Common Tax Reliefs That Help Reduce The Tax Bills

Some common tax reliefs for companies to help reduce their tax are:

  • Tax Exemption Scheme for New Start-Up Companies;
  • Partial Tax Exemption for all companies; and
  • Deduction of Expenses Incurred Before Commencement of Business.

 

Tax Exemption Scheme for New Start-Up Companies

The tax exemption scheme for new start-up companies was introduced in Year of Assessment (YA) 2005 to support entrepreneurship and help our local enterprises grow.

Under the scheme, qualifying new companies are given full exemption on the first $100,000 normal chargeable income* and a further 50% exemption on the next $200,000 of normal chargeable income* for the first three consecutive YAs. The maximum exemption is therefore $200,000 (100% x $100,000 + 50% x $200,000). The table below summarises the amount of tax exemption.

*Normal chargeable income refers to income to be taxed at the prevailing corporate tax rate.

Tax Exemption on First $300,000 of Chargeable Income

 Chargeable Income% Exempted from Tax Amount Exempted from Tax 

First $100,000

100%

$100,000

Next $200,000

50%

$100,000

The maximum exemption to be enjoyed is $200,000 ($100,000 + $100,000).

The exemption is available only for the first three YAs. From the fourth YA onwards, the company can enjoy the partial tax exemption like all other qualifying companies.

Qualifying Conditions for Start-Up Companies

The tax exemption is open to all new companies except these two types of companies:

  • A company whose principal activity is that of investment holding; and
  • A company whose principal activity is that of developing properties for sale, investment, or both.

Investment holding companies derive only passive incomes such as dividend and interest income, while the real estate industry typically incorporates a new company for each new property development.  The start-up tax exemption for encouraging entrepreneurship is not intended for such companies. These companies will be given partial tax exemption.

To qualify for tax exemption for start-ups, eligible companies must satisfy these three qualifying conditions:

  1. The company must be incorporated in Singapore;
  2. The company must be a tax resident in Singapore for that YA;
  3. The company must not have more than 20 shareholders throughout the basis period for that YA where:
    1. all of the shareholders are individuals "beneficially and directly" holding the shares in their own names; or
    2. at least one shareholder is an individual "beneficially and directly" holding at least 10% of the issued ordinary shares of the company.
  1. Companies must be tax resident in Singapore i.e. the control and management of the company must be exercised in Singapore. For details, please refer to Tax Residence Status of A Company.
  2.  Companies limited by guarantee can qualify for the scheme, as long as they have members,
    1. all of whom are individuals throughout the basis period for that YA; or
    2. at least one of whom is an individual throughout the basis period for that YA, and the contribution of that individual under the memorandum of association of the company to the assets of the company in the event of it being wound up, amounts to at least 10% of the total contributions of the members of the company throughout the basis period for that YA.

Determining the First YA of a Qualifying Company

The exemption is for the company's first three consecutive YAs. The first YA is the YA relating to the basis period during which the company is incorporated.

The first YA of a company depends on the financial year end chosen and the closing date of the first set of accounts. Hence, the first YA of a company may be different from another company that is incorporated on the same day.

Date of Incorporation1 Jul 2015

Financial year end

30 Jun every year

1st set of accounts closed on

30 Jun 2016

Period covered in 1st set of accounts

1 Jul 2015 - 30 Jun 2016 (12 months)

 YABasis Period 

1st YA 2017

1 Jul 2015 to 30 Jun 2016 (12 months)

2nd YA 2018

1 Jul 2016 to 30 Jun 2017

3rd YA 2019

1 Jul 2017 to 30 Jun 2018

Date of Incorporation1 Jul 2015

Financial year end

31 December every year

1st set of accounts closed on

31 December 2015

Period covered in 1st set of accounts

1 Jul 2015 to 31 Dec 2015 ( < 12months)

YA

Basis Period

1st YA 2016

1 Jul 2015 to 31 Dec 2015 ( < 12 months)

2nd YA 2017

1 Jan 2016 to 31 Dec 2016

3rd YA 2018

1 Jan 2017 to 31 Dec 2017

Date of Incorporation1 Jul 2015

Financial year end

31 December every year

1st set of accounts closed on

31 December 2016

Period covered in 1st set of accounts

1 Jul 2015 to 31 Dec 2016 (> 12months)

YA

Basis Period

1st YA 2016

1 Jul 2015 to 31 Dec 2015 ( < 12 months)

2nd YA 2017

1 Jan 2016 to 31 Dec 2016

3rd YA 2018

1 Jan 2017 to 31 Dec 2017

Explanation: The first set of accounts covers a period of 18 months. Generally, the company's profit/losses must be attributed and declared under two YAs (i.e. YA 2016 and YA 2017) as the basis period for each YA should not exceed 12 months. The first YA is YA 2016 and not 2017.
Time apportionment may be used if the company is not able to directly identify its income and expenses to the two periods.

The table below summarises the three examples above of companies incorporated on the same date (1 Jul 2014) with different periods covered in their first set of accounts.

ExampleFinancial Year endPeriod Covered in First Set of AccountsYABasis Period
130 Jun1 Jul 2015 to 30 Jun 2016
(= 12 months)
2017 (1st YA)1 Jul 2015 to 30 Jun 2016
2018 (2nd YA)1 Jul 2016 to 30 Jun 2017
2019 (3rd YA)1 Jul 2017 to 30 Jun 2018
231 Dec1 Jul 2015 to 31 Dec 2015
(< 12 months)
2016 (1st YA)1 Jul 2015 to 31 Dec 2015
2017 (2nd YA)1 Jan 2016 to 31 Dec 2016
2018 (3rd YA)1 Jan 2017 to 31 Dec 2017
331 Dec1 Jul 2015 to 31 Dec 2016
(> 12 months)
2016 (1st YA)1 Jul 2015 to 31 Dec 2015
2017 (2nd YA )1 Jan 2016 to 31 Dec 2016
2018 (3rd YA)1 Jan 2017 to 31 Dec 2017

Claiming Tax Exemption

To claim tax exemption, complete the relevant sections of the Estimated Chargeable Income (ECI) form and income tax return.

For more information on filing ECI and the income tax return, please refer to:

Partial Tax Exemption for Companies (PTE)

All companies including companies limited by guarantee can enjoy PTE, unless they have already claimed the Tax Exemption Scheme for New Start-Up Companies. Qualifying companies can enjoy:

  • 75% tax exemption on the first $10,000 of normal chargeable income; and
  • A further 50% tax exemption on the next $290,000 of normal chargeable income.
Chargeable Income% Exempted from Tax

Amount Exempted from Tax

First $10,000

@75%

= $ 7,500

Next $290,000

@50%

= $145,000

The maximum exemption to be enjoyed is $152,500 ($7,500 + $145,000).

Abuse of the Tax Exemption Scheme

IRAS takes a strong stand against companies set up to abuse this scheme and have not been incorporated for entrepreneurship and genuine commercial reasons. IRAS will not hesitate to take action where such abuses are uncovered.

The abuse of the tax exemption scheme generally takes the following forms:

  1. Allocating the income of an existing profitable going concern to a few shell companies so that the chargeable income of each shell company is within the threshold for tax exemption; or
  2. Charging fees/ expenses to an existing profitable going concern by shell companies without any bona fide commercial reasons. The shell companies claim the tax exemption on the income they receive from the profitable going concern, while the latter claims tax deduction on the fees/expenses paid to the shell companies.

These shell companies do not carry out any activities or significant activities and have no or few employees. Their accounts usually show few transactions and low capitalisation (usually at $2). The effect of these forms of arrangement is an overall net reduction of tax for the profitable going concern and the shell companies.

As at 28 Feb 2015, more than 100 companies have been audited to check for possible abuse of the tax exemption scheme for new companies. This resulted in a tax recovery of more than $2 million, with penalties amounting to about $2 million.

Tax evasion/ fraud is a criminal offence punishable under the law and the Court imposes severe penalties for such offences. Businesses or individuals who engage in abusive tax arrangements such as setting up shell companies to take advantage of the tax exemption scheme for new start-ups, or individuals who assist others with abusive tax arrangements should disclose such abuse immediately. IRAS will treat such disclosure as a mitigating factor when considering the penal charges.

 

Deduction of Expenses Incurred Before Commencement of Business

Only revenue expenses incurred after your business commences are deductible for tax purposes.

As a concession, revenue expenses incurred one year before the first day of the financial year in which you earn your first dollar of business receipt will be tax-deductible.

 Example

Company A was incorporated on 1 Jul 2014 and has a Dec year-end. Assuming it earned its first dollar of business receipt on 1 Sep 2016 (relates to YA 2017), the revenue expenses incurred during the period 1 Jan 2015 to 31 Dec 2015 (i.e. one year before 1 Jan 2016, which is the first day of the financial year in which your company earned its first dollar) will also be tax-deductible in YA 2017.

For details, please refer to Tax Treatment of Business Expenses.

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