Singapore has recently made changes to its Income Tax Act by adding Section 10L, which pertains to profits from the sale of foreign assets and becomes effective from January 1, 2024. The objective of this new provision is to align Singapore’s tax laws with global standards aimed at preventing tax avoidance and to promote significant economic activities within Singapore.
Indeed, this provision imposes taxes on profits or losses resulting from the sale or disposal of any movable or immovable assets located outside Singapore, referred to as ‘foreign assets,’ within Singapore’s jurisdiction.
Before 2024, profits derived from the sale of foreign assets considered capital gains were exempt from taxation. As a result, only gains stemming from the sale or disposal of assets categorized as revenue-based, regardless of their origin in Singapore or abroad, were subject to taxation upon receipt in Singapore.
An examination was necessary to determine whether the gain was of a capital or revenue nature, which involved assessing the company’s involvement in trade. This evaluation utilized the six badges of trade outlined by the Royal Commission on the Taxation of Profit in 1955.
Starting from January 1, 2024, profits arising from the sale or disposal of foreign assets will be subject to taxation under section 10(1)(g) of the Income Tax Act provided that all the conditions listed below are fulfilled.
First, gains from the sale or disposal of foreign assets will trigger taxation if:
- the gains would not otherwise be chargeable to tax as income under section 10(1); or
- the gains would otherwise be exempt from tax under this Act.
Then, gains from the sale or disposal of foreign assets will be chargeable to tax in Singapore if:
- the gains are received in Singapore from outside Singapore; and
- by an entity of a relevant group and if one of the two below conditions is met:
- the gains are derived by an entity without adequate economic substance in Singapore; or
- the gains are from the disposal of foreign Intellectual Property Rights.
In this article, we will go through key ideas:
- Included revenue: profits from the sale or elimination of overseas assets.
- Received in Singapore
- Acquired by a relevant group entity
- Sufficient economic presence in Singapore
- Foreign Intellectual Property Rights
- Conclusion
1. Included revenue: profits from the sale or elimination of overseas assets.
Gain or loss from the sale or disposal of any movable or immovable property situated outside Singapore, commonly refer to (not limited):
- immovable property is situated outside Singapore;
- equity securities and debt securities are registered in a foreign exchange;
- unlisted shares are issued by a company incorporated outside Singapore;
- loans where the creditor is a resident in a jurisdiction outside Singapore;
- Intellectual Property Rights where the owner is a resident in a jurisdiction outside Singapore.
2. Received in Singapore
Received in Singapore, means that if the foreign sourced disposal gain is:
- remitted to, or transmitted or brought into, Singapore;
- applied in or towards satisfaction of any debt incurred in respect of a trade or business carried on in Singapore;
- applied to the purchase of any movable property which is brought into Singapore.
As a result, if the gains belong to a foreign entity that is neither incorporated nor registered nor established in Singapore and that is not operating in or from Singapore, the gain will not be considered as received in Singapore.
3. Acquired by a relevant group entity
An entity is considered a member of a group of companies if its assets, liabilities, income, expenses and cash flows meet either of the following conditions:
- included in the consolidated financial statements of the parent company of the group; or
- excluded from the consolidated financial statements of the parent company of the group solely on size or materiality grounds or on the grounds that the entity is held for sale.
A group is a relevant group if:
- the entities of the group are not all incorporated, registered or established in Singapore; or
- any entity of the group has a place of business outside Singapore.
4. Sufficient economic presence in Singapore (excluding for foreign Intellectual Property Rights)
The foreign-sourced disposal gains will not be subject to tax in Singapore if the entity receiving the gain has adequate economic substance in Singapore.
a. Pure equity-holding entity
A pure holding company is a company that only owns interest in other companies in order to receive dividends and/or disposal gains in relation to shares and equity interests.
Consequently, to meet the economic substance requirement the pure equity holding entity needs to satisfy the below conditions:
- Submits required returns (i.e tax return)
- Manages and performs its operations in Singapore; and
- Possesses sufficient human resources and premises in Singapore to conduct its operations.
b. Non pure equity holding entity
A non-pure holding company is defined as a company that possesses ownership interests in other companies alongside engaging in additional activities.
Evaluation of the economic substance requirement will focus on the income-generating activities of the non-pure holding entity in Singapore. Thus, to satisfy the economic substance requirement, the pure equity holding entity must meet the following criteria:
- Manages and performs its operations in Singapore; and
- Has adequate economic substance in Singapore, by considering the following:
- the number of its full-time employees in Singapore;
- the qualifications and experience of such employees or other persons;
- the amount of business expenditure incurred in respect of its operations in Singapore;
- whether the key business decisions of the entity are made by persons in Singapore.
5. Foreign Intellectual Property Rights
Qualifying Intellectual Property Rights (“IPRs”) means any patent or application for a patent under the Patents Act 1994 or the equivalent law of any country or territory; or any copyright subsisting in software by virtue of the Copyright Act 2021 or the equivalent law of any country or territory.
The exemption applies to earnings generated from the utilization of qualifying Intellectual Property Rights (IPRs) if the entity has invested in Research and Development (R&D) activities linked to those IPRs. A direct connection between the income benefiting from the IPRs and the expenses incurred (qualifying expenditures) contributing to that income must be established.
Indeed, the portion of gains from the sale or disposal of qualifying foreign IPRs could be exempt from tax in Singapore if the modified nexus approach is applied to calculate this portion.
The modified nexus approached corresponds to the below formula:
1QE: Qualifying expenditure: means the qualifying Research and Development expenditure incurred in respect of the qualifying IPRs to which the qualifying IP income disposal gains relate.
NE: Non-qualifying expenditure: means the nonqualifying expenditure incurred in respect of the qualifying IPR.
Conclusion
The implementation of Singapore’s latest Section 10L represents a notable transformation in the country’s tax framework, bringing it into harmony with the revised guidance on FSIE regimes by the EU Code of Conduct Group. This substantial alteration emphasizes the criticality of prompt response, particularly for investment holding entities with minimal or no substance.
For personalized assistance in understanding and managing the impacts of Section 10L, reach out to us for customized guidance and support.
