Tax Treatment Of Redomiciled Companies Under Newly Amended Income Tax Act
- Foreign companies are now allowed to redomicile in Singapore
- Tax treatment of deductions, allowances and intellectual property acquisitions provided under Section 34G
- Tax credits available under Section 34H
On 11 October 2017, a new redomiciliation regime came into force allowing companies incorporated outside Singapore to be redomiciled in Singapore. The law of the company's place of incorporation must authorize the redomiciliation, and the applicant company must comply with these laws. This redomiciliation allows the company to maintain its corporate history and identity, and will be useful for facilitating corporate group restructurings.
(For background information regarding the redomiciliation regime's introduction and application procedure, please refer to our earlier Client Alert — "New Companies Act redomiciliation provisions now in force".)
The newly amended Income Tax Act now provides for the tax treatment of redomiciled companies. Section 34G sets out the tax treatment of deductions, allowances, and intellectual property (IP) acquisitions — applying only to companies that are registered as a company limited by shares under Part XA of the Companies Act and that have not previously carried on trade or business in Singapore prior to redomiciliation. Section 34H sets out the tax credits available under the new regime.
Tax Treatment Of Deductions, Allowances And IP Acquisitions
Section 34G accounts for the tax treatment of the company's bad debts, expenses, impairment losses, capital expenditure, and IP acquisitions.
Bad debts and impairment losses for debts
There is no tax deduction for bad debts and impairment losses for debts that were incurred prior to redomiciliation. Conversely, any subsequent recovery or reversal of bad debts or impairment losses after redomiciliation would not be chargeable to tax.
Deductions for impairment losses for financial assets
Where a company incurs impairment losses in respect of financial assets before redomiciliation and these are reversed after domiciliation, the reversals are not taxable.
However, where a redomiciled company incurs an impairment loss from any financial asset that it acquired before redomiciliation, the company may be allowed a deduction subject to certain conditions. Any reversal of the impairment loss allowed will be chargeable to tax.
Deductions for expenses
No deduction is allowed in respect of any expenses incurred prior to the company's redomiciliation where those expenses were allowed deduction or relief by a foreign country levying tax akin to income tax.
For trading stocks acquired before its redomiciliation date, the deduction allowed under any provisions of the Income Tax Act is the lower of (a) the cost of the trading stock to the company; or (b) the net realizable value of the trading stock on that day.
Deductions under Sections 14A, 14D, 14Q, 14S and 14U
These sections generally refer to specific IP-related expenses and renovation and refurbishment.
Despite the provisions under Sections 14A, 14D, 14Q, 14S and 14U, a redomiciled company may claim a deduction under those sections for costs, payments or expenses incurred prior to its redomiciliation provided firstly, it did not carry on any trade or business outside Singapore prior to its redomiciliation and secondly, they were incurred for the purposes of a trade or business in Singapore.
Capital allowances (initial and annual allowances) under Section 19 are available to a redomiciled company for capital expenditure incurred prior to its redomiciliation to acquire plant and machinery, provided they are used for its trade or business in Singapore after its redomiciliation. The allowances are based on the lower of the net book value or market value of the plant and machinery.
Accelerated capital allowances under Section 19A (in lieu of Section 19 capital allowances) are similarly available for plant and machinery acquired prior to its redomiciliation and also for developing a website mentioned in Section 19A(10). This is provided that the plant and machinery, and website are used for the company's trade or business in Singapore after its redomiciliation. The allowances are granted based on the lower of the net book value or market value of the item or website at the date of redomiciliation.
Writing down allowances for IP rights
Section 34G also makes allowances available for expenditure on acquisition of IP rights prior to redomiciliation provided the rights are used for its trade or business in Singapore after its redomiciliation. The allowances are based on the lower of (a) the acquisition cost of the IP rights less the accumulated amortisation and impairment losses as at the redomiciliation date, and (b) the open market price of the rights as of that date.
Tax Credits and Powers for Recovery
A redomiciled company that is resident in Singapore and has income taxable in Singapore may upon redomiciliation also have taxes on the estimated income in its country of incorporation. A tax credit based on a formula may be allowed in respect of the foreign tax subject to conditions and the years of assessment that may be specified by the Minister.
If a redomiciled company ceases its trade or business in Singapore, an amount is recoverable by the Comptroller of Income Tax based on a formula applied on the tax credit granted to the company.
With the Companies Act instituting a new regime allowing for redomiciliation of companies, Singapore has kept pace with the other countries that have facilitated similar changes. The new amendments under the Income Tax Act addresses the applicable tax treatment for companies that might choose to redomicile in Singapore.