Foreign-Sourced Income Tax Exemption in Singapore

Tax Exemption

Singapore’s attractiveness as a dynamic business hub at the heart of the world’s most robust economic region is an amalgamation of compelling components, namely: consistent top ranking in Ease of Doing Business, excellent infrastructure, stable political structure, as well as a highly skilled and readily available workforce, among many others.

One particular component that has put the city-state at the forefront of financial and wealth management industry is its progressive tax framework. The foreign-sourced income exemption (FSIE) scheme under the Income Tax Act (ITA) of Singapore is a distinct proof of this – allowing cash flows and income remittances from other countries to be eligible for tax exemptions.

What is Foreign-Sourced Income Exemption (FSIE) Scheme

As global markets borders continue to diminish, it makes it easier for businesses to set up branch companies and own subsidiaries around the world. The introduction of the Foreign-Sourced Income Exemption (FSIE) Scheme by the Singaporean government, which took effect since June 2003, is a proactive response to this ongoing phenomenon.

Under the FSIE scheme, company dividends, profits, and service income accrued in or derived from abroad operations can be eligible for tax exemptions, provided it satisfies particular conditions. This enables companies to avoid double taxation and enjoy a simpler tax treatment on their foreign-sourced company income.

What Qualifies as Foreign-Sourced Income

The income that qualifies as foreign sourced is one that is not a direct result of doing business or trade within the jurisdiction of Singapore. The FSIE scheme provides specific clarifications:

  • Foreign-sourced dividends – derived from a non-Singaporean tax resident company
  • Foreign branch profits – derived from business operations of a Singaporean company that is registered as a branch in another country
  • Foreign-sourced service income – derived from rendered services of a resident taxpayer’s profession, business, or trade through a fixed place of operation in a non-Singaporean jurisdiction

Note: The term ‘fixed place of operation’ specifically refers to the resident taxpayer’s main office, permanent place of management, or registered business location. Failure to provide sufficient proof will constitute the income as locally-sourced and one that is not exempt from taxes.

Clarifications about Foreign Sourced Income ‘Received’ Into Singapore

Establishing the nature of income as foreign-sourced income is one thing but proving that it is tax exempt in Singapore is another.

To help avoid confusion, the IRAS (Inland Revenue Authority of Singapore) made clarifying provisions regarding foreign-sourced income ‘received’ in Singapore. They are deemed as such if:

  • The foreign-sourced income from an overseas jurisdiction is transmitted, remitted, or brought to Singapore
  • The foreign-sourced income from an overseas jurisdiction is utilised as debt payment for any business or trade within Singapore
  • The foreign-sourced income from an overseas jurisdiction is utilised as purchase payment for movable property to be brought, conveyed, or transported to Singapore
    How to Qualify for Tax Exemption

Under Section 13(9) of the Income Tax Act, there are three main stipulations that will allow foreign-sourced income to qualify for tax exemption:

  • The foreign-sourced income has been taxed by the non-Singaporean country (known as the “subject to tax” condition)
  • The foreign-sourced income has been subjected to a minimum of 15% corporate tax rate or headline tax rate of the overseas jurisdiction before transferred to a Singaporean account
  • The Comptroller of the Income Tax finds the tax exemption satisfactory and beneficial for the resident taxpayer

What “Subject to Tax” Condition Means

According to the IRAS (Inland Revenue Authority of Singapore), the specified foreign income received in Singapore can only be classified to have undergone the “subject to tax” condition if has been charged with either the dividend tax or the underlying tax by the foreign country where it originated.

  • The dividend tax is the income tax that is imposed on the dividend by the foreign country where it originated
  • The underlying tax is the income tax that is incurred by the income that came from the dividends

Special Concessions under the “Subject to Tax” Condition

Some overseas jurisdictions provide special concessions to foreign-sourced income generated in their own country.

In other words, the Comptroller of the Income Tax will declare the foreign-sourced income as having met the “subject to tax” condition if those are revenues from substantive business activities by the company or investor.

To be eligible for the special concessions, the company must prepare, submit, and maintain the following documents:

  • A declaration by the company or investor indicating that the non-Singaporean jurisdiction has waived the tax on the chargeable foreign income due to significant business activities
  • A tax incentive certificate, approval letter, or dividend voucher (whichever is applicable) issued the foreign country to the company or investor

Key Aspects of the Double Taxation Agreement (DTA)

The main purpose of the Double Taxation Agreement (DTA) is to ensure that any income generated in a non-Singaporean country by a resident taxpayer will not be charged twice. It also allows for reduced levies or tax exemptions on certain types of foreign-sourced income.

Should the Comptroller of Income Tax deem the tax exemption as non-beneficial for the investor and the host country, the resident taxpayer can still benefit from the DTA under the following provisions:

  • The ITA’s Double Taxation Relief (Section 50) for foreign-sourced income remittances from overseas jurisdictions with which Singapore has a DTA
  • The ITA’s Unilateral Tax Credit (Section 50A) for foreign-sourced income remittances from overseas jurisdictions with which Singapore does not have a DTA
    Administrative Requirements for Tax Exemption

Resident taxpayers seeking to benefit from the FSIE scheme must include within their Income Tax Return file the following details:

  • Nature and amount of the specified foreign-sourced dividends, profits, and service income
  • Overseas jurisdiction where the income is generated
  • Headline tax rate of that non-Singaporean country
  • Proof of payment for the foreign tax imposed on the specified income

Corporate Services Singapore as your Expert Taxation Team

business analysisWhether you’re unsure about how to obtain tax exemption for your company or you’re pressed for time to attend to your company’s taxation needs, Corporate Services Singapore offers bespoke services that will help your company take advantage of the FSIE scheme to the fullest as you focus on expanding your business in the global community.

Posted in Taxation.