By Ivy Yang

From August 29 to September 12, 2024, the Huangpu District Judicial Bureau and Lawyers’ Working Committee jointly organized the Singapore International Legal Services Practice Workshop. Our firm’s partner, Lawyer Ivy Yang, was honored to represent the firm and participate the workshop in Singapore. Through two weeks of study and on-site visits, she gained a comprehensive understanding of Singapore's legal system, financial regulation, and tax environment. Based on her communication with local tax authorities and intermediary organizations, as well as her experience handling cross-border tax cases between China and Singapore in recent years, the author now offers an initial sharing on Singapore's tax policies and the tax-related issues encountered in cross-border economic activities.

1.Overview of Major Taxes and Relevant Policies in Singapore

According to Section 2(1), Chapter 134 of Singapore's Income Tax Act, a tax resident of Singapore for a given Year of Assessment is defined as:

Individuals: A person who has resided, stayed, or worked (excluding as a company director) in Singapore for a period of 183 days or more in the previous year of assessment, with reasonable temporary absences not counting against the 183 days.

Companies or Entities: Companies or entities whose management and control functions are located within Singapore.

(A) Corporate Income Tax

(1)Taxpayer entities

There are two categories of corporate income taxpayers: resident and non-resident enterprises. In Singapore, the classification of a tax-paying entity is determined by the location where the enterprise's control and management functions are exercised, rather than its place of registration. To be specific, an enterprise registered in Singapore may not necessarily be considered a resident enterprise; only if the control and management functions of the enterprise are performed in Singapore can it be considered a resident enterprise (even if it is not registered in Singapore). If the control and management functions are carried out outside Singapore, such enterprises are regarded as non-resident enterprises in Singapore. This includes foreign-registered enterprises conducting business in Singapore, Singapore offices established in Singapore but with management and/or control located overseas, and Singapore branches of foreign enterprises.

Non-resident enterprises may be subject to withholding tax on certain types of income sourced from Singapore (such as interest, royalties, and rental income). In addition, non-resident companies may not be eligible for certain tax incentives that are specifically tailored for resident companies (such as tax exemptions schemes for newly established enterprises).

(2)Tax Rate

Currently, Singapore applies a unified corporate income tax policy, with a corporate tax rate of 17%. Companies in Singapore, whether resident or non-resident, are taxed at the same uniform rate of 17% on their taxable income. This tax rate is not subject to geographical restrictions and applies to both local and foreign companies.

Singapore adopts a single-tier tax system, where dividends distributed by resident enterprises to their shareholders are not subject to additional taxation. Moreover, Singapore applies an exemption policy on capital gains (no capital gains tax is levied), including profits from the sale of fixed assets, foreign exchange gains from capital transactions, insurance proceeds, etc. For multinational groups, income derived from the disposal of foreign investments and received in Singapore is subject to tax. However, if the entity has economic substance in Singapore, it may be eligible for tax exemption.

(3)Tax Exemption Schemes: To encourage entrepreneurship and support business growth, Singapore has introduced a tax exemption scheme for new start-up companies and a partial tax exception scheme for companies.

a)New Start-up Company Tax Exemption Scheme: This scheme is applicable to newly incorporated companies that are tax residents of Singapore (excluding investment holding companies and companies undertake property development for sale, investment, or both). Under this scheme, for the first three consecutive years of assessment, the company is entitled to a 75% tax exemption on the first S$100,000 of normal chargeable income, and a 50% tax exemption on the next S$100,000 of normal chargeable income. Commencing from the fourth year of assessment, the company will no longer qualify for this scheme; however, it will be eligible for the partial tax exemption scheme.

b)Partial Tax Exemption Scheme: All companies, including companies limited by guarantee, are eligible for this scheme, unless they are claiming the tax exemption for new start-up companies. The relief is as follows: the first S$10,000 of chargeable income is 75% exempt, and the next S$190,000 is 50% exempt.

(B) Individual Income Tax

In Singapore, the individual income tax rates are dependent on an individual's tax residency status. Taxpayers are classified into residents and non-residents.

(1)Resident Individuals: Resident individuals in Singapore are subject to a progressive tax rate system for personal income tax, with the highest rate currently set at 24% on income exceeding SGD 1,000,000..

(2)Non-resident Individuals:

Employment Income: Employment income of non-resident individuals is taxed at a flat rate of 15% or at the applicable progressive tax rates for residents, whichever results in a higher tax liability.

Director’s Fees, Consultancy Fees, and Other Income: Non-resident individuals are taxed at a rate of 24% on these types of income. This tax rate applies to all income, including rental income, pensions, and director’s fees, except for employment income and certain types of income subject to reduced withholding tax rates.

Withholding Tax on Non-resident Individuals’ Income: Specific types of income earned by non-resident individuals are subject to withholding tax at the time they are due and payable. The applicable withholding tax rate depends on the nature of the income and the relevant tax year.

(C) Goods and Services Tax (GST)

The Goods and Services Tax (GST) is a tax imposed on the importation of goods, as well as on the supply of nearly all goods and services within Singapore.

The current GST rate in Singapore is 9%. GST-registered businesses are required to charge GST at the rate of 9% on all taxable supplies of goods and services made in Singapore, unless such supplies are subject to a zero rate or are exempt under the GST legislation.

Exempt supplies include the provision of financial services, the supply of digital payment tokens, the sale and lease of residential properties, the importation and local supply of investment-grade precious metals, and out-of-scope supplies. Out-of-scope supplies include the sale of goods that are not brought into Singapore, sales made within Free Trade Zone (FTZ) and Zero GST Warehouse, and private transactions.

(D) Withholding Tax

Withholding tax is a key feature of Singapore's taxation system. Under the withholding tax regime, a payer is required to withhold tax on certain payments made to non-resident enterprises or non-resident professionals (e.g., royalties, interest, and technical service fees), and remit the withheld tax to the Inland Revenue Authority of Singapore (IRAS).

Non-resident enterprises withholding tax rates:

Non-resident professionals' withholding tax rates:

A non-resident professional is a foreign expert who resides in Singapore for no more than 183 days and is an individual who exercises any professional skill under a service contract. The specific standards for withholding tax payment are as follows:

(E) Avoidance of Double Taxation

Singapore has entered into Double Taxation Agreements (“DTAs”) with multiple countries, designed to prevent both companies and individuals from being subject to double taxation in two different jurisdictions. For enterprises operating in countries with which Singapore has a tax treaty, they can not only eligible for exemptions from double taxation but may also benefit from reduced withholding tax rates. However, the specific application of these benefits depends on the type of services provided by the enterprise and the relevant provisions of the applicable DTA.

The Tax Treaty between Singapore and China, along with its Protocol, was signed on April 18, 1986. On July 11, 2007, both parties signed a revised agreement to avoid double taxation on income and prevent tax evasion, together with an updated protocol. A second protocol to the agreement was signed on August 24, 2009. The treaty and its protocols, including the second protocol, came into effect on January 1, 2008, and December 11, 2009, respectively.

2. Impact of the BEPS Project and OECD Legislation on Singapore's Tax Environment

(A) Focus of BEPS and OECD Legislation on “Minimum Tax Rates” and “Economic Substance”

In September 2013, the leaders of G20, at the St. Petersburg Summit, issued a communiqué announcing the implementation of the Base Erosion and Profit Shifting (BEPS) project, and tasked the Organization for Economic Co-operation and Development (OECD) with leading the initiative. BEPS refers to the strategies used by multinational companies to exploit differences in tax systems and mismatches in tax rules across jurisdictions, in order to make taxable profits "disappear" or be shifted to low-tax jurisdictions, thereby reducing their global tax burden. The BEPS project comprises 15 action plans covering areas such as digital economy, hybrid mismatches, controlled foreign company (CFC) rules, interest deductions, and harmful tax practices. The OECD established a task force to draft the "Multilateral Convention to Implement Tax Treaty Measures to Prevent Base Erosion and Profit Shifting" (the "Convention"). The Convention text was officially adopted on November 24, 2016. China deposited its instrument of ratification for the Convention on May 25, 2022. Under Article 34 of the Convention (on its entry into force), the Convention became effective for China on September 1, 2022, which is the first day of the month following the three-month period from the deposit of the instrument of ratification.

On October 8, 2021, the BEPS Inclusive Framework issued a Statement on the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalization of the Economy, commonly referred to as the "Two-Pillar" solution. This solution is an extension of BEPS 1.0 and aims to further address the tax challenges posed by the digitalization of the economy. Pillar One focuses on resolving the allocation of taxing rights in the context of the digital economy, while Pillar Two seeks to ensure that multinational corporate groups are subject to at least a minimum level of tax in all jurisdictions, often referred to as the Global Minimum Tax Rules.

Economic substance and the Global Minimum Tax Rate are key components of the BEPS project. Under these provisions, companies registered in low-tax jurisdictions must demonstrate sufficient economic substance locally in order to benefit from tax incentives, and they must comply with the global minimum effective tax rate of 15% as set out in Pillar Two.

(B) Changes in Singapore's Economic Substance Legislation: Adequacy of Economic Substance

On October 3, 2023, the Singapore Parliament passed an amendment to the Income Tax Act of 1947, introducing Section 10L. This new section stipulates that, effective from January 1, 2024, gains from the sale or disposal of foreign assets will be subject to tax, if such gains are received in Singapore by enterprises without adequate economic substance locally. The amendment aligns Singapore's tax practices with the OECD's anti-tax avoidance norms, aiming to combat harmful tax practices and ensure that tax obligations are appropriately linked to substantive economic activities.

Under Section 10L, “despite anything in this Act, gains from the sale or disposal by an entity (called in this section the seller entity) of a relevant group of any movable or immovable property situated outside Singapore at the time of such sale or disposal or any rights or interest thereof (called in this section a foreign asset), that are received in Singapore from outside Singapore, are treated as income chargeable to tax under section 10(1)(g) for the year of assessment relating to the basis period in which the gains are received in Singapore”. That is to say, certain gains from the sale or disposal of foreign assets are subject to tax when received in Singapore. However, if the entity has sufficient economic substance in Singapore, the income from the sale or disposal of foreign assets (excluding intellectual property) will not be treated as income chargeable to tax in Singapore.

In this section, an entity refers to: (i) any legal person (including limited liability partnership) but not an individual; (ii) a general partnership or limited partnership; or (iii) a trust.

The determination of economic substance is based on the actual management and effective control of the entity, considering the following factors:

(1)For a pure equity-holding entity:

“The entity submits to a public authority any return, statement or account required under the written law under which it is incorporated or registered, being a return, statement or account which it is required by that law to submit to that authority on a regular basis;”

the operations of the entity must be managed and performed in Singapore (whether by its employees or by such other persons where the activities performed by other persons for the entity are under the direct and effective control of the entity);

the entity must have sufficient human resources and premises in Singapore to conduct its operations.

(2)For non-pure equity-holding entities:

The operations of the entity must be managed and conducted in Singapore (whether by its employees or by other persons where the activities performed by such other persons for the entity are under the direct and effective control of the entity.

The entity must have sufficient economic substance in Singapore, taking into account the following considerations:

the number of full-time employees (or other persons managing or executing the entity's operations) in Singapore;

the qualifications and experience of those employees or other persons;

the business expenses incurred by the entity during its operations in Singapore;

whether the key business decisions of the entity are made by persons in Singapore.

It is important to note that if the proposed sale or disposal of foreign assets is expected to occur within one (1) year from the application date, an application for an advance ruling may be made to confirm whether the economic substance is adequate.

In addition to implementing economic substance measures to meet OECD anti-tax avoidance standards, Singapore will also begin implementing the Global Minimum Tax Rule (15% minimum effective tax rate) in 2025. The implementation of this rule will impact Singapore's current tax policies, so companies with plans to invest in Singapore should monitor these changes closely.

(C) Determination of Economic Substance in China

Chinese enterprises operating in Singapore must not only consider the impact of Singapore's economic substance legislation but also be aware of China's relevant provisions regarding the economic substance of multinational investment enterprises to avoid the risk of double taxation in practice.

(1)Corporate Income Tax: Determination of Controlled Foreign Corporations (CFC) and Effective Management

In 2008, the Corporate Income Tax Law of the People's Republic of China incorporated the fundamental principles of economic substance into the provisions on Controlled Foreign Corporations (CFCs) and Effective Management. According to Article 45 of the Income Tax Law, a Controlled Foreign Corporation (CFC) refers to a foreign corporation established in a jurisdiction where the actual tax burden is less than 50% of the tax rate specified in Article 4, Paragraph 1 of the Income Tax Law, and which is controlled by resident enterprises or by a combination of resident enterprises and resident individuals, and does not distribute or reduces the distribution of profits, except for legitimate business reasons.

The determination of the Effective Management of an enterprise affects its classification as a resident enterprise. According to the Corporate Income Tax Law and its relevant implementation regulations, the residency status of a foreign-registered enterprise in China depends on whether the entity that exercises substantial management over the enterprise’s production, operations, personnel, accounting, assets, and other matters is within the territory of China.

Additionally, Article 2 of the State Administration of Taxation’s Notice on the Determination of Foreign-Registered Chinese-Controlled Enterprises as Resident Enterprises Based on the Effective Management Standard (State Taxation Administration Circular [2009] No. 82) states “a foreign-registered Chinese-controlled enterprise that meets all the following conditions simultaneously shall, in accordance with the provisions of Article 2, Paragraph 2 of the Corporate Income Tax Law and Article 4 of the Implementation Regulations, be determined as a resident enterprise with its Effective Management in China and subject to corporate income tax on income sourced both within and outside China:

the senior management personnel responsible for the daily operations and business management of the enterprise, as well as the location where the senior management functions are carried out, are primarily situated within China;

the enterprise’s financial decisions (such as loans, financing, financial risk management, etc.) and personnel decisions (such as appointments, dismissals, compensation, etc.) are made by entities or individuals within China, or require approval from entities or individuals in China;

the enterprise's principal assets, accounting books, company seals, minutes of board meetings and shareholder meetings, and other related documents are located or stored within China;

more than half (including half) of the directors or senior executives with voting rights are ordinarily resident in China.”

Furthermore, Article 3 of State Taxation Administration Circular [2009] No. 82 stipulates: "In determining the Effective Management, the principle of substance over form must be followed."

(2)Individual Income Tax: General Anti-Tax Avoidance Rules

According to Article 8 of the Individual Income Tax Law, effective from January 1, 2019: “In any of the following circumstances, the tax authorities have the right to make tax adjustments using reasonable methods:

where transactions between an individual and their related parties do not comply with the Arm's Length Principle and reduce the individual's or their related parties' tax liabilities without legitimate reasons; 

where an enterprise controlled by a resident individual, or jointly controlled by a resident individual and a resident enterprise, is established in a country or region with significantly low tax rates, and, without legitimate business reasons, profits attributable to the resident individual are not distributed or are reduced in distribution;

where an individual implements other arrangements without legitimate business purposes to obtain improper tax benefits. 

If tax adjustments are made in accordance with the preceding paragraph and additional taxes are owed, the tax authorities shall collect the overdue tax, along with any interest required by law.”

Article 8 of the Individual Income Tax Law introduces key anti-tax avoidance principles, including the Arm's Length Principle (ALP), Controlled Foreign Corporation (CFC) rules, and General Anti-Tax Avoidance Rules (GAAR). These are systematic anti-tax avoidance provisions and their inclusion in the Individual Income Tax Law marks a significant step in Chinese tax administration’s oversight of residents' involvement in offshore investments. In particular, the CFC rules are undoubtedly a sword hanging over domestic investors who use offshore Special Purpose Vehicles (SPVs) to invest in foreign assets.

In July 2014, the OECD published the Standard for Automatic Exchange of Financial Account Information in Tax Matters (hereinafter referred to as the Standard), which provides a strong legal basis for enhancing international tax cooperation and combating cross-border tax evasion. The Standard consists of two parts: the Model Competent Authority Agreement (MCAA) and the Common Reporting Standard (CRS). The CRS sets out the requirements and procedures for financial institutions to identify, collect, and report the financial account information of non-resident individuals and entities to tax authorities. Under the CRS, financial institutions in participating jurisdictions are required to report account information to the tax authorities, which will then facilitate the exchange of information between the jurisdictions.

Both China and Singapore are signatories committed to participating in the CRS information exchange mechanism. Therefore, when Chinese enterprises engage in cross-border investments in Singapore, they should carefully consider the differences in tax policies between the two countries, as well as their respective determinations of “economic substance”, and pay close attention to the relevant OECD regulations to ensure the proper structuring of transactions.