This is Why Singapore’s Tax Regime Stands Out for Entrepreneurs Setting up New Companies
Attractive Singapore tax system continues to attract many foreign entrepreneurs and investors for business incorporation. Its progressive tax regime is one of the best known in the world. This tax regime is based on territorial policy. What this means is that companies and individuals are taxed on income earned in the city, and on foreign income remitted into the country.
The Singapore government has committed itself significantly to encourage business and trading across borders. It has signed more than 20 Free Trade Agreements (FTAs) and more than 70 Double Tax Agreements (DTAs). The sole aim has been to facilitate trade, investment, and technical expertise through minimizing tax barriers.
Taxes being a key consideration for setting up an offshore company, entrepreneurs have a preference for Singapore. Their primary drive is the simple and low tax system. There are different tax benefits you will enjoy as a Singapore, company owner. Here are benefits that make this country more appealing to business people internationally.
Single-tier Corporate Income Tax System
Singapore government charges tax on only that portion of profits earned or received in Singapore. There is no double taxation. The tax a company pays on its chargeable income is the final tax. Therefore all other profits or benefits like capital gains and dividends received by shareholders are tax-free.
Capital gains include money realized after a sale of fixed assets and receipts from foreign exchange capital transactions. Neither are there any withholding tax on distributed dividends.
Tax Incentive for Newly-formed Companies
Newly formed businesses are exempt from tax for the first S$100,000 in each of the first three years. Also for the next S$200,000 a new company is 50% exempt from tax. The newly incorporated company must fulfil the following requirements:
- Must be incorporated in Singapore
- Must be a tax resident in Singapore
- Have no more than 20 shareholders and one individual shareholder with at least 10% of shares.
There is also a new development in this new startups arena. There will be a revision of this scheme, and the changes will take effect from the year 2020. The first S$100,000 will be 75% exempt from tax. And the next S$100,000 will be 50% exempt from tax. Check out here for a detailed illustration.
Headline Tax Rate
Companies incorporated in Singapore enjoy a progressive tax rate. If your company has been there for more than three years, it is charged a progressive tax as follows:
- The first income of S$300,000 is charged at 8.5%
- Income over S$300,000 is charged a flat rate of 17%
This is the only tax a company will submit to the tax authorities. All other gains are tax free.
Companies also enjoy Goods and Services Tax (GST) of 7%. This is equivalent to VAT as in other countries of an average of 16.4%. Companies and individuals enjoy a very convenient and favorable GST here in Singapore.
In the case whereby a Singapore company makes losses, it is allowed to carry forward its losses and capital allowances. They are offset against subsequent years income until they are fully absorbed.
Avoidance of Double Taxation Treaties
As earlier mentioned, the Singapore government signed a double taxation treaty (DTA) with numerous countries. This offers an added advantage to Singapore global entrepreneurs in avoiding dual taxation on their income. The DTA eliminates taxes like the withholding tax that is otherwise applicable.
This incentive is a great attraction to foreign investors and entrepreneurs. Business owners thus consider Singapore as the jurisdiction favorable for locating their holding companies. The treaty allows your Singapore company that earns foreign income from a treaty partner to claim the benefits DTA entitles it. You only present a certificate of residence (COR) to the foreign jurisdiction.
This certificate serves as proof that your company is a Singapore tax residence. Usually, when you receive foreign income in Singapore, the income may have been taxed. It is subjected to taxation again in Singapore. The DTA will allow the Singapore company to claim a relief from foreign tax suffered. This claim will be against the tax payable in Singapore on the same income.
Similarly, tax residents of treaty partners who derive income from Singapore also enjoy the benefits of DTA. They follow the same approach of submitting the certificate of residence to IRAS.
Regional Headquarters (RHQ) and International Headquarters (IHQ) Incentive
Companies that qualify to set up RHQ or IHQ in Singapore enjoy a concessionary tax rate of 15%. This rate is as opposed to the usual 17%. They enjoy this rebate for 3+2 years on incremental qualifying income from abroad. The qualifying income is income from approved activities abroad. The initiative aims to support the companies’ international growth.
A company may delay in fulfilling the minimum requirements. If this happens by the end the third year of the incentive period, no need to worry. This concessionary tax rate benefit could be extended for two more years. These minimum requirements include:
- A paid-up capital of S$200,000 at the end of the first year. And S$500,000 at the end of the third year of incentive period.
- By the end of year 3, the company should have set entities in three countries outside Singapore. These entities should be receiving at least three types of services from the headquarter.
- During the incentive period, 75% of staff should be skilled and thus received National Trade Certificate 2(NTC2).
- By the end of year 3, the company growth capacity should have allowed the employment of ten additional professionals in Singapore.
- Also, five of the top executives should be receiving remuneration of at least S$100,000.
Moreover, there are additional industry-specific tax incentives.
Progressive Individual income tax
A Singapore resident enjoy an appealing progressive tax rate. You are a resident if you are a citizen or a foreigner with a stay of 183 days or more. This rate starts at 0 and ends at 20% for income above S$320,000. For an ordinary non-resident, the tax rate is either 15% or resident rate whichever is higher. But directors and consultant are charged a rate of 20%. Ordinary workers who work for 60 days or less are exempt from tax.
It’s clear that the tax regime is a significant source of the attractiveness of Singapore as a business hub. It is the key motivator of foreign company owners to open companies in Singapore. Therefore, consider Singapore for moving or expanding your business.