Corporate Tax in Singapore: What Startups Should Know
Top-ranking startup ecosystem, strategic location, ambitious economic policies, excellent environment for technology-driven industries and strong legal system are just few of the numerous benefits of starting a company in Singapore. But the most important benefit from a business point of view is the attractive policy of corporate tax in Singapore.
In an endeavor to create a perfect startup ecosystem for newly-established businesses and encourage foreign investments The Lion City has adopted ambitious economic policies and a flexible tax system.
In this article we’ll provide an overview of Singapore corporate tax regulations as well as discuss several important things that should be considered when incorporating a company in the dramatically growing business ecosystem of Singapore.
The startup-friendly tax regime of Singapore
Back in February 2004, the Government of Singapore reaffirmed its willingness to support entrepreneurship in the country by announcing corporate tax rate drop from former 22% to 20% and providing a S$100,000 startup tax exemption to businesses in their first 3 years of assessment (YA).
Since 2004 the vigorous efforts to boost entrepreneurship in Singapore have gone a long way. Today the headline corporate tax in Singapore is 17%, for taxable profits more than S$300,000. This is the highest tax that can be paid by companies in a certain jurisdiction. In case of startups and small or medium-sized businesses that enjoy tax benefits, including full tax exemptions, deductions and rebates provided by the Singapore Government, the tax to be paid can be much lower.
Which startups are eligible for full tax exemption?
Startups are entitled to claim full tax relief on the first S$100,000 of normal chargeable income (excluding Singapore franked dividends) for the first three consecutive years of assessment and a further 50% exemption on the next S$200.000 of normal chargeable income. A year of assessment(YA) is the period of time in which companies evaluate the income gained during the previous financial year and pay taxes on it.
The tax exemption scheme is available for all companies except those whose main activity is either investment holding or developing properties for sale, or both.
According to The Inland Revenue Authority of Singapore (IRAS) - the government body responsible for administering, assessing and collecting taxes; newly-established companies must fulfill the 3 following requirements to qualify for tax exemption scheme:
- The company must be incorporated in Singapore;
- The company must be a tax resident in Singapore for that assessment year;
- The company must not have more than 20 shareholders throughout the basis period for that YA where:
- all of the shareholders are individuals "beneficially and directly" holding the shares in their own names; or
- at least one shareholder is an individual "beneficially and directly" holding at least 10% of the issued ordinary shares of the company.
Partial Tax Exemption: Who is Eligible?
In order to further relieve corporations from their tax burden and make the city-state a more attractive hub for investors, the Government of Singapore has also established a partial tax exemption scheme.
All Singapore tax resident companies, except those who already benefit from a full tax exemption, can claim partial tax relief of S$ 152.500 after the first 3 years of assessment. Businesses that qualify for the partial tax relief scheme can get up to 75% relief on the first S$10,000 normal chargeable income and a 50% exemption on the following S$290,000 normal chargeable income.
Corporate Income Tax Rebate for YAs 2017-2018
During Budget 2018, the Minister of Finance of Singapore, Heng Swee Keat, announced that the maximum Corporate Income Tax Rebate for 2017 will be raised from S$20,000 to S$25,000. The rebate percentage will be the same as for the YAs 2016-2017, 50% of the corporate tax payable. According to IRAS, the CIT Rebate will be extended to 2018 at a reduced rate of 20% of the corporate tax payable, subject to a cap of $10,000.
Filing Annual Forms to IRAS
Companies in Singapore are generally required to submit two annual corporate income tax forms to IRAS declaring the amount of income generated during an accou
The first form submitted to IRAS is generally known as Estimated Chargeable Income (ECI) form which is the approximate estimation of a business’s taxable income for a certain YA and has to be filed within the first 3 months of the company’s financial year, except for companies that are exempt from filing the ECI form. The form can be either e-filed or paper-filed.
The second form is called Singapore Corporate Income Tax form. It must include all the financial transactions that occurred during the given YA, accounting records, bank statements or any other documents related to the financial operations of the company.
A financial year might be different from the calendar year. Based on what complements their financial operations more, company owners can choose to move the start and end dates of their accounting year. Although most companies prefer to begin their financial year on January 1 and end it on December 31, some might choose to have different end and start days of the accounting year; for example, 30 of June and 1 of July of each year.
Singapore Corporate Tax Residency
Being physically located and conducting trading activities in Singapore does not indicate that the company is a tax-resident in the city-state. Under the Income Tax Act of the state, the residence status of an entity is determined by the place from where it is managed and controlled.
To be considered a Singapore tax resident, the company should either locate its strategic management and decision-making body (e.g. Board of Directors) or have most of its Board meetings in Singapore showing that the key decisions by the managing authority are made in Singapore. It is also important to relocate the books and accounting records of the company to Singapore to improve its chances of getting a Singapore tax resident status.
Companies that meet the requisite requirements can apply for a Residence Certificate issued by IRAS and valid for only one year. Thus, when preparing its annual Income Tax Report to IRAS, the company should clearly show that during the previous 12 months the management of the company was indeed exercised in Singapore. In addition, it has to demonstrate that its income is remitted or is going to be remitted in Singapore. However, IRAS reserves the right to request for more information.
IRAS encourages taxpayers to file their reports and pay their taxes on time. Paying taxes late or not filing taxes at all may have serious consequences for companies and individuals. IRAS reserves the right to take necessary actions, such as fining the company for late tax return, taking the guilty party to the court or issuing an arrest warrant. Hence, it’s essential to keep the company’s accounting reports and cash flow under constant control.
In order to avoid the hassle of managing all the financial records, bookkeeping and paperwork companies can engage professional accounting services or software to the increase the time-efficiency of the accounting process.