If you are a foreigner planning to expand your business in Singapore a good assumption for one of the reasons that may have motivated such a decision are the notorious tax rate for companies in the country. The Singapore corporate tax rate is perhaps one of the most beneficial for startups and in general for new developing companies. In this article, we will try to explain briefly why this is indeed a sound argument.
Corporate Tax Rate in Singapore
With effect from 2020, the corporate tax in Singapore has a flat rate of 17% on the chargeable income of a company. The chargeable income, as in most countries, is calculated by subtracting the deductible costs of the business from its taxable revenues. Under local law, an expense is considered deductible if the company can prove that it has been necessary to earn a respective income.
17% doesn’t sound that great, we know. However, what makes Singapore taxation regulation so beneficial is the variety of schemes that lower the payable tax.
Tax Exemption for Start-Ups
The tax exemptions scheme for new companies has been introduced in Singapore back in 2005 in a rather successful attempt to encourage entrepreneurship. The taxation regulations allowed new companies to deduct 100% of their taxable income for the first S$100 000 of annual revenue and further 50% on the next S$200 000.
This generous policy was revised the new rules for tax exemptions are as follows:
- 75% on the first S$100 000 of revenues;
- 50% on the next S$100 000 of revenues
These tax exemptions apply to the first three financial years of new companies. They allow start-ups to save up to S$125 000 from corporate tax every year.
In order to qualify for the Start-up Tax Exemption Scheme your company must satisfy three conditions:
- The company must be incorporated in Singapore;
- The company must be a tax resident of Singapore;
- The company does not have more than 20 shareholders
Tax Exemption for Regular Companies
If your company is not a Start-up it can still be eligible to qualify for the Partial Tax Exemption (PTE). It allows:
- 75% on the first S$10 000 of revenues;
- 50% on the next S$190 000 of revenues
The maximum tax exemption here is S$ 95 000 per year.
You should be aware that the Inland Revenue Authority of Singapore (IRAS) takes a strong stand against companies that try to abuse the tax exemption schemes. There are two major ways to try and circumvent the limits of the exemptions:
- Allocating income to different companies in order to keep the chargeable income of each company within the threshold;
- Charging fees/expenses to shell companies for the sole purpose that they claim the tax exemption while the original companies claim a deduction of taxable income.
Tax evasion is a criminal offense in Singapore and the IRAS performs a frequent audit on companies that are suspected to abuse the tax exemption schemes.
Year of Assessment And Basis Period
In order to fully understand the Singapore corporate tax schemes, you should know the meaning of “year of assessment” and “basis period”. Singapore companies are taxed on their income earned in the preceding financial year – the basis period. The year in which the tax is assessed is called “year of assessment” (YA).
2020 is the YA for your incomes generated in a basis period that ends in 2019. A basis period is generally a 12-month period preceding the YA. In Singapore, companies are allowed to choose their financial years freely. It is common to choose a final date of the financial year one of the following dates:
- 31 December;
- 30 June;
- 31 March
Here is an example with a random basis period. If your financial year ends on 30 June your basis period may be 1 July 2018 – 30 June 2019. The year of assessment for this basis period is still 2020.
New taxation rules in Singapore usually apply not to basis periods but to assessment years.
Deduction of Expenses Before Commencing Business
In Singapore, the moment of incorporation of a company is different from the moment of commencement of business. The latter is the date when the company makes its first profit. However, even though the company hasn’t commenced its business activities it may still incur expenses. These expenses are tax-deductible if they are incurred within 12 months before the start of the financial year in which your company has commenced business.
Here is an example: If you incorporate your company on 15 March 2020 but only start selling goods/services in 2021, your first year of assessment will be 2022. The expenses incurred in 2020 will also be subtracted from the taxable income in 2021.
Useful Resources
