I. Introduction:

Changes to Singapore’s Foreign-Sourced Income Exemption Regime (FSIE) in the form of a new s10L of the Income Tax Act 1947 (ITA) were recently proposed by the Ministry of Finance (MOF). These changes formed part of the draft Income Tax (Amendment) Bill 2023 that was open for public consultation from 6 June to 30 June 2023. Following the receipt of public comments and consequent amendments to the draft legislation, the Income Tax (Amendment) Bill (Bill No. 30/2023) was introduced and read for the first time on 18 September 2023. It is expected that the revised s10L will be enacted and come into operation on 1 January 2024.

S10L, if enacted in its proposed form, will allow Singapore to tax gains from the sale of foreign assets that are received in Singapore under certain circumstances. In this client alert, we will first explore the reasons driving the introduction of s10L, before providing an overview of its key features. We then provide our views on the impact s10L will have on taxpayers.

II. Reasons for Introducing Section 10L

MOF stated that s10L was proposed to align the treatment of gains from the sale of foreign assets to the EU Code of Conduct Group Guidance.

For context, the EU Code of Conduct (Business Taxation) is an EU instrument that was created to promote fair tax competition. The EU Code of Conduct Group (COCG), which is composed of member states of the EU and the European Commission, was established to assess tax measures that fall within the ambit of the Code of Conduct. In 2022, the COCG published an updated guidance on FSIE regimes.

Under the updated guidance, the COCG observed that FSIEs that are broad enough to exclude from taxation passive income (including dividends, interest, royalties and capital gains) without any conditions, can result in ring-fencing and a lack of substance. It noted that the exemption of passive income without clear conditions such as an explicit link to some real activity in the jurisdiction would contravene the principles underlying the EU Code of Conduct. It therefore went on to stipulate that in relation to foreign sourced income, jurisdictions should either introduce taxation of passive income; or if they exclude from taxation certain types of passive income, (1) implement adequate substance requirements, (2) have robust anti-abuse rules in place; and (3) remove administrative discretion in determining the income to be excluded from taxation.

Whilst this guidance originated from the COCG, such pieces of guidance do factor into the decisions of jurisdictions around the world in formulating tax legislation. This is because the COCG publishes an EU list of non-cooperative jurisdictions for tax purposes that is constantly reviewed, to encourage change in tax legislation and practices outside of the EU.

Hong Kong, for instance, had been included in the EU’s grey list in 2021, and has effective 1 January 2023 implemented a revised foreign-sourced income exemption regime which has been accepted by the EU as being compliant with the EU’s earlier guidance on FSIE regimes. However, in response to the updated guidance on FSIE regimes published by the Code of Conduct Group, Hong Kong is further considering what appropriate revisions should be made to its FSIE regime to bring it in line with the updated FSIE Guidance, with the focus being on foreign-sourced disposal gains. Please refer to the client alert published by our Dentons Hong Kong Office for more information on the changes to the FSIE regime in Hong Kong.

Singapore, similarly, is seeking to align the treatment of gains from the sale of foreign assets to the COCG’s guidance, via its proposed s10L.

III. Overview of the Proposed Section 10L

Scope of Taxation

Under the proposed s10L(1) of the ITA, gains from the sale or disposal of a foreign asset by an entity of a relevant group that are received in Singapore from outside Singapore, on or after 1 January 2024, will be treated as income chargeable to tax.

Further, the same deemed receipt rules under current tax laws for foreign-sourced income would apply. Gains from the sale or disposal of foreign assets will be deemed as received in Singapore from outside Singapore if:

1. These gains are remitted to Singapore
2. These gains are applied to satisfy any debt incurred in respect of a trade or business carried on in Singapore; and
3. These gains are applied to the purchase of any movable property which is brought into Singapore.

There are also rules that determine when an asset is treated as a foreign asset. Immovable property situated overseas, shares in or securities issued by a foreign incorporated company and intellectual property rights owned by a non-resident are regarded as foreign assets under such rules.

Who s10L(1) applies to

An entity of a relevant group is defined as a member of a consolidated group of entities where at least one member of the group has a place of business in more than one jurisdiction or where the entities of the group are not all incorporated in a single jurisdiction, and the entity’s accounts are included in the consolidated financial statements prepared by the parent entity of the group, or are excluded from the consolidated financial statements solely on size or materiality grounds or on the grounds that the entity is held for sale. S10L(1) therefore only applies to entities of multinational groups, and does not target single standalone entities, or an individual.

S10L does not apply to financial institutions as well as entities that enjoy one of the specified tax incentives, such as incentive schemes enacted for the shipping, aircraft and insurance industries, the Finance and Treasury Centre incentive, as well as Pioneer, Pioneer Service and Development and Expansion incentives (pursuant to S10L(6)). This makes sense given that such incentives are generally granted only if the entity has a sufficient level of economic substance in Singapore.

If the entity of a relevant group is not such an entity, it would have to meet the prescribed economic substance requirements in order to qualify as an excluded entity that is not taxed under s10L. The requirements are prescribed depending on whether the entity is a pure equity-holding entity, which refers to an entity whose primary function is to hold shares or equity interest in other entities and which have no income other than dividends or similar payments, gains on the sale or disposal of share or equity interests, or income incidental to its activities of holding shares or equity interests in other entities.

IV. Reflections on the Impact of Proposed S10L

Capital Gains Tax – A Fundamental Shift

As mentioned, COGC’s guidance specifically targets tax regimes that do not tax what COGC views as foreign-sourced passive income, which includes not just dividends, interest and royalties, but also capital gains.

As of today, Singapore tax system provides for foreign-sourced income to be taxed in Singapore if it is received or deemed received in Singapore (unless any exemptions apply) – but this applies only to income that is revenue in nature, such as dividends, interest and royalties. It has been a cornerstone of Singapore’s tax system that it does not tax capital gains.

With the enactment of S10L, this will effectively introduce capital gains tax into Singapore, which is a fundamental change to Singapore’s tax system. This outcome is clearly intentional to align Singapore’s tax position with COGC’s guidance which requires jurisdictions to pass laws to tax foreign-sourced passive income including capital gains.

Impact on Taxpayers

Currently, foreign businesses that are not operating in or from Singapore can remit their foreign income to Singapore without being taxed on the income, pursuant to IRAS’ administrative concession. This is to encourage the use of Singapore banking system. In defining entities of a relevant group that are subject to the operation of S10L, the proposed S10L does not exclude entities that do not have any nexus with Singapore apart from the remittance of funds into Singapore. There is therefore still a question of whether IRAS’ administrative concession will extend to preclude foreign businesses from being taxed under S10L.

We also note that the exceptions which apply to tax incentivised companies do not extend to incentives targeting the wealth management sector, such as the various trust incentive schemes and fund incentive schemes. However, it is possible that companies qualifying for these incentives may already meet economic substance requirements under s10L to be considered an excluded entity, such that s10L does not apply. Still, entities who enjoy these incentives and who form part of a group with consolidated accounts should keep an eye on s10L in this regard.

Ultimately, Singapore as a choice of holding jurisdiction may not be significantly affected by the introduction of s10L. This is because we expect the level of substance for pure holding companies to be lower, given that this is the case in economic substance regimes in offshore jurisdictions. We would expect this point to be addressed more fully in the e-Tax guide that IRAS plans to release. In any case, as of today, IRAS already requires companies to demonstrate a certain level of economic substance to qualify for a Certificate of Residence to prevent treaty shopping. We would still advise taxpayers to keep a close watch on s10L.

Moving forward, we expect that IRAS will provide further guidance on the implementation of s10L.

V. Conclusion

Taxpayers should keep an eye on the developments surrounding s10L and the FSIE regime in Singapore. It is important for taxpayers to seek advice on the impact of s10L on their transactions and holding structure. That said, based on the proposed S10L, we are of the view that with proper planning, it will not have a significant adverse impact on Singapore’s attractiveness as a jurisdiction to conduct business in or to use as a holding jurisdiction.

Should you have any questions on the above or have concerns relating to the taxation of your foreign sourced income, please feel free to get in touch with any of our key contacts.¹

1. This client alert has been updated following an amended version of s10L being read for the first time on 18 September 2023 as part of the Income Tax (Amendment) Bill (Bill No. 30/2023). Out of the changes made, we would highlight the following two changes, which have already been reflected above:
   
   1. Non-pure equity holding entities are no longer required to carry on a trade, business or profession in Singapore to be considered an excluded entity;
   
   2. For a pure equity holding entity to be an excluded entity, there is now an additional requirement for the entity to have adequate human resources and premises in Singapore to carry out the operations of the entity.
   
   We observe that there is still uncertainty surrounding some of the provisions in s10L, for instance, uncertainty regarding whether economic substance requirements are met. We note however, that MOF has stated that IRAS will provide further guidance through an e-Tax Guide, to provide clarity on the operation of s10L when it comes into effect on 1 January 2024. ↩