The Tax Treatment of Foreign-Sourced Income in Singapore

 The Tax Treatment of Foreign-Sourced Income in Singapore

In Singapore, companies are taxed either on income generated directly from business operations or certain types of income generated from overseas activities through foreign subsidiaries and branches (foreign-sourced income). This article will focus on the latter by providing a comprehensive overview of foreign-sourced income tax treatment in Singapore. Please, note that the information provided is for general purposes only and not intended to replace professional advice on corporate taxes.

What constitutes foreign-sourced income?

According to the Inland Revenue Authority of Singapore (IRAS), foreign-sourced income is revenue derived from trade or business conducted outside of Singapore (typically through operating subsidiaries in other jurisdictions). There has been considerable debate on what constitutes the term foreign-sourced income. Therefore, to avoid any confusion, please look at the following examples provided by IRAS:

  • Dividends are considered foreign-sourced as long as they are paid by a non-Singapore tax resident company.
  • A foreign branch of a Singapore company must be located outside of Singapore for income derived from it to be considered ‘foreign-sourced.’
  • Service income (e.g., income from professional, technical, consultancy, or other services) is considered foreign-sourced if the services are provided through a ‘fixed place of operation’ in a foreign country.

A fixed place of operation refers to a management place, an office, or some floor space where the specified resident taxpayer or employees provide services. A place is considered a fixed place of operation if:

  • It has features of permanence.
  • It is available to the specified resident taxpayer on an ongoing basis. 
  • The specified resident taxpayer uses it regularly to carry on its trade, business, or profession of providing services.  
  • The specified resident taxpayer does not use it to carry out auxiliary or preparatory activities only.

What is foreign-sourced income received in Singapore?

A foreign-sourced income is considered to be received in Singapore when it meets the following conditions:

  • The income is “transferred to or brought into Singapore.” If the relevant funds are transferred to a Singapore bank account or brought into Singapore in the form of a check, money order, or cash, they will meet these criteria.
  • The income is “applied in or to meet any debts incurred in connection with trade or business carried on in Singapore.” If you use your foreign income to pay the debts of a Singapore-based business, then you meet this condition.
  • The income is “applied to purchase any movable property, which is brought into Singapore.” Note that real estate purchases will not qualify under this condition.

How is foreign-sourced income taxed?

Foreign-sourced dividends, foreign-sourced branch profits, or foreign-sourced service income can be tax-exempt if they meet the following qualifications:

  • Foreign income has been taxed in the foreign jurisdiction from which it was received (known as the “taxable” condition). The rate at which foreign income is taxed may differ from the primary tax rate;
  • The highest corporate tax rate (foreign primary tax rate condition) of the foreign jurisdiction where the income is received is at least 15% at the time the foreign income is received in Singapore; and
  • The Comptroller is satisfied that the tax exemption will be beneficial in Singapore.

Note that IRAS will consider income “taxable in a foreign jurisdiction” even if that income is exempt from tax in the foreign jurisdiction (e.g., income eligible for tax incentives in a foreign jurisdiction). Thus, the actual tax paid in the foreign jurisdiction may be zero (or even negative), yet it will be considered subject to tax and qualify for tax exemption in Singapore.

IRAS does not require companies to submit specific documents to claim tax exemption (although IRAS reserves the right to request justification and proof upon demand). Instead, companies only need to include the following information on their income tax return:

  • The nature and amount of the specified foreign income;
  • The country from which the income is received;
  • The headline tax rate of that country; and
  • The amount of foreign tax paid/payable in that country. 

To avail to “subject to tax” concession, companies do not have to submit any supporting documents with their income tax return. However, they must retain the following documents in their companies’ records:

  • A declaration that the specified foreign income is exempt from tax in the foreign jurisdiction because of tax incentives.
  • A copy of the tax incentive certificate or approval letter issued by the foreign jurisdiction. 
  • For foreign-sourced dividends, companies must keep a dividend voucher stating that the dividend is exempt from tax in the foreign jurisdiction due to tax incentives.

Double tax relief on foreign income

Double taxation arises when a foreign income earned by a Singapore company is being taxed two times; in the foreign jurisdiction and Singapore.  To relieve taxpayers from the burden of double taxation, Singapore has signed numerous Avoidance of Double Taxation Agreements (DTAs) with an extensive network of countries. 

Furthermore, if a foreign jurisdiction is not covered by a DTA, Singapore provides a Unilateral Tax Credit (UTC) for income sourced from that jurisdiction. Under DTA and UTC, companies may claim a tax credit on income taxed in a foreign jurisdiction, thus reducing or eliminating the tax paid on such income in Singapore. For additional information about these subjects, please refer to:

Singapore’s Double Tax Treaties Explained

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