This post is also available in: 简体中文 (Chinese (Simplified))
How Foreign Tax Credit (FTC) is benefiting you as a Holding Company
Resident taxpayers are subject to tax on foreign income received in Singapore unless the foreign income qualifies for tax exemption. Where that income is also subject to tax in the foreign tax jurisdiction in which it is derived, FTC may be claimed against the Singapore tax payable on the same income. This mitigates double taxation on the same income.
Conditions for Claiming FTC
The company must satisfy all of the following conditions in order to claim FTC:
- The company is a tax resident in Singapore for the relevant basis year;
- Tax has been paid or is payable on the same income in the foreign jurisdiction; and
- The income is subject to taxation in Singapore.
Companies in loss positon
No FTC will be given to a company in a loss position.
FTC can be in the form of Double Tax Relief or Unilateral Tax Credit.
Double Tax Relief (DTR)
A DTR is the relief provided for under an Avoidance of Double Taxation Agreement (DTA) to reduce double taxation, in the form of a tax credit. It allows the Singapore tax residents to claim a credit for the amount of tax paid in the foreign jurisdiction against the Singapore tax that is payable on the same income. A DTR will be granted if the foreign tax was paid in accordance with the DTA provisions and is capped at the lower of the foreign tax paid and the Singapore tax that would have been payable on the same income.
A company is a tax resident of Singapore if the control and management of its business is exercised in Singapore.
Unilateral Tax Credit (UTC)
Effective Year of Assessment (YA) 2009, a UTC will be granted on all foreign-sourced income received in Singapore by Singapore tax residents from jurisdictions that do not have DTAs with Singapore.
Regardless of the type of FTC claimed, the amount of FTC to be granted is the lower of the foreign tax paid and Singapore tax payable on the income. This is computed on a “source by-source and country-by-country” basis.
“Source by-source and country-by-country” basis
Under the “source-by-source and country-by-country” basis of FTC computation, any excess of foreign tax paid over the Singapore tax payable on one type of foreign income from a country cannot be used to reduce the Singapore tax payable on another type of foreign income from the same country. For example, any excess of foreign tax paid over the Singapore tax payable on dividend from China cannot be used to reduce the Singapore tax payable on interest from China.
Similarly, any excess of foreign tax paid over the Singapore tax payable on one type of foreign income from a foreign country is not available for offset against the Singapore tax payable on the same type of income from another foreign country. For example, any excess of foreign tax paid over the Singapore tax payable on dividend from China cannot be used to reduce the Singapore tax payable on dividend from Thailand. The excess foreign tax paid is disregarded for tax purposes.
In addition, any excess of foreign tax paid over the Singapore tax payable on one type of foreign income from a foreign country cannot be used to reduce the Singapore tax payable on a different type of foreign income from a different foreign jurisdiction. For example, any excess of foreign tax paid over the Singapore tax payable on dividend from China cannot be used to reduce the Singapore tax payable on interest from Thailand.
You may refer to this worked example as illustration.
FTC Pooling System
With effect from YA 2012, a company may elect for the FTC pooling system whereby FTC on various foreign income may be pooled together and need not be computed on the above basis.
This applies to foreign income which you receive in Singapore during the basis period for the YA 2012 and for subsequent YAs, and is provided that all the following conditions are met:
- income tax must have been paid on the income in the foreign tax jurisdiction from which you derived the income;
- the headline tax rate of that foreign tax jurisdiction is at least 15% at the time you receive the foreign income in Singapore;
- there must be Singapore tax payable on your foreign income; and
- you are entitled to claim for FTC
If your foreign income does not qualify for FTC pooling or you do not elect for the pooling of FTC, the “source-by-source and country-by country” basis of FTC computation continues to apply.
You may refer to this worked example as illustration.
Tax Exemption of Foreign-Sourced Income
The three categories of specified foreign income are:
- Foreign-sourced dividend
- Foreign branch profits
- Foreign-sourced service income
Under Section 13(8) of the Income Tax Act, tax exemption will be granted when all of the following three conditions are met:
- The highest corporate tax rate (headline tax rate) of the foreign jurisdiction from which the income is received is at least 15% at the time the foreign income is received in Singapore;
- The foreign income had been subjected to tax in the foreign jurisdiction from which they were received (known as the “subject to tax” condition). The rate at which the foreign income was taxed can be different from the headline tax rate; and
- The Comptroller is satisfied that the tax exemption would be beneficial to the person resident in Singapore.
Advantages of having a Singapore Holding Company
Any Singapore resident company that receives foreign income can be assured that there will not be double taxation being imposed. This even applies to income received from countries without a DTA with Singapore. Double taxation can be avoided through the claim of FTC or tax exemption.
It will be good to open a holding company in Singapore to hold all your foreign subsidiaries. As a holding company, FTC can be claimed on foreign incomes such as royalty and interest. This tax benefit can also be enhanced by opting for FTC pooling if conditions permit.
When receiving dividends from subsidiaries, there is a choice of claiming FTC or exemption from Singapore tax. Do be aware that exemption may not always be better than FTC. Even though Hong Kong may grant full tax exemption on foreign income, it may not necessarily be better than claiming FTC by investing through Singapore.
To make use of the low-tax regime of Singapore and to eliminate double taxation, incorporating a Singapore entity is the perfect choice.
Contact us today at firstname.lastname@example.org to set up a Singapore company and to engage our company tax services.