What is Foreign Tax Credit
Foreign income earned by your Singapore company may be subject to taxation twice - once in the foreign jurisdiction, and a second time when the foreign income is remitted into Singapore. There are 2 types of foreign tax credit that your Singapore company may enjoy to alleviate the double taxation suffered.
Double Tax Relief (DTR)
A DTR is the relief provided for under an Avoidance of Double Taxation Agreement (DTA) to reduce double taxation, in the form of a tax credit. It allows the Singapore tax resident to claim a credit for the amount of tax paid in the foreign jurisdiction against the Singapore tax that is payable on the same income. A DTR will be granted if the foreign tax is paid in accordance with the DTA provisions and is capped at the lower of the foreign tax paid and the Singapore tax that would have been payable on the same income.
Unilateral Tax Credit (UTC)
A UTC will be granted on all foreign-sourced income received in Singapore by Singapore tax residents from jurisdictions that do not have DTAs with Singapore.
Your company must satisfy all of the following conditions in order to claim foreign tax credit:
- Your company is a tax resident of Singapore for the relevant basis year;
- Tax has been paid or is payable on the same income in the foreign jurisdiction; and
- The income is subject to taxation in Singapore.
Companies in Loss Position
No foreign tax credit will be given to a company in a loss position.
Companies with Permanent Establishments Overseas
When a company has a permanent establishment (PE) overseas and the income is derived through that PE, the income is generally taxed overseas. A foreign tax credit will be granted only if the income is also taxed in Singapore.
Companies Deriving Passive Income
Passive income (e.g. interest, dividend) derived from outside Singapore is generally taxed overseas in the year of receipt. Such income is taxed in Singapore in the year of remittance. A foreign tax credit will be given when the income is taxed in Singapore.
How to Calculate Foreign Tax Credit
Foreign tax credit is the lower of:
- The actual amount of foreign tax paid; or
- The amount of Singapore tax attributable to the foreign income (net of expenses).
If your company is claiming DTR, the amount of foreign tax credit to be claimed is also subject to the specific terms and conditions as specified in the DTA with the relevant DTA partner.
Computing the Singapore Tax Attributable to the Foreign Income
The amount of foreign tax credit granted should be computed on a 'source-by-source and country-by-country' basis. You may refer to our worked example on computing foreign tax credit on a 'source-by-source and country-by-country' basis (PDF, 92KB).
Alternatively, your company may elect for the foreign tax credit pooling system whereby foreign tax credit on various foreign income may be pooled together and need not be computed on the above basis.
How to Claim Foreign Tax Credit
The claim for foreign tax credit should be made when your company files its Corporate Income Tax Return (Form C). Companies claiming foreign tax credit cannot use Form C-S or Form C-S (Lite).
Your company does not need to file any supporting documents with the Form C. It must, however, keep the supporting documents and submit these to IRAS upon request.
Foreign Tax Credit Pooling System
The foreign tax credit pooling system gives businesses greater flexibility in foreign tax credit claims, reduces their Singapore taxes payable on remitted foreign income and simplifies tax compliance.
Singapore tax residents may elect for the foreign tax credit pooling system when claiming foreign tax credit on income for which they have paid foreign tax.
Under the pooling system, foreign tax credit is the lower of:
- The actual amount of pooled foreign tax paid on the foreign income under pooling; or
- The total amount of Singapore tax attributable to the same pool of foreign income (net of expenses).
You may refer to our worked example on computing foreign tax credit under the pooling system (PDF, 135KB).
Your company must satisfy all of the following conditions to qualify for the foreign tax credit pooling system:
- Foreign income tax has been paid on the income in the foreign jurisdiction from which the income is derived;
- The highest Corporate Income Tax rate (headline tax rate) of the foreign jurisdiction from which the income is derived is at least 15% at the time the foreign income is received in Singapore;
- There is Singapore tax payable on the income; and
- The company is entitled to claim foreign tax credit under the Income Tax Act.
Where the above conditions are not met, or where the company chooses not to elect for the foreign tax credit pooling system, the 'source-by-source and country-by-country' basis for computing foreign tax credit applies.
Learn more about foreign tax credit pooling (PDF, 332 KB).
My company received dividends from an Indian tax resident company which was net of India’s dividend distribution tax (DDT). Does the DDT qualify for foreign tax credit?
Yes. The DDT qualifies for foreign tax credit in the form of a UTC under Section 50A(3) of the Income Tax Act. This is provided that the Singapore tax resident company owns not less than 25% of the total number of issued shares of the Indian company paying the dividends.
A Singapore tax resident company received service fee income from a Malaysian customer on technical services rendered to the Malaysian customer. The Singapore company does not have a permanent establishment in Malaysia. Can the Singapore company claim foreign tax credit in the form of a DTR for the tax paid in Malaysia in respect of the service fee income?
According to Article 13 of the Singapore-Malaysia DTA, technical service fees derived from Malaysia may be taxed in Malaysia at the maximum rate of 5% if the services are performed in Malaysia. So long as the Singapore company satisfies all the conditions for claiming foreign tax credit, a DTR will be accorded based on the lower of the foreign tax paid in Malaysia (i.e. 5% of the technical service fees) and the Singapore tax payable on the service fees. The claim for DTR should be made when the Singapore company files the Corporate Income Tax Return (Form C).
However, where the technical services are not performed in Malaysia, in accordance with Article 13 of the Singapore-Malaysia DTA, the fees payable to the Singapore company are not taxable in Malaysia. A DTR will not be available to the Singapore company for any taxes paid in Malaysia which are not in accordance with the DTA provisions.