Concessionary Group Treatment for Dividend Income

Deficit arising from a block of shares may be used to offset against the net dividend income from other blocks of shares within the same group.

Dividend Income is Taxable

Dividend income is taxable under Section 10(1)(d) of the Income Tax Act unless the dividends constitute receipts of a trade or business carried out by the company.

Each block of shares is regarded as a separate source of dividend income. To claim deduction of expenses, companies are required to match expenses incurred on each block of shares against the dividend income from the same block of shares.

A company which takes up a loan to finance the purchase of a block of 10,000 shares in X Ltd will be allowed a deduction of the interest expense incurred on the loan, against the dividend income from the same block of 10,000 shares in X Ltd.

Any excess of the interest expense over the dividend income (i.e. the deficit) will be disregarded. The deficit cannot be offset against dividend income from other blocks of shares or other sources of income for that year or subsequent years.

Concessionary "Group" Tax Treatment for Dividend Income

Effective YA 1996, the concessionary "group" tax treatment for dividend income taxable under section 10(1)(d) allows the deficit arising from a block of shares to be set-off against the net dividend income from other blocks of shares within the same group.

Any excess of expenses of any group in any year will be disregarded. In other words, the deficit cannot be set-off against the net dividend income of another group or other sources of income.

Grouping of Shares

All investments in shares / stocks are divided into the following groups under the concession.

Group 1

Non-income producing shares (local and foreign shares).

Shares are regarded as non-income producing if they have not generated any dividend income since the date of acquisition.

Expenses are not deductible as the expenses incurred on the shares do not produce dividend income taxable in Singapore.

Group 2

Shares which generate tax-exempt dividend income (e.g. one-tier and foreign-sourced dividend income remitted to Singapore in the year and exempted from tax).

Expenses are deductible.

Group 3

Income producing shares in overseas companies where dividend income is remitted to Singapore in the year and taxable in Singapore.

Expenses are deductible.

Group 4

Income producing shares in overseas companies where dividend income is not remitted to Singapore in the year.

Expenses are not deductible as the expenses incurred on the shares do not produce dividend income taxable in Singapore but may be carried forward.*

*Under the liberalised treatment, expenses incurred on shares in Group 4 may be carried forward for deduction against the foreign dividend income of this group which is remitted to Singapore in later years. For more details, please refer to the e-Tax Guide " Liberalised treatment of expenses incurred in Singapore to derive foreign income (16KB)".

A company which takes up a loan to finance the purchase of a block of 10,000 shares in X Ltd will be allowed a deduction of the interest expense incurred on the loan, against the dividend income from the same block of 10,000 shares in X Ltd.

Any excess of the interest expense in respect of the 10,000 shares in X Ltd (assume in Group 2) can be deducted against the net dividend income from shares in Z Ltd (similarly in Group 2) under the concession. Should there be a net deficit in Group 2, the deficit cannot be set-off against the net dividend income of Group 3 and vice versa.

Claiming Foreign Tax Credit

The weighted average method will be used to allocate any deficit arising from one or more blocks of shares to offset against the net dividend income of the other blocks of shares, within the same group for the purposes of claiming foreign tax credit (FTC).

Shares in CompanyForeign Dividend IncomeAllowable ExpensesNet Income/
(Deficit)
Net Income for computing FTC

A

$5,000

$1,000

$4,000

$2,400 (1)

B

$2,000

$1,000

$1,000

$600 (2)

   

$5,000

 

C

$4,000

$6,000

($2,000)

- (3)

   

$3,000

 

(1) $4,000 - ($4,000 / $5,000 x $2,000) = $2,400

(2) $1,000 - ($1,000 / $5,000 x $2,000) = $600

(3) FTC is not applicable as the net dividend income is nil.

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