The purpose of companies is to generate revenue and profit. Nevertheless, economic crises, unpredictable market conditions, and rapidly evolving technology can adversely affect business operations, resulting in hefty losses. Unexpected situations like the outbreak of the COVID-19 pandemic also significantly impact the business’s finances, making it hard for big and small companies to sustain a healthy flow of profits.
Under these conditions, when companies suffer from losses, business owners need to take measures to mitigate future losses and optimize cash flow. Singapore law provides various guidelines and provisions for managing business losses. This article highlights key concepts or actions that business owners and the Singapore management team can take to handle their company losses.
Business Losses Treatment in Singapore and Its Qualifying Conditions
Corporate taxpayers in Singapore can offset trading losses against all earnings within the same accounting period. The losses can be offset against any earnings types, whether it is interest incomes, rental incomes, or earnings from dividends. They can carry forward any unused tax losses indefinitely and offset them against trading incomes in the future.
However, businesses claiming a loss carry forward need to go through a shareholding test. The shareholders and their shareholdings should not demonstrate any principal changes as at the relevant dates. These dates are the year’s last day wherein the loss was incurred and the tax year of assessment’s first day wherein the losses are to be deducted. The test compares the company’s shareholdings percentage held by the same individuals as at the relevant dates.
Loss Carry-back Relief
This concept was introduced back in 2006 to support sole proprietors and partnership companies and small corporate taxpayers to tide over economic downturns. Under this scheme, businesses can offset their current losses against taxes filed in the previous accounting years, allowing them to claim back tax should they suffer substantial financial losses. Therefore, this concept is highly advantageous for startups and small companies.
A firm can transfer its unutilized trading losses during the present year to another firm within similar groups to which it belongs. These transferred losses will be taken away from the claimant firm’s assessable revenue for the same year of assessment, as long as some conditions are satisfied. A transferor agency may transfer 100% of its loss items to a claimant agency provided that the latter can absorb the losses.
The transferor and claimant company must be registered in the country, belong to a similar group of companies, meet the seventy-five per cent shareholding threshold, and the accounting year of the companies should end at the same date to qualify for group relief.
Disqualified Loss Items
Loss items are not eligible for transfer are as follows:
- Foreign branches’ loss items
- Loss items with regards to income completely exempt from tax
- Loss items concerning specific classes of trade or activities where there are regulations to restrain the unused losses and capital allowances
- Loss items of businesses that have been given any of the Economic Expansion Incentives’ incentives, such as investments in the new technology firm
- Costs of dormant firms which remains unused as of the year-end
- Unused Section 14Q deduction commencing in the YA and before
- Present year unused losses commencing from expenses’ excess over investment earning of investment holding companies
Investment Holding Corporations
Losses of pure investment firms might not be carried forward. Such companies are companies whose operations are restricted to holding investments and deriving earnings from investments in interest, dividend, or rental forms.
Singapore government offers various tax incentives for small companies and startups to help them establish their presence in the industry. These incentives also support the companies if they incur losses during their initial years. These incentives and exceptions enable corporations to build their foundation in the market and recover from losses they might suffer during their initial years of establishment.
For instance, a newly-registered company can apply for complete tax exemption during their first three years as long as it meets the qualifying condition. If a startup firm chooses to carry back its losses, the eligible deductions will be utilized to set off against its accessible earnings for the previous year of assessment. If there is no remaining chargeable income after the deduction, the company cannot enjoy the exemption scheme’s benefit. Simultaneously, the company can also elect to carry forward unabsorbed trade losses and then use the tax exemption scheme to prevent taxation problems.
Getting Help from Professional Accounting Services in Singapore
Business owners can hire a professional accounting services provider in Singapore familiar with the company’s working process and the country’s tax incentives to help them manage their losses more effectively and smoothly.