There are two types of statuses in corporate tax terms for businesses in Singapore. One is Resident and another is Non-Resident. We discuss this topic in greater detail.
What is tax residence?
It is a status for a company which exercises control and management in Singapore. For instance, Firm A controlled and managed its business activities in Singapore throughout 2019. This qualifies Firm A for tax residency status in YA2020.
Having this status allows the company to enjoy certain tax exemptions offered by the Singapore government. This status is not permanent once granted. It may change from year to year depending on the location of its operations.
Note that the definition of ‘company’ according to the Inland Revenue Authority of Singapore (IRAS) does not include sole-proprietorship and partnership businesses registered in or outside Singapore.
What companies can qualify for tax residence status?
Where the company is incorporated has no bearing on its tax residence status. Any business entity which fulfils the following criteria can qualify:
Controlled and managed business activities in Singapore, i.e. made decisions on strategic matters such as company policy and strategy (meetings on these matters are held in Singapore)
This means that, even if the physical office of the company is located in Singapore and its daily operations are run here, it will not qualify for tax residence status as long as the board meetings that set the company policy, strategy or direction are exercised abroad.
Similarly, if a company is incorporated by local shareholders and its operations are based in Singapore, but the control and management is exercised abroad, it will not qualify for tax residence as well.
What types of companies are considered non-resident?
The following are automatically considered non-resident unless certain conditions are met according to IRAS:
- Foreign-owned investment holding companies
- Non-Singapore incorporated companies
- Singapore branches of foreign companies
Foreign-owned investment holding companies
A company is considered ‘foreign-owned’ if 50% or more of its shares are held by foreign companies incorporated outside of Singapore or shareholders who are non-Singaporean citizens. This type of company usually operates based on the direction of its foreign owners.
If it fulfills both criteria as mentioned above, and its income is of a purely passive source or it receives only foreign-sourced income, it will be considered a non-resident by default.
Conditions to be met for IRAS to grant tax resident status:
- The company can prove that its control and management of business is exercised in Singapore; and
- It has valid reasons for setting up an office in Singapore; and
- One of the following criteria:
- It has related companies in Singapore which are tax residents or they have business activities in Singapore; or
- It receives support or administrative services from a related company in Singapore; or
- It has at least 1 director based in Singapore who holds an executive position and is not a nominee director; or
- It has at least one key employee (e.g. CEO, CFO, COO) based in Singapore.
Non-Singapore incorporated companies and Singapore branches of foreign companies
These types of companies are controlled and managed by their foreign parent and are, therefore, regarded as non-residents. However, they may apply for tax residence status if they can satisfy these conditions:
- The control and management of the company’s business is exercised in Singapore (i.e. the Singapore branch is exercising the full control and management of the company); and
- The company has valid reasons for not incorporating in Singapore.
Applications to IRAS must be done in writing, and IRAS has the right to request for additional information on the company.
How tax residency status affects foreign income
Both resident and non-resident companies are generally taxed in the same manner. However, resident companies enjoy certain benefits related to foreign income. They include:
- tax benefits provided under Avoidance of Double Taxation Agreements (DTAs) which Singapore concluded with other jurisdictions;
- tax exemption on foreign-sourced dividends, foreign branch profits, and foreign-sourced service income under section 13(8) of the Income Tax Act; and
- tax exemption for new start-up companies.
The tax residency certificate in Singapore
Companies which are Singapore tax residents with income from other countries may apply to IRAS for a Certificate of Residence (COR) to certify that it is a tax resident. This letter is required for claiming tax benefits under the DTA.
For more information on the application process, read Tax Residency Certificate in Singapore – Why Apply and How.
Singapore has become one of the main hubs for finance and business in Asia due to its flexible tax infrastructure; in particular, the tax exemptions to be gained from being a tax resident of Singapore. Aside from that, companies operating in Singapore enjoy low tax on corporate income at a flat rate of only 17%.
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