Have you considered establishing a company in Singapore? Is the thought of starting your own business and managing your operations, marketing, and sales appealing to you?
If so, you ought to be aware that your start-up can qualify for tax benefits. These tax exemptions might provide a significant boost that could encourage you to launch your company much more swiftly.
These schemes were initiated by the Singaporean government in 2005, and they have continued to improve the business climate in the nation. This article is a summary of numerous tax exemption schemes for newly established firms that encourage them to take the initiative and adopt creative thinking.
The Start-Up Tax Exemption (SUTE) Scheme: What Is It?
To aid enterprises incorporated in Singapore, the Singaporean government is always proposing new incentives and schemes programs.
The Start-Up Tax Exemption Scheme, or SUTE scheme, offers qualified start-ups a special tax exemption for the first three years of assessments. By lowering the relevant corporate tax rates, it offers these new companies some tax relief.
The first S$300,000 of the company’s net chargeable income was exempt when the scheme was first introduced in 2005. The scheme was altered in Budget 2018, and as a result, the first S$200,000 of the company’s net chargeable income is now free from any taxation.
The new tax exemption system, however, only took effect in YA 2020 and has resulted in two distinct situations for tax exemption for eligible businesses.
Which are the Typical Tax Benefits for Singapore Corporations?
Singapore offers several standard tax reliefs, including:
- A new start-up tax exemption scheme for newly started Singaporean firms.
- Full tax exemption for all businesses.
- Deduction of costs incurred before the start of a business.
Singapore originally instituted the tax exemption program in 2005, intending for it to foster local company development and entrepreneurship.
For the first three years of assessment (YAs) following the date of establishment, businesses are exempted from paying taxes per the following schedule:
- The first $100,000 of ordinary chargeable income is subject to a 75% exemption, which reduces the first $100,000 of chargeable income’s effective tax rate to 4.25%; and
- The following $100,000 of chargeable income also receives a further 50% exemption, lowering the effective tax rate on that amount to 8.5%.
Keep in mind that any income subject to the current corporate tax rate is referred to as “normal chargeable income.”
What are the Requirements to Qualify for the SUTE Scheme?
The SUTE system makes tax exemption available to all start-ups that meet the following requirements:
- The start-up is registered in Singapore.
- For the relevant YA, the start-up is a Singaporean tax resident.
- There is a maximum of 20 shareholders in each YA of the company.
Additionally, a business must fulfil one of the requirements listed below to be eligible for tax exemption for start-up businesses:
- Individuals who possess the shares directly and beneficially in their names as shareholders.
- Or, at least one individual shareholder beneficially and directly owns 10% or more of the company’s issued ordinary shares.
Which Companies are Ineligible for a Start-Up Company Tax Exemption Scheme?
Except for the businesses that fit into these two categories, all newly registered firms in Singapore are eligible for tax benefits for start-up businesses:
- A company that primarily deals with investment holdings and generates money from investments.
- A company that develops new real estate for investment or sale.
These two groups are left out for the following reasons:
- Only passive income, such as dividend and investment income, is generated by investment holding corporations.
- For each new property development, real estate development businesses register a new company.
The SUTE initiative was launched mainly as an initiative to encourage entrepreneurship among Singaporeans. These two business models, however, do not meet their requirements. They stand for a business model that is incompatible with entrepreneurship in start-ups. As a result, they can only receive a partial tax exemption.
What are the Requirements for Corporations Limited By Guarantee to Qualify for SUTE Scheme?
If they meet the following requirements, companies limited by guarantee are also eligible for the SUTE scheme:
- Each of its members is an individual in that YA.
- A minimum of one individual member who, per the Company Constitution, contributed at least 10% of all members’ contributions to the company’s assets during the relevant YA.
How Do You Determine the First YA for Your Company?
The SUTE scheme is applicable only for a start-up’s initial three years of assessment. Determining your company’s first YA is essential to maximise tax benefits. A company’s first YA is typically decided by the FYE (Financial Year End) selected and the closing date of its first set of accounts.
However, the base period for the company’s registration is equally relevant to the first YA for tax exemption. As a result, two businesses that were founded on the same day may have different YAs.
What Takes Place from the Fourth Year Onwards?
After the first three years, it is no longer possible for a company to apply for or make use of the start-up tax exemption scheme’s benefits. However, it may then go on to qualify for the Partial Tax Scheme for Companies starting in the fourth year (PTE).
Claiming the SUTE Scheme’s Tax Exemption for Start-Up Companies
The SUTE scheme employs an automated process for new businesses seeking these tax benefits. After completing the necessary sections, you must also file your corporation tax return (Form C-S/C) and Estimated Chargeable Income. Following the submission, IRAS (Inland Revenue Authority of Singapore) will immediately compute the tax exemption amount that you are entitled to.
What are the Partial Tax Exemptions Schemes for Singaporean Corporations?
The following firms will be eligible for the Partial Tax Exemption (“PTE”) Scheme if they do not qualify for the SUTE during the first three years of operation or after the fourth year of operation:
- The first S$10,000 of regular chargeable income is subject to a 75% exemption, which reduces the effective tax rate on that amount to 4.25%; and
- In addition, a further 50% exemption is applied to the next S$190,000. This lowers the effective tax rate on the following S$190,000 of chargeable income to 8.5%.
Tax Exemption for Income Derived from Abroad
Tax exemptions may apply to some foreign-sourced income types:
- Dividends sourced from abroad.
- Foreign branch earnings.
- Service revenue from abroad.
Foreign-sourced income must be repatriated to Singapore to qualify for this exemption, and it must also fulfil the following criteria:
- When foreign income is received in Singapore, the top marginal tax rate in the receiving country is at least 15%.
- The foreign jurisdiction has already taxed the foreign-sourced revenue (note that the rate at which the foreign income was taxed can be different from the headline tax rate).
- The Singaporean tax resident would benefit from the tax exemption, according to the Singaporean government.
What Additional Costs are Tax Deductible?
It’s helpful to know that only revenue costs incurred after the beginning of your business activities qualify as tax deductions.
Tax deductions are available for revenue costs incurred up to a year before the start of the fiscal year in which you receive your first income.
Since they are considered to have been expended before the production of income, business costs incurred before the start of activities are not tax deductible.
Capital Allowances (CA)
You may be able to claim CA on fixed assets that you purchase and use in your trade or company. Depreciation, which is not tax-deductible, is replaced with CA in this case. This may, for instance, apply to the furniture, fittings, and electronic or office equipment you own.
Expenses Related to Renovation and Refurbishment (R&R)
Your company is entitled to a deduction for allowable business costs on your R&R works. This may, for instance, include the cost of flooring, wall coverings, permanent partitions, general electrical installations, lighting, and doors and windows.
A deduction will be given on a linear basis over three successive YAs, with a $300,000 maximum for each of the three basis periods.
Misuse of a Tax Break
IRAS strongly advises businesses not to seek to take advantage of the various tax exemption schemes it offers.
More than 200 businesses were inspected in 2019 alone to look for any potential misuse of the tax exemption scheme for new businesses, resulting in more than S$25 million in tax recovery and penalties.
Never forget that tax evasion is a crime punishable by law, and the courts impose severe punishments for such acts.
Anyone who engages in abusive tax arrangements, such as setting up shell companies to benefit from the tax exemption scheme for new businesses or who helps others engage in similar practices, should immediately confess to such behaviour.
When weighing the legal charges, IRAS will consider this as a mitigating circumstance.
Hopefully, you and your company may benefit from these schemes.
Since every dollar matters in the first few years of business, new entrepreneurs can benefit significantly from these schemes. The money saved will undoubtedly make a difference.
Just keep in mind that IRAS will not tolerate any abuse of the system and that you should keep all activities within the bounds of the law.
If you need help managing your taxes and getting the most from these tax benefits, you should engage an experienced tax consultant. Timcole can help incorporate your company in Singapore and claim tax exemptions on your profit. In addition, we can offer tax advice regarding the commencement of business activities and also guide you to maximise your tax savings.