In this article, we will cover:
- Introduction
- Cover income: gains from the sale or disposal of foreign assets
- Received in Singapore
- Received by an entity of a relevant group
- Adequate economic substance in Singapore (excluding for foreign Intellectual Property Rights)
- Foreign Intellectual Property Rights
- Conclusion
Singapore has recently amended its Income Tax act by introducing the new Section 10L on gains from Sale of foreign assets effective from January 1, 2024. The purpose of this new section is to bring Singapore’s tax regime in line with international anti-tax avoidance norms and to encourage substantial economic activities to be anchored in Singapore.
Indeed, this section subjects gains or losses arising from the sale or disposal of any movable or immovable property situated outside Singapore, referred to as a “foreign asset,” to taxation in Singapore.
Prior 2024, gains from the sale of foreign assets that were capital in nature were not subject to tax. Consequently, only gains from the sale or disposal of assets that were revenue in nature, irrespective of whether the income was Singapore or foreign-sourced, where taxed when received in Singapore.
To ascertain if the gain were capital or revenue in nature, an analysis was required to determine if the company was engaged in trade. This assessment involved the use of the six badges of trade as defined by the Royal Commission on the Taxation of Profit in 1955.
Now, as of January 1, 2024, gains from the sale or disposal of foreign assets shall be chargeable to tax under section 10(1)(g) of the Income Tax Act if all the below conditions are met.
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.
1. Covered income: gains from the sale or disposal of foreign 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. Received by an entity of a relevant group
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. Adequate economic substance 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 a company that not only owns interest in other companies.
The economic substance requirement will be assessed based on the non-pure holding income-generating activity in Singapore. Therefore, to meet the economic substance requirement, the pure equity holding entity needs to fulfill the following conditions:
- 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 is available for income derived from the use of a qualifying IPRs if the entity has incurred qualifying expenditure on Research and Development (“R&D”) activities related to the qualifying IPRs. There must be a direct nexus between the income receiving benefits and the expenses (qualifying expenditures) contributing to that income.
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 introduction of Singapore’s new Section 10L marks a significant shift in the Singapore tax landscape, aligning it with the EU Code of Conduct Group’s updated guidance on FSIE regimes. This fundamental change underscores the importance of timely action, especially for low or no substance investment holding entities.
For personalized assistance in understanding and managing the impacts of Section 10L, reach out to us for customized guidance and support.
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