The Inland Revenue Authority of Singapore (“IRAS”) in conjunction with other statutory bodies such as the Economic Development Board and Maritime and Port Authority of Singapore provide several industry specific concessions and grants to business in Singapore.
A common requirement of these concessions and grants is the requirement for the company to be a tax resident of Singapore. Whilst we shall explore some of these programs in the coming months, it is important to consider the issue of tax residency and how it applies companies in Singapore.
In addition to access to these programs, it is important to remember that only a company who is a tax resident of Singapore can:
- Access income tax rebates;
- Have a tax exemption on foreign-sourced dividends, foreign branch profits, and foreign-sourced service income; and
- Apply the provisions of double tax agreements or limited treaties between Singapore and a foreign jurisdiction.
Residency and place of incorporation
It is important to note that the jurisdiction in which the company is incorporated does not play a role in determining whether a company is a tax resident of Singapore. This approach is very different to jurisdictions like Australia, the USA and Hong Kong, where the legislation specifically states that a company incorporated in those countries are considered as tax resident.
In Singapore, the determination of tax residency is focused upon where the company is controlled and managed during the year of assessment. This determination of corporate residency is required to be made annually, based on the facts associated with the company.
For example, a company incorporated in Hong Kong may be regarded as a tax resident of Singapore because the directors of the company have relocated to Singapore. In this therefore means that the company is a in fact a dual resident for tax purposes – Hong Kong based on incorporation and in Singapore based on control and management.
What does “control and management mean”
The concept of control and management is not defined in legislation but is rather terminology established through the common law court system over time. With a common law judicial system, Singapore relies heavily on precedents establish by other common law jurisdictions such as the UK and Australia.
The concept of control and management for a company does not mean where the day-to-day operations of the company are carried on – thus the location of trading activities and physical operations is not considered. Rather the concept of control and management is considered from a corporate governance perspective.
Generally, if the board of directors hold their meetings in Singapore, then it is considered that the control and management of a company is located and exercised in Singapore.
Examples of the types of decisions which are taken under corporate governance are:
- Where the company’s business shall be;
- Whether a company is to commence or cease operations;
- Whether an investment / acquisition is to proceed; and
- Whether a dividend is to be paid to shareholders.
What about a permanent establishment
The concept of a Permanent Establishment (“PE”) arises to determine the taxing rights of two jurisdictions. In the case of a PE, there is no question as to where control and management is located. In these situations, it is always located outside of Singapore.
A PE generally arises where a foreign corporation has some form of physical presence in a jurisdiction (e.g. construction sight, agent or employees with authority to conclude contracts).
Where a PE exists in Singapore, the profits earned by PE shall be taxed by IRAS (subject to the provisions of a Double Tax Agreement if one exists between Singapore and the home jurisdiction).
Boon Tan – CST Tax Singapore