax exemption under this scheme.

Therefore, the corporation’s first fiscal year must be determined. The date of the company’s first financial year depends on the date chosen as the company’s financial year-end when it was incorporated and the date of the closing of its first set of accounts.

On the other hand, this regime applies to the normal taxable income. Normal taxable income is the corporation’s taxable income (e.g. investment income) after deducting allowable business expenses (e.g. employee medical expenses).

New companies benefit from the following taxation (for the first 3 years of operation):

This can amount to up to SGD 200,000 of tax exemption per year for the first 3 years. However, income is not taxable when it is a capital gain (e.g. gains on the sale of fixed assets such as machinery, and gains on the exchange of capital transactions).

The company must be resident for tax purposes in Singapore and not have more than 20 shareholders holding the entire share capital of the company. In addition, there are two possibilities for a company to be eligible:

Similarly, a newly incorporated company cannot be a company whose principal business is investment holdings; or a company that undertakes the development of real estate for sale, for investment, or for both investment and sale. This is because investment holding companies generally receive only passive income (e.g., dividends and investment income), whereas real estate developers generally form a new company for each new real estate project.

Companies that do not qualify for SUTE in the first three years of operation or companies that are in the fourth year of operation or more, will be eligible for the partial tax exemption (“PTE”) scheme. All companies, including private limited companies, are eligible for the partial tax exemption, unless they apply for the tax exemption for start-ups.

A 75% exemption applies on the first $10,000 of normal taxable income, reducing the effective tax rate to 4.25% on the first $10,000 of taxable income. In addition, an additional 50% exemption is applied on the next $190,000, reducing the effective tax rate to 8.5% on the next $290,000 of taxable income.

Some companies may be tempted to abuse tax exemption schemes. The taxpayer may be tempted to abuse the tax exemption regimes because where a taxpayer performs an act that is fictitious or is done solely for the purpose of evading or mitigating tax, the taxpayer is committing an abuse of rights.

In the same way, a taxpayer can divert the spirit of the law, while respecting it, in order to manipulate the legal and fiscal mechanisms put in place for an exclusively fiscal purpose. In this case, the taxpayer reduces his tax liability by interpreting the law in accordance with the letter of the law, but contrary to the objectives of its drafters, i.e. the spirit of the law.

Thus, abuse of the tax exemption regime includes the allocation of income from an existing profitable business to a shell company, so that the taxable income of each shell company falls within the tax exemption threshold.

On the other hand, the charging of fees/expenses to an existing profitable business by shell companies, without any bona fide business reason, is an abuse of law. This is also the case when the shell companies claim a tax exemption on the income they receive from the profitable company, while the latter claims a tax deduction on the fees and expenses paid to the shell companies.

As a result, these shell companies have little or no activity and few or no employees. Their accounts generally show few transactions. These forms of arrangement result in an overall net tax reduction for the profitable company and the shell companies.

IRAS takes very seriously companies that are set up to abuse this regime and that are not set up for entrepreneurial and genuine business reasons. Therefore, such arrangements are subject to sanctions. Indeed, tax evasion/fraud is a criminal offence punishable by law and the court imposes severe penalties for such offences. As of January 31, 2021, more than 300 companies have been audited for possible abuse of the tax exemption scheme for start-ups. This has resulted in a total tax and penalty recovery of over $25 million.