Untaxed Foreign Dividends Still Qualify for Tax Break: Singapore

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By Lien Hoang

Singapore will not tax funds that are coming in from foreign countries, in some cases, even if those countries do not first levy a dividend tax on the funds, according to a notice on the city-state’s tax agency.

The Inland Revenue Authority of Singapore also expanded its online guidance Dec. 12 to spell out the documents that companies can submit to apply for this and related benefits on its web page, “Tax Exemption of Foreign-Sourced Income.”

For overseas dividends in particular, the tax office confirmed that the income could be exempt from tax once it reached Singapore. This would be on condition that the income has been subject to “the underlying tax, which is income tax paid or payable by the dividend-paying company on the income out of which the dividend is paid.”

In order for the dividends to qualify, they must come from the foreign company during a positive tax year.

The revenue authority used the examples of nearby Malaysia and Hong Kong, where the governments do not collect a dividend tax.

Wong Hsin Yee, a partner for international tax services at EY’s office in Singapore, said the tax authority was not issuing a new policy but wanted to “clarify this more explicitly in the webpage.”

“We believe that the IRAS may have received queries from multiple taxpayers with respect to whether dividends from countries that do not levy dividend withholding tax will qualify for foreign-source income exemption,” Yee told Bloomberg Tax Dec. 18.

Other earnings that can qualify for the tax exemption include foreign-sourced service income and branch profits.

The income must meet three criteria:

1. The foreign jurisdiction has a corporate tax rate of at least 15 percent.

2. The income has been subject to tax in that jurisdiction.

3. Singapore is “satisfied that the tax exemption would be beneficial to the person resident in Singapore.”

Benefits for Investment, Financial Sectors

The financial and investment sectors are likely to benefit from these tax breaks, said Kim Leng Siaw, managing director in the Singapore office of accounting firm TMF. She views the IRAS update as part of a broader effort to attract investors.

“The trend we’re seeing is that the Singapore government has progressively relaxed the taxation policy on foreign-sourced income in order to enhance the competitiveness of Singapore as an international business hub, and to encourage repatriation of incomes earned abroad,” she told Bloomberg Tax on Dec. 19.

She added that the liberalization of the tax rules “does not only encourage foreign funds to flow into Singapore, but also promotes and boosts the Singapore fund and wealth management industries.”

Document Repatriated Funds

In order to prove the second of the three criteria listed above, companies need to document that their repatriated funds have been subject to corporate taxes. Acceptable documents include the audited accounts of the foreign payer company; a certification from the bank that the Singapore taxpayer used to invest in the foreign company; or a confirmation letter from the foreign company that taxes have been paid.

The tax authority said, “as a concession,” it will now accept consolidated accounts, too, if the foreign company is publicly listed and “carrying out substantive business activities.”

As for dividend taxes, the revenue authority said companies must prove taxes were paid abroad or not applicable, such as through a dividend voucher stating the income was “exempt from tax due to tax incentive granted to the payer company for carrying out substantive business activities in that foreign jurisdiction.”

To contact the reporter on this story: Lien Hoang in Ho Chi Minh City at correspondents@bloomberglaw.com

To contact the editor responsible for this story: Penny Sukhraj in London at psukhraj@bloombergtax.com

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