One-tier corporate tax system
Singapore adopts a one-tier corporate tax system with effect from 1 Jan 2003. Under the one-tier corporate tax system, tax paid by a company on its chargeable income is a final tax. All dividends paid by a company are exempt from tax in the hands of the shareholders.
Imputation system
Before 1 Jan 2003, Singapore adopted an imputation system. Under the imputation system, tax payable by a Singapore-resident company on its chargeable income is passed on as tax credit to its shareholders upon distribution of dividends. Shareholders are taxed on the gross dividend and a tax credit (tax deducted at source) is given to the shareholders.
The differences between the one-tier corporate tax system and the imputation system are as follows:
Imputation system
(Applies to Singapore resident companies only) |
One-tier corporate tax system
(Applies to all companies) |
Tax payable on the chargeable income of a company is not a final tax.
Dividends paid out of "after tax profit" are taxed in the hands of the shareholders and shareholders can claim tax credits on the dividends distributed (franked dividends).
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Tax payable on the chargeable income of a company is a final tax.
Dividend paid out of "after tax profit" will be exempt from tax in the hands of shareholders (exempt one-tier dividends).
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Tax payable by a company is passed on to its shareholders as tax credits on payment of dividends, by way of the Section 44 account mechanism.
Under the Section 44 account mechanism, any tax assessed on the company is credited to a Section 44A account.
When the company pays any dividend, it is required to deduct tax at the prevailing corporate tax rate from the dividend paid.
The amount of tax deducted at source is debited to the Section 44A account.
The company must submit a Section 44A statement upon payment of dividends.
If the Section 44A balance as at the day before the date of payment of the franked dividend is lower than the tax deducted at source, the company has to pay the shortfall, known as a "Section 44A charge" to the Comptroller within 14 days from the date of dividend payment.
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A company need not maintain Section 44A account.
Tax assessed on or after 1 Jan 2003 is not credited to a Section 44A account.
When the company pays exempt one-tier dividend, it is not required to deduct tax from the dividend paid.
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5-year transitional period
A company with Section 44A balance as at 31 Dec 2002 can:
- remain under the imputation system for up to five years (1 Jan 2003 to 31 Dec 2007); or
- opt to move to one-tier corporate system anytime during 1 Jan 2003 to 31 Dec 2007.
During the five years transition period, a company that remains under the imputation system can utilise its Section 44A balance as at 31 Dec 2002 to pay franked dividends.
Once its Section 44A balance is nil, it will automatically be moved to one-tier system.
Payment of dividends on or after 1 Jan 2008
From 1 Jan 2008, all companies remaining on the imputation system were moved to the one-tier corporate system.
All dividends paid on or after 1 Jan 2008 will be exempt one-tier dividends. Companies cannot pay franked dividend on or after 1 Jan 2008 even if there is any Section 44A balance remaining as at 31 Dec 2007.