What You Need to Know About the Government Tax Incentives in Singapore
Singapore’s government gives several tax incentives to encourage and promote entrepreneurship. Together with the Inland Revenue of Singapore (IRAS), it has enforced tax incentive schemes that target businesses, especially the startups.
The incentives could be from exemptions on income capital in order to claim for renovations and training.
Therefore, Singapore’s government created policies, which makes Singapore a dominant startup hub in the region. The business-friendly policies and efficient tax system are the main reasons. The government always introduces new incentive schemes so that businesses will grow and expand better.
This post highlights the government tax incentive schemes that the government of Singapore implemented so that businesses can establish themselves in the country.
Startup Tax Exemption (SUTE) Scheme
Singapore’s tax authority gives a special exemption to startups in the first three years of assessment. Of course, this scheme’s main objective is to promote entrepreneurship and help the growth of startups and establish headquarters in the country.
All startup companies in Singapore may avail of this scheme with these exceptions:
- The main activity is investment holding.
- The main activity is developing properties that are for investment, sale, or both.
What are the conditions to qualify? The startups eligible for this must-have meet these conditions so they can qualify for tax exemption:
- The company needs to register in Singapore.
- A company should be a tax resident during the assessment year in Singapore.
- The company shareholders must not be more than 20 during the assessment year.
What are the tax benefits? The startups in Singapore that are eligible must be exempted from tax on the first S$100,000 normal chargeable income they earn. In addition, the company will be exempted from a 50% tax on its next normal chargeable income of S$200,000. This exemption applies to the startup on its first three years of assessment. Therefore, these benefits drastically reduce the effective tax rate in their first three years of operation.
Corporate Income Tax (CIT) Rebate
Singapore’s Ministry of Finance has incentives rolled out to help businesses with increasing business costs. Companies shall receive a 30% Corporate Income Tax (CIT) Rebate, which is called at S$30,000 during the assessment year.
It is given to companies that do not tax residents and companies that have their income taxed at a concessionaire’s rate. This is including Registered Business Trusts.
Productivity and Innovation Credit Scheme (PIC)
This scheme offers business owner credits in a tax deduction form. The deduction is available to businesses that invest in innovation activities. The incentive of this scheme is for businesses to continuously innovate to improve their productivity and efficiency in operations which promotes company growth.
Businesses that are registered in Singapore can enjoy the benefits of this scheme. These companies include partnerships, branches, and a sole proprietorship or foreign holding companies’ subsidiaries.
Conditions to Qualify
The scheme will cover these business activities:
- Acquisition and IT leasing and Automation Equipment
- Training of employee
- Acquiring the licenses of IPR
- Patent registration, designs, trademark, and plant varieties
- Research and development activities
- Design projects investment
The allowed tax deductions for the qualifying activities is 400% of the yearly expenses on the activities to qualify. It is capped at S$600,000 for SMEs that qualify for the scheme. There is a 400% scaling which means that even if the total spending of a company is S$150,000 for PIC activities, it can still claim a deduction that is 4 times the amount which is S$600,000.
Angel Investors Tax Deduction Scheme (AITD)
The AITD is to encourage the angel investors in stimulating additional investments into the base startups in Singapore. An angel investor who is approved, and puts in at least S$100,000 into a start-up can have tax deductions of 50% of their investment amount after a 2-year holding period. However, the deduction of tax is capped at S$250,000 in every assessment year.
Wage Credit Scheme
A wage credit scheme is also in the three-year support package of the government. It enables the government to fund part of the employees’ wage increase that earns a gross of up to S$4,000 a month.
This scheme was implemented in 2013 for three years. During the 2015 budget, they extended the scheme for an additional three years, and the 2018 budget extended the program for three years again.
In 2019, Singapore’s government co-funded 15% of wage increases, which was from 20%. In 2020, it will be further lowered to 10%.
What are the criteria for eligibility?
For the Employers
An employer is eligible for this scheme if:
- They pay their employee a monthly gross salary of less than $S4,000.
- The employer increased the gross monthly wage of employees by not lower than S$50 during the qualifying year.
For the Employees
An employee is qualified for the scheme if:
- They are a citizen of Singapore.
- The employee is receiving a Central Provident Fund (CPF) from their employer for at least three months during the previous year.
- The employee is on the payroll of the company for not less than three months during the qualifying year
- Employees can check with a withholding tax provider on how much they are supposed to pay.
Benefits for the Employer
- 40% co-funding if they increased the wage between 2013-2015.
- 20% co-funding if they increased the wage between 2015-2018.
- 15% co-funding if they increased the wage in 2019.
- 10% co-funding if they increased the wage in 2020.
The incentive for investment allowance is enforced by the EDB where businesses may enjoy a maximum of 100% tax exemption in the fixed capital expenditure the company incurred.
The EDB will define a fixed capital expenditure, which is incurred for the qualifying projects in a period of five years. This can have a maximum extension of eight years.
Companies can have a 100% tax exemption if they have considerable investments in project automation.
The EDB approved projects are:
- Manufacturing new products or production increase of the existing products.
- Those that promote the country’s tourism industry.
- Research and development.
- The energy-efficient projects.
- Projects which focus on lowering water consumption.
- Those that provide specialized technical and engineering services.
- Maintenance, repair, and overhaul services of aircraft.
The category covered by expenditures are:
- Equipment for new products.
- Construction of factories in Singapore.
- Acquiring the know-how of patents.
Intellectual Property Development Incentive (IDI)
The purpose of the IDI scheme is to encourage the commercialization and use of IP that arises from the R&D activities of a taxpayer. The approved IDI company is eligible for a lowered tax rate of 5 or 10% on a qualifying income percentage that comes from a certain IP. The percentage is given by the fixed nexus approach that is set out in the Action 5 report of OECD erosion base and profit that shifts (BEPS) projects. The tax concessionary rate increases at regular intervals based on the Income Tax Act.
Enterprise Finance Scheme (EFS)
This scheme is being implemented by IE Singapore and it provides financing needs that are needed for businesses to realize their potential for growth and needs for expansion. The scheme is applicable to these areas:
- SME Working Capital Loan Scheme. This scheme lets small and medium-scale enterprises try qualifying for a non-collateral loan that is up to S$300 for the business’ working capital. The maximum period for repayment is five years.
- Venture Debt Loan. It is for startups with high-growth that do not have important assets that can be bank loan collaterals. Startups can use the funds for growing businesses or diversify their services or products. The highest available loan is S$5 million and a repayment period of up to five years.
- SME Fixed Asset Loan. The scheme helps in financing domestic and overseas investment assets like for purchasing machines and equipment, and factories. The highest available loan is S$30 million that has a repayment period of fifteen years.
- Project Loans. This is primarily for the working capital of companies that want to start overseas projects. They can loan up to S$50 million and a repayment period of fifteen years.
- Trade Loans. Businesses that engage in import and export activities can loan up to S$5 million with a repayment period of one year.
- Merger and Acquisition (M&A) Loans. This loan aims to help businesses to acquire international or local companies. The highest available loan they can acquire for this scheme is S$5 million with a repayment period of five years.
These are the government tax incentives in Singapore that make it easier for businesses to get started and expand. That is why many investors want to open a branch in Singapore. If you are interested, you may contact 3E Accounting.