When Singapore separated from Malaysia almost 50 years ago, it was a struggling city-state with no natural resources of its own, except its people. Thus, to promote economic growth and development, the leadership of the country decided to open doors and invite foreign investments and international trade.
Business-friendly and efficient tax policies were implemented; English educated skilled workforce was brought up; robust and transparent regulatory environment was initiated; and a world-class infrastructure was set-up. Slowly, Singapore became the world’s easiest place to do business, one of its busiest ports, a prolific oil refining and distribution centre, a leading supplier of electronic components, and arguably Asia’s financial hub.
The Singapore Government provides tax incentives for business activities that enhance the country’s economic or technological development. Tax incentives are available to a wide range of industries, including manufacturing, shipping, trading, investment and financial services sectors.
How are tax incentives offered to companies?
Tax incentives are either in the form of an exemption from taxation or a reduction in the tax rates.
There are various tax incentives available to taxpayers involved in specified activities or industries identified as being beneficial to Singapore’s economic development.
Tax incentive applications are typically subject to an approval process during which the administering agency evaluates the applicant’s business plans in detail. Successful applicants are required to satisfy rigorous requirements and are expected to make significant economic commitments in Singapore.
Generally, applicants are expected to carry out substantive, high value activities in Singapore, and will be required to commit to certain levels of local business spending and skilled employment. Some factors that will be considered include the use of Singapore as a base from which to implement regional growth strategies; introduction and anchoring of leading-edge skills, technology, and activities in Singapore; contributions to the growth of R&D and innovation capabilities; and potential spin-off to the rest of the economy.
Pioneer tax incentive
Corporations manufacturing approved products with high technological content or providing qualifying services may apply for tax exemption for five to 15 years for each qualifying project or activity under the pioneer tax incentive. Corporations may apply for their post-pioneer profits to be taxed at a reduced rate under the Development and Expansion Incentive, as discussed below.
Development and Expansion Incentive
Under the Development and Expansion Incentive, corporations engaging in new high-value-added projects, expanding or upgrading their operations, or undertaking incremental activities after their pioneer period may apply for their profits to be taxed at a reduced rate of not less than 5% for an initial period of up to ten years. The total tax relief period for each qualifying project or activity is subject to a maximum of 40 years (inclusive of the post-pioneer relief period previously granted, if applicable).
Under the investment allowance, a tax exemption is granted on an amount of profits based on a specified percentage (of up to 100%) of the capital expenditure incurred for qualifying projects or activities within a period of up to five years (up to eight years for assets acquired on hire-purchase). Capital expenditure incurred for productive equipment placed overseas on approved projects may likewise be granted integrated investment allowances. Investment allowances of 100% of capital expenditure (net of grants) may be granted to businesses seeking to make substantial investment in automation, subject to a cap of SGD 10 million per project.
Incentives for internationalisation
The International Growth scheme provides for a 10% concessionary tax rate on incremental income from qualifying activities for up to five years. This incentive is intended for larger Singapore companies that anchor key functions in Singapore as they venture overseas.
In addition, the double tax deduction scheme for internationalisation allows companies expanding overseas to claim a double deduction for eligible expenses for specified market expansion and investment development activities. This includes manpower expenses incurred when Singaporeans are deployed to overseas entities.
Intellectual Property Development Incentive (IDI)
The IDI is a new incentive scheme that was introduced to encourage the exploitation of IP arising from R&D activities of the taxpayer. Income from the commercialisation of certain IP will be taxed at a concessionary rate. This incentive scheme is expected to be modelled after the modified nexus approach set out in the Action 5 report of the OECD base erosion and profit shifting (BEPS) project.
Productivity and Innovation Credit (PIC)
The PIC scheme provides for an enhanced 400% deduction for qualifying expenditure incurred in respect of six qualifying activities during the accounting periods that end between 2010 and 2017 (i.e. years of assessment 2011 to 2018). The six qualifying activities are:
- The acquisition or leasing of prescribed IT and automation equipment.
- Staff training.
- The acquisition of IP.
- The registration of IP rights.
The enhanced deduction is available only on the first SGD 400,000 of qualifying expenditure incurred each year on each of the qualifying activities, although, for the years of assessment 2015 to 2018, qualifying small and medium enterprises may claim PIC benefits for up to SGD 600,000 of such expenditure for each qualifying activity a year. The cap may be combined for certain years of assessment. Certain activities are subject to approval or minimum ownership requirements.
For the years of assessment 2013 to 2018, the acquisition of IP rights includes licensing of those rights, other than trademarks and any rights to the use of software.
Mergers and acquisitions allowance
The mergers and acquisitions allowance allows a write-off, over five years, of 25% of the value of qualifying mergers or acquisitions deals executed between 1 April 2015 and 31 March 2020, subject to a cap of SGD 5 million (SGD 10 million for deals executed from 1 April 2016 to 31 March 2020) per year of assessment. This incentive is available only to companies that are incorporated, tax resident, and carrying on a business in Singapore. A 200% tax allowance is also granted on transaction costs (capped at SGD 100,000 per year of assessment) incurred on qualifying deals.
Financial services incentives
Financial Sector Incentive (FSI) scheme
The FSI scheme covers a broad range of financial institutions, including bond intermediaries, Asian currency units, derivative traders, fund managers, equity capital market intermediaries, operational headquarters, providers of high-value-added processing services supporting financial activities, providers of trustee and custodian services, and trust management or administration services. Financial institutions that plan to expand their Singapore operations and are prepared to meet various strict qualifying conditions may apply for this incentive.
Under the FSI scheme, income from certain high growth, high-value-added activities, such as services and transactions relating to the bond market, derivatives market, equity market, and credit facilities syndication, may be taxed at 5%, while a broader range of financial activities will qualify for a 12% tax rate. This rate has been increased to 13.5% for awards granted or renewed from 1 June 2017, and the scope of qualifying income has been expanded (broadly speaking, certain currency, counterparty, and investment instrument restrictions have been removed). The tax incentive period may last for five, seven, or ten years, subject to certain conditions being met.
Finance and treasury centre (FTC)
Income derived by an FTC from approved FTC activities is taxed at a reduced rate of 8%. Approved activities include international treasury and fund management activities, corporate finance and advisory services, economic and investment research and analysis, and credit control and administration.
Interest payments to overseas banks and approved network companies are also exempt from WHT where the funds borrowed are used for approved activities.
Debt securities incentives
A package of tax concessions is available to various players in the Singapore bond market, including those involved in certain Islamic financing arrangements.
Insurance Business Development (IBD) scheme
The IBD scheme is an umbrella incentive for the insurance sector. Incentives offered under this scheme include a 10% concessionary tax rate for qualifying income of life, general, and composite insurers from carrying on insurance businesses from Singapore. This includes income from marine hull and liability insurance and captive insurance businesses. The concessionary tax rate is further reduced for qualifying income derived by insurers and brokers in respect of qualifying specialised insurance businesses.
Real Estate Investment Trusts (REITs)
Distributions made to foreign non-individual investors by a listed REIT out of rental income from Singapore real estate are subject to a reduced tax rate of 10%, subject to certain conditions being met. Listed REITs investing in foreign properties can apply for tax exemption for certain foreign income received in Singapore. Distributions out of this income similarly are exempt. A GST remission is granted to listed REITs to allow them to claim GST on their business expenses regardless of whether the underlying assets are held directly or indirectly through SPVs or sub-trusts.
Islamic financing arrangements
The income tax, stamp duty, and GST treatment of prescribed Islamic financing arrangements and Islamic debt securities (Sukuk) are aligned with that of the conventional financing contracts to which they are economically equivalent, subject to certain conditions.
Infrastructure project finance incentives
Tax exemption is available for interest income earned from qualifying investments in qualifying infrastructure projects/assets. FSI companies that provide project finance advisory services related to qualifying projects/assets may enjoy certain tax concessions for their qualifying income, and companies that provide management services to qualifying business trusts and funds pay tax at 10% on their qualifying income.
Sovereign wealth funds
Tax exemption is available for income derived by a sovereign fund entity and an approved foreign government-owned entity from funds managed in Singapore.
Headquarters (HQ) schemes
Approved regional headquarters in Singapore are taxed at a concessionary rate of tax of 15% on qualifying overseas income. Depending on their level of economic commitments to Singapore, international headquarters can apply for various tax incentives, including tax exemption or concessionary tax rates on qualifying income.
Maritime Sector Incentive (MSI) scheme
The MSI scheme is the umbrella incentive for the maritime sector. Incentives offered include tax exemption for shipping companies and a 10% concessionary tax rate for international freight and logistics operators. Approved ship investment managers are also taxed at 10% on qualifying management-related income. The scheme also includes approved ship investment vehicles, which are tax exempt on their qualifying vessel lease income; approved container investment enterprises, which are taxed at 5% or 10% on qualifying income from container-leasing; and approved container investment management companies, which are taxed at 10% on qualifying management fees.
Qualifying ship operators and lessors under the MSI scheme also enjoy automatic tax exemption on gains from the disposal of vessels, vessels under construction, and new building contracts.
Global Trader Programme (GTP)
International traders are taxed at concessionary rates of 5% or 10% on qualifying income from physical trading, brokering of physical trades, and derivative trading income. This incentive was enhanced from 21 February 2017 to include income from trading activities in Singapore.
Incentives for not-for-profit organisations and the provision of international legal services include tax exemptions or concessionary tax rates of 10% for qualifying income. There is also a concessionary tax rate of 8% for approved aircraft lessors.
Foreign tax credit
See Foreign income in the Income determination section for a description of the foreign tax credit regime.
Singapore is a country with one of the lowest tax rates in the world. But on top of its low rates, the country provides numerous tax incentives and cash grants to help the growth of businesses thereby reducing the effective tax rates even further. Additionally, the hassle-free legal system and efficient business policies make Singapore a very attractive place for entrepreneurs to start their business. The country also provides a natural hub for expansion to Asia and Australia. If you wish to set up a new business, Singapore is a very attractive choice for these reasons.