Taxing Gains on Sale of Foreign Assets Received in Singapore by an Entity without Economic Substance

The newly introduced Section 10L of the Income Tax Act 1947 (ITA) aims to tax gains from the sale or disposal of foreign assets (movable or immovable property situated outside Singapore) taking place on or after 1 January 2024 and received in Singapore by a relevant entity that does not have economic substance here.

This includes gains that are capital in nature or tax-exempt ( i.e. those covered under the S13W safe harbour rules) where gains on disposal of ordinary shares held of at least 20% and 24 months from date of sale are exempt.

The implementation is aimed at aligning Singapore’s foreign-sourced income exemption (FSIE) regime to guidelines updated by the EU Code of Conduct Group to require a FSIE regime to tax capital gains.  The move also mitigates the risk of international tax avoidance.

Who Are Subject to Section 10L?

A relevant entity is a member of a group where at least 1 member has a place of business outside Singapore. The entity is considered a member of a group if its assets, liabilities, income, expenses and cash flows are included in consolidated financial statements prepared by the parent entity of the group.

Section 10L doesn’t apply to certain entities as detailed below.

An entity with economic substance in Singapore generally means its operations are managed & performed by key personnel in Singapore. 

To qualify as an entity with adequate economic substance:

1. Pure Equity Holding entity (PEHE) (i.e one whose function is to hold shares or equity interests & derives dividends, gains from sale of investments) would be required to fulfill all 3 conditions below:

a. Comply with every obligation to submit any regular return, statement or account under the written law under which it is incorporated or registered;

b. Have its operations managed and performed in Singapore whether by its employee, third or group entities; and

c. Have adequate human resources and premises in Singapore (its own, shared with associated entities or that of outsourced service provider) to carry out its operations

2) For an entity that is not a PEHE (non PEHE), it would be required to:

a. Carry on a trade, business, or profession in Singapore (this requirement has since been removed)

b. Have its operations managed and performed in Singapore, whether by its employee or other persons; and

c. Have reasonable economic substance in Singapore which considers 

  • number of employees, their qualification and experience 
  • amount of business expenditure incurred in or outside Singapore.
  • Strategic business decisions made by key personnel in Singapore

What Foreign Asset Sales are Considered Covered Income under S10L ?

Gains from disposal of foreign assets is taxed under Section 10(1)(g) of the ITA when received in Singapore by a relevant entity.

Some Changes from the Draft Bill

1. Ascertainment of gains and losses chargeable to tax

Deductible expenses – purchase cost, enhancement cost, selling costs, interest, expenditure to protect or preserve its value is deducitble against sale price, if such have not been deducted against any other income.

• Losses – Losses incurred on disposal of foreign assets (which would have been brought to tax had they been gains) may be set-off against gains from disposal of other foreign assets brought to tax here.  Unutilised disposal losses may be carried forward for set-off against future gains.

2. A non-PEHE is no longer required to carry on a trade for it to be excluded from S10L

The requirement in the draft Bill for non-PEHE to carry on a trade, business or profession in Singapore has been removed.

3. Foreign tax credit

Double tax relief or unilateral tax credit is available for foreign tax paid in respect of gains taxed once again here under section 10L. Resident taxpayers may also elect for foreign tax credit pooling, subject to conditions.

Tax Filing/Record Keeping Requirements

To ensure entities keep track of S10L gains/losses, Inland Revenue Authority of Singapore (IRAS) stipulated that businesses will be required to provide certain information in their tax computations mainly to facilitate the tracking of certain assets as below:

  • Unremitted gains,
  • Deductible expenses (local & foreign) attributable to foreign asset disposal gains/losses
  • Information on their economic substance in Singapore eg number of employees, operating costs, any outsourcing arrangement.

IRAS also listed records and supporting documents that entities are required to maintain, but need not be submitted with the tax return, unless called for.

Our Thoughts

Multinational Groups headquartered overseas and using Singapore as an intermediary to hold investments would be hard put to re-look its structure to address the “adequate economic substance” requirement in the local company so any gains on disposal of foreign assets (on or after 1 January 2024) received in Singapore is not subject to tax here. 

For such gains remitted to Singapore in subsequent years, the company has to track upfront, the unremitted proceeds/expenses deductible against and attributable to the sale.

It is interesting to note IRAS has upped the ante to additionally require a PEHE to have adequate human resources and premises in Singapore to carry out its operations (for it to be seen as having economic substance and thus be an excluded entity of S10L implications). 

This is in line with IRAS’ recent practice of requiring investment holding companies (particularly those foreign owned) to demonstrate some level of economic substance by having key personnel here other than the routine yearly BOD meetings physically held here before the tax authority issues a Certificate of Residence for it to enjoy treaty benefits.

Singapore-based fund managers should note that investment entities enjoying fund tax incentives here are not specifically ‘removed from’ S10L implications either.  This may well be the case that companies qualifying for fund incentives are already required to meet minimum local business spending and so may already meet economic substance requirements under s10L to be considered an excluded entity.

IRAS has encouraged robust record keeping and retention to administer S10L reporting.  A relevant entity may apply an advance ruling to seek certainty on the “economic substance” requirement when the gain on a sale is expected to take place within a year from application to IRAS. 

The ruling, if issued, may be valid up to 5 Years of Assessment (YAs) including the YA in which the proposed sale is envisaged to take place.  What this means is the ruling is applicable to subsequent sale within the 5-year period provided the facts represented/tax laws remain unchanged. 

You may peruse IRAS’ e-tax guide for details on S10L:

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All materials have been prepared for general information purposes only. The information presented in this document is not legal advice, is not to be acted on as such, may not be current and is subject to change without notice. Professional advisory should be sought before taking or refraining from any action as a result of the contents of this document.