Tax Exemption Schemes for New Companies

[Rating: 5]

Client Profile

The client is a foreign entity which desired to have a business presence in Singapore. It sought legally compliant means to reduce its tax liabilities for the first few months of operations since during this early phase of setting up, there are losses to be incurred, mostly associated with the opening of bank accounts and financing of operations.

Challenges

The client, being a foreign company, had no in depth knowledge regarding the applicable tax schemes in the City State. The common error among new Singapore entrepreneurs, both local and foreign, is that they choose the year end of the company without taking into account the tax incentives provided by the IRAS. This bad business decision bars them from availing of tax exemptions which are readily available to newly formed companies.

Business Solutions

The objective of Corporate Services was to help the client understand the tax exemption scheme in Singapore in accordance with the IRAS regulations:

Tax Exemption on First $300,000 of Chargeable Income

 Chargeable Income% Exempted from Tax Amount Exempted from Tax 
First $100,000100%$100,000
Next $200,00050%$100,000

The maximum exemption to be enjoyed is $200,000 ($100,000 + $100,000).

In essence, a *qualified start-up company is entitled to full tax exemption for the first 3 years of incorporation up to the first S$100,000 tax free and next S$200,000 at 50% tax free.

After determining the qualifications of our client, we explained in detail the nature of tax incentives and advised them to adopt the changes to better utilise the tax incentives offer by IRAS. We likewise assisted them in changing the financial year end of their company, which rectification only took a week to complete.

The scope of work for the rectification entailed:

  1. The filing of the change of financial year end with ACRA along with the duly approved directors’ resolution signed by Board of Directors
  2. Preparing the form and stating the commercial reasons for implementing the change and filing it with the IRAS.

To illustrate the application of the tax scheme of IRAS for our client, here is a sample computation.

For example:

A new company incorporated on January 12, 2015. The director chose the first financial year end of the company on December 31, 2016.

Date of Incorporation1 December 2015
Financial year end31 December every year
1st set of accounts closed on31 December 2016
YABasis Period
1st YA 20161 Dec 2015 to 31 Dec 2015 ( < 12 months)
2nd YA 20171 Jan 2016 to 31 Dec 2016
3rd YA 20181 Jan 2017 to 31 Dec 2017

To a newly incorporated company, the first few months of a start up company is normally making losses. However, from an income tax point of view, the company has already utilised 1 year of full tax exemption. Our practice is to advise the client to maximise the tax incentives offer by IRAS. This is because the tax savings for the first S$100,000 tax free already equate to S$17,000.

Results

We were able to successfully rectify the year end information of our client within a week. Likewise, by assisting the client to avail of the tax exemption scheme for newly formed companies, our client was able to enjoy tax savings of up to S$17,000.

With our help, the client understood how to maximise tax incentives and how to qualify for the full and partial exemptions under Singapore’s tax regime.