Tax Reliefs on Foreign Income
Foreign income refers to income derived from outside Singapore. Generally, such income is taxable in Singapore when remitted to and received in Singapore. Where the foreign income arises from a trade or business carried on in Singapore, it is taxable in Singapore upon accrual, regardless of whether it is received in Singapore.
In many cases, foreign income is taxed twice - once in the foreign jurisdiction and a second time in Singapore.
There are tax reliefs available to Singapore tax residents to alleviate the double taxation suffered, such as:
- Exemption or reduction in tax imposed on specified foreign income that is derived in a jurisdiction that has an Avoidance of Double Taxation Agreement with Singapore
- Tax exemption on specified foreign-sourced income such as foreign-sourced dividends, foreign branch profits and foreign-sourced service income under Section 13(8) of the Income Tax Act
- Foreign tax credit for the taxes paid in the foreign jurisdiction against the Singapore tax payable on the same income
Claiming Benefits under Avoidance of Double Tax Agreements
An Avoidance of Double Tax Agreement (DTA) is an agreement between Singapore and another jurisdiction (i.e. a DTA partner). It serves to relieve double taxation of income that is earned in 1 jurisdiction by a resident of the other jurisdiction.
Purpose of DTAs
A DTA states the taxing rights between Singapore and her DTA partner on the different types of income arising from cross-border economic activities between the 2 jurisdictions.
The DTA also provides for reduction or exemption of tax on certain types of income.
Where the benefit under the DTA is not an exemption of tax but a reduction of tax rate, the Singapore company may have to pay tax in both the foreign jurisdiction and Singapore.
The DTA provides relief for this double taxation by allowing the Singapore company to claim a credit of the foreign tax suffered against its Singapore tax payable on the same income.
Learn more about this credit, also known as Double Tax Relief.
For Singapore Tax Resident Companies
Singapore tax resident companies can claim benefits under the DTA (i.e. the company is exempt from tax or subject to withholding tax at a reduced rate in the foreign jurisdiction) when they derive foreign income from a DTA partner.
To claim DTA benefits, the company must show the DTA partner that it is a tax resident of Singapore by:
This is a letter certifying that a company is a tax resident of Singapore for the purpose of claiming tax benefits under the DTAs.
The DTA partner may require the company to submit a tax reclaim form issued by that jurisdiction together with or in place of a COR.
For Tax Resident Companies of our DTA Partners
Tax residents of our DTA partners can claim benefits under the DTA (i.e. the foreign company is exempt from tax or subject to withholding tax at a reduced rate in Singapore) when they derive income from Singapore.
To claim DTA benefits, they have to show IRAS that they are a tax resident of the DTA partner by submitting a completed Certificate of Residence that is duly certified by the tax authority of their country/ territory of residence.
Tax Exemption on Specified Foreign-Sourced Income
Singapore tax resident companies may enjoy tax exemption on specified foreign-sourced income that is remitted into Singapore.
Scope of Specified Foreign-Sourced Income
Foreign-sourced income is foreign income that does not arise from a trade or business carried on in Singapore.
The 3 categories of specified foreign-sourced income are:
- Foreign-sourced dividend
- Foreign branch profits
- Foreign-sourced service income
Qualifying Conditions for Tax Exemption
Under Section 13(9) of the Income Tax Act, tax exemption is granted when all of the following 3 conditions are met:
- The foreign income has been subject to tax in the foreign jurisdiction from which it is received (known as the 'subject to tax' condition). The rate at which the foreign income was taxed can be different from the headline tax rate;
- The highest Corporate Income Tax rate (i.e. foreign headline tax rate condition) of the foreign jurisdiction from which the income is received is at least 15% at the time the foreign income is received in Singapore; and
- The Comptroller of Income Tax is satisfied that the tax exemption is beneficial to the Singapore tax resident company.
'Subject to Tax' Condition
To meet this condition, the specified foreign income received in Singapore must have been subject to tax in the foreign country/ territory from which the income is received.
For Substantive Business Activities
The Comptroller of Income Tax will regard the ‘subject to tax’ condition as met if the income is exempt from tax in the foreign jurisdiction due to tax incentive(s) granted for substantive business activities carried out in that jurisdiction.
The following documents must be prepared and retained for at least 5 years from the relevant Year of Assessment (YA):
- A declaration by the company that the foreign jurisdiction has exempted the foreign income from tax because of substantive business activities carried out by the company in that jurisdiction
- A copy of the tax incentive certificate/ approval letter issued by the foreign jurisdiction. In the case of a foreign-sourced dividend, a dividend voucher (if available) stating that the dividend is exempt from tax due to tax incentive granted to the dividend-paying company for carrying out substantive business activities in that foreign jurisdiction is sufficient
For Foreign-Sourced Dividends
For the purpose of this ‘subject to tax’ condition, tax paid or payable on foreign-sourced dividend received in Singapore includes:
- The dividend tax, which is income tax levied on the dividend by the foreign country/ territory of source
- The underlying tax, which is income tax paid or payable by the dividend paying company on the income out of which the dividend is paid
The following documents must be prepared to substantiate that the underlying tax has been paid on the income out of which the foreign-sourced dividend is paid:
- Audited accounts of the foreign dividend paying company
To demonstrate that its foreign-sourced dividend has suffered underlying tax, the company can provide the audited accounts of the foreign dividend paying company for the financial period ending in the year before the year the dividend is received in Singapore. The accounts must show a positive current year tax (excluding deferred tax expense).
IRAS is also prepared to accept the consolidated accounts of the foreign dividend paying company and its group companies as proof that the ‘subject to tax’ condition has been met. However, the foreign dividend paying company must be:
- A company listed on a stock exchange; and
- An operating company carrying out substantive business activities (investment holding is excluded). This must be supported by evidence such as description in the consolidated accounts or any official publication showing the principal activities of the foreign dividend paying company to be such (as opposed to the Group).
The consolidated accounts of the foreign dividend paying company and its group companies for the financial period ending in the year before the year the dividend is received in Singapore must show a positive current year tax (excluding deferred expense).
For example, if the dividend is received in Singapore on 30 Jun 2019, the consolidated accounts of the foreign dividend paying company and its group companies for the financial year 2018 must show a positive current year tax.
- Alternative documents accepted
IRAS also accepts the following documents to show that the income of the foreign dividend paying company has been subject to tax:
- A certification from the bank through which the taxpayer invested into the foreign dividend paying company
- A confirmation letter from the foreign dividend paying company that foreign tax has been paid on the income out of which dividends are paid
If you are unable to secure any proof that tax has been paid on the income of the foreign dividend paying company, the ‘subject to tax’ condition will not be considered met.
The relevant information/ documents must be retained for at least 5 years from the relevant YA.
IRAS may review and modify the use of alternative documents should there be any cases of abuse.
'Foreign Headline Tax Rate of at least 15%' Condition
Dividend is considered to be sourced in the jurisdiction that the dividend paying company is tax resident of. Where the dividend paying company is a non-Singapore tax resident, the dividend is considered foreign-sourced.
Foreign-sourced dividend may be paid by a company listed on the stock exchange in 1 jurisdiction (e.g. Hong Kong) but tax resident of another jurisdiction (e.g. Bermuda). Hence, it cannot be presumed that the jurisdiction of the listing of the dividend paying company is where the dividend is sourced.
Where a dividend paying company is incorporated outside the jurisdiction where it is listed, the Comptroller of Income Tax may treat the dividends as not sourced in the jurisdiction of listing unless there are facts to show otherwise. In such a circumstance, the ‘headline tax rate condition’ will be considered not met if the jurisdiction in which the dividend paying company is incorporated has a headline tax rate of less than 15%.
Expenses Incurred in Respect of Foreign-Sourced Income
All expenses incurred in respect of foreign-sourced income received in Singapore that qualifies for tax exemption must be deducted against such foreign-sourced income. These expenses are not available for deduction against any other taxable income.
How to Claim Tax Exemption
To enjoy the tax exemption, you have to provide the following information in your Corporate Income Tax Return (Form C):
- Nature and amount of income received
- Jurisdiction from which the income is received
- Headline tax rate of the foreign jurisdiction
- Confirmation that foreign tax has been paid in the jurisdiction from which the income is received. This is to satisfy the ‘subject to tax’ condition
If you are filing Form C-S/ Form C-S (Lite) instead of Form C, you should include the above information in the company's tax computation and retain any supporting documents/ information for at least 5 years from the relevant YA.