The Singapore Tax Authority (IRAS) have special rules relating to the taxation of investment companies. An investment company is one that owns investments such as properties, shares, bonds and therefore derives income such as rental, dividend and interest.
The principle activity of the company is that of owning investments. In particular we look at three types of such companies namely an:
(i) Investment holding company
An investment holding company holds investment assets such as properties, shares and bonds for long-term investment and as such derives income such as rental, dividends and interest which are regarded as ‘passive’ income and is non-trade in nature.
Expenses which are deductible against the investment income are classified into 3 categories:
(a) Direct Expenses
These expenses are incurred directly to derive the income e.g. interest on loan to purchase property which is rented out and other outgoings such as property tax, maintenance fees and agent’s fees.
Where a company derives different sources of income and the direct expenses attributable to the source of income are more than the income, the excess expenses cannot be off-set against the other sources of income. Where one source of income is exempt e.g. one-tier dividend the expenses incurred by this investment cannot be off-set against other taxable income like interest.
Capital expenditure incurred such as legal and stamp fees to acquire the investment are disallowed. Commission, legal and advertising costs to derive the first tenancy are considered capital in nature and disallowed although these expenses incurred on subsequent tenancies and renewals will be allowed.
(b) Statutory expenses
Expenses which are incurred to comply with statutory and regulatory provisions such as the Companies Act are allowed e.g. corporate secretarial fees for yearly filing with ACRA, audit fees, accountancy fees and bank charges.
(c) Indirect expenses
Apart from the direct and statutory expense other expenses such as staff salaries, Directors’ fees, transport expenses and other general expenses are not permitted, but as a concession IRAS has allowed such expenses but restricted the deduction to 5% of the turnover or the actual indirect expenses incurred whichever is lower.
The statutory and indirect expenses are allocated to the different sources of income by apportionment on a turnover basis.
Due to the nature of an investment holding company i.e. it derives only passive income and is not trading, it is not allowed to claim capital allowances. An investment holding company is not entitled to claim any of the benefits available under the Productivity and Innovation Credit Scheme. In addition it is not entitled to claim Group Relief to off-set losses with other companies within its group and if there are any unutilised losses during the year they cannot be brought forward as well.
Investment holding companies incorporated after the 25th of February 2013 are not eligible to claim the Tax Exemption for New Start-up Companies which comprises of full tax exemption for the first S$100,000 and 50% of the balance S$200,000 of chargeable income. However investment holding companies can still enjoy the partial tax exemption of 75% of the first S$10,000 and 50% towards the balance S$290,000 of chargeable income.
(ii) Investment dealing company
A company that is carrying out the business of deriving investment income as a trade is taxed as though its business activities constitute a trade. The company’s income is determined under section 10E of the Income Tax Act and is taxed as a trade income. Whether a company is an investment dealing company or an investment holding company is a question of fact and the IRAS will look at the facts and business activities to determine this.
Deduction of expenses is less restrictive for an investment dealing company than for an investment holding company. The following rules apply to determine the deduction of its expenses:
(a) Any outgoings or expenses incurred in respect of investments which produce income are deductible.
(b) Any outgoings or expenses incurred in respect of investments which produce income are only deductible against the income derived from such investments. The balance of any outgoings and expenses which cannot be set-off in that year shall be disregarded; and
(c) It is allowed to claim capital allowances under the Income Tax Act for plant and machinery used to derive its income. The balance of any allowances which cannot be set off in that year shall be disregarded.
As the investment dealing company is carrying out a trade, it would be able to enjoy the benefits of the Productivity and Innovation Credit Scheme. It is also able to claim the full tax exemption for the first 3 Years of Assessment after incorporation.
Group Relief is however not available as any losses and capital allowances which are not utilised are disregarded.
(iii) Eligible family-owned investment company
Tax exemption for qualifying family-owned investment holding company (FIHC) was introduced in the 2008 Budget. The scheme allows a FIHC to enjoy tax exemption on income that would be otherwise exempt if derived or received by an individual. This would encourage individuals to use companies as investment vehicles and facilitate wealth and succession planning.
Under this scheme Singapore sourced investment income accrued or derived on or after 1 April 2008 and foreign sourced income received in Singapore on or after 1 April 2008 by FIHC are exempt. Thus Singapore sourced investment income such as interest income which is exempt in the hands of the individual would be exempt when received by the FIHC. Remittances of foreign income like rental which is taxable if received by a company would be exempt to the FIHC.
To qualify for this exemption, the FIHC must:
(a) Be incorporated before 1 April 2013;
(b) Be principally engaged in investment holding/making;
(c) Be wholly-owned, either directly or through a trust, nominee company or another FIHC, by individuals who are ‘connected’ persons under the Trust Companies Act;
(d) Be administered by an institution licensed or approved by the Monetary Authority of Singapore (MAS);
(e) File an annual declaration with the MAS and the IRAS.
The FIHC can be resident in Singapore, maintain bank accounts in Singapore and be managed from within Singapore.
The FIHC can also enjoy the following tax benefits:
(a) The FIHC can remit tax free dividends to its Shareholders regardless of whether they are resident or non-resident in Singapore;
(b) The FIHC being a Singapore tax resident company can enjoy the benefits of Singapore’s extensive network of Double Tax agreements especially in the area of reduced withholding tax rates on dividends and interest;
(c) In addition if the income of the FIHC is less than S$5,000,000 the company need not prepare and file audited annual financial statements; and
(d) No approval is required from the MAS or IRAS for the scheme and the scheme can be applied so long as it meets all the qualifying conditions.
The FIHC would need to file an annual tax return with the IRAS.