Singapore amends Foreign Source Income Exemption (FSIE) regime

The Singapore parliament passed the Income Tax (Amendment) Act 2023 on 3 October to introduce a new Section 10L in the Income Tax Act 1947 (ITA), which aligns Singapore’s foreign source income exemption (FSIE) regime with international standards by taxing gains received in Singapore from the sale of foreign assets by businesses without economic substance in Singapore.

The Act, which applies as of 1 January 2024, is a significant departure from the current tax regime, where only revenue-based foreign-sourced income – such as dividends, royalties and interest – are taxed in Singapore, and not capital gains.

In 2019, the European Union’s Code of Conduct Group (COCG) announced a review of FSIE regimes worldwide, including Singapore and Hong Kong, on the grounds that tax systems that excluded passive income without any conditions, such as economic substance requirements, could be regarded as ‘ringfencing’ and therefore harmful.

In 2021, the COCG assessed Singapore’s FSIE scheme as not harmful, but Hong Kong was added to the EU’s ‘grey list’ of non-cooperative jurisdictions for tax purposes. Hong Kong amended its FSIE scheme with effect from 1 January 2023 and will make further amendments with effect from 1 January 2024.

Following an update of the COCG guidance in respect of FSIEs in December 2022, the Singapore Ministry of Finance (MOF) proposed amending its FSIE regime to tax gains from the sale of foreign assets that are received in Singapore by businesses without economic substance in Singapore in line with the revised COCG guidance.

Under the new Section 10L of the Income Tax Act (ITA), gains from the sale or disposal of any movable or immovable property situated outside Singapore (foreign assets) by a relevant entity that are received in Singapore from outside Singapore, on or after 1 January 2024, will be treated as income chargeable to tax.

The rules for determining the situation of movable and immovable property, are as follows:

• Immovable property and tangible movable property are situated where the property is physically located.
• Secured or unsecured debt (other than a judgment debt or securities) is situated where the creditor is resident.
• Shares in or securities issued by a company, and any right or interest in such shares or securities, are generally situated where the company was incorporated.
• Intangible movable property is situated where the ownership rights in respect of the property are primarily enforceable.

A relevant entity is an entity that is part of a group where at least one entity of the group has a place of business outside Singapore. As such, domestic groups and standalone entities are excluded.

Generally, an excluded entity is one that has adequate economic substance in Singapore. Pure equity-holding entities (PEHEs), whose primary function is to hold shares or equity interests in other entities and have no other income than dividends or similar payments, are further excluded.

Excluded entities are not required to carry on a trade, business or profession in Singapore but are required to maintain reasonable economic substance in Singapore and need to make sure that the operations of the entity are managed and performed in Singapore.

MOF said it would not be practical to prescribe minimum thresholds to establish economic substance in legislation because business models and scale of operations will vary even within the same sector. Instead, IRAS will provide further guidance through an e-Tax Guide, including examples for certain sectors.

Section 10L requires the foreign assets to be disposed of or sold at their open market value. The selling entity may claim a tax deduction on amounts incurred to acquire, create, or improve, protect or preserve the value of, or sell or dispose of the property, and any ‘unused’ losses it incurred on the sale or disposal of any other property where the gain would have been chargeable under Section 10L. If Section 10L gains are received in Singapore in different basis periods, the deductible expenses must be reasonably apportioned between the relevant basis periods.

Section 10L deems gains from the disposal of foreign assets that are received in Singapore as chargeable income under section 10(1)(g) of the ITA. From an international tax perspective, section 50A of the ITA in respect of unilateral tax credits has also been amended to provide that unilateral tax credits will be given for any foreign tax paid in respect of a gain that is treated as income under section 10L.

Taxpayers should review existing structures to assess the impact of the new Section 10L, particularly in respect of the nature of certain assets and the economic substance of relevant entities.

Contact Sovereign Singapore specialist tax advisory team for more information and support on this change.