2. Share and asset sale, and acquisition of IP

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Questions and Answers

What is a potential outcome of identifying tax exposures during a transaction?

Reduction of regulatory compliance requirements

Increase in the goodwill assessment

Possible impact on purchase price and need for retention (correct)

Elimination of tax liabilities in future years

Which of the following is NOT a key warranty typically included in tax warranties?

No tax liability in other jurisdictions

Guarantee of no tax changes in future (correct)

All inter-company transactions on an arm’s length basis

All returns filed, completed, and correct

What does tax indemnity specifically cover in the context of a transaction?

General disclosures related to tax avoidance agreements

Tax obligations incurred after the accounts date

All guarantees for future tax liabilities post-completion

Liabilities arising from pre-completion income and profits (correct)

In assessing potential tax liability, which aspect is NOT considered?

Future profitability forecasts Signup and view all the answers

What action can be taken if the wording of a Seller's tax statement proves to be incorrect?

The Buyer can claim damages subject to proving their loss Signup and view all the answers

What is the main condition for a loss to be deductible against profits as per the Same Business test?

The loss must be directly related to the same trade or business. Signup and view all the answers

Which of the following transactions is subject to stamp duty according to the content?

Transfer of shares in a Singapore company. Signup and view all the answers

When must stamp duty be paid if the instrument is executed outside of Singapore?

Within 30 days after it has been received in Singapore. Signup and view all the answers

What rate of stamp duty applies to the transfer of shares?

0.2% on the higher of consideration or market value. Signup and view all the answers

In which scenario would Additional Conveyance Duty (ACD) apply?

Transfer of equity in an entity owning a Singapore residential property. Signup and view all the answers

What can be used as a proxy for the value of shares if there is no market value available?

The net asset value of the company. Signup and view all the answers

Which type of property is considered under the definition of residential property for ACD purposes?

Properties zoned for mixed purposes, which includes residential. Signup and view all the answers

What is the time frame for paying stamp duty on instruments executed within Singapore?

Payable within 14 days after execution. Signup and view all the answers

What is included in the definition of Tax Liability covered by the tax indemnity?

Loss or reduction in the amount of any tax asset reflected in the target’s accounts. Signup and view all the answers

Which of the following is NOT considered a limitation or exclusion from tax indemnity?

Tax Liabilities reported during due diligence. Signup and view all the answers

In what circumstance may an indirect share transfer trigger tax issues?

If a Singapore company holds a foreign subsidiary and the transfer occurs. Signup and view all the answers

What should be considered when calculating the costs of making a claim under the tax indemnity?

The expenses incurred during the claim process. Signup and view all the answers

Which condition would NOT lead to a Tax Liability for the Target post-Completion?

Future claims related to previous income statements. Signup and view all the answers

Which of the following is a reason why certain jurisdictions may 'see through' a share transfer?

To assess the full scope of tax obligations associated with the transferred shares. Signup and view all the answers

What does the Seller covenant with the Buyer regarding Tax Liabilities?

To cover tax liabilities from income received before the Completion Date. Signup and view all the answers

In evaluating Tax Liability, which factor is least likely to influence the amount payable?

The Seller's financial stability. Signup and view all the answers

What is a key tax implication of a share sale from a tax perspective?

There is often no tax burden for the seller. Signup and view all the answers

Which scenario does not apply in an asset sale?

Tax issues follow the sale. Signup and view all the answers

What must a company do to claim the writing down allowances under Section 19B?

Make an election to claim over specific periods. Signup and view all the answers

Which of the following is NOT included in the definition of intellectual property rights as per Section 19B?

Customer information. Signup and view all the answers

What may trigger a balancing charge when it comes to intellectual property rights?

The rights are sold, transferred, or assigned. Signup and view all the answers

What is the implication of a transfer qualifying as a transfer as a going concern in an asset sale?

No GST is applied to the transaction. Signup and view all the answers

Which of the following is a condition that can disallow further writing down allowances under Section 19B?

The intellectual property is transferred or assigned. Signup and view all the answers

What type of tax burden may a seller face in an asset sale?

Income tax due to balancing charge. Signup and view all the answers

What is the general withholding tax rate applied to royalties deemed as Singapore-sourced income paid to non-Singapore tax residents?

10% Signup and view all the answers

Under what condition can the withholding tax rate on royalties be reduced for non-Singapore tax residents?

The non-Singapore resident is tax resident in an applicable treaty jurisdiction Signup and view all the answers

Who is primarily responsible for withholding the appropriate tax on royalties paid to non-Singapore tax residents?

The payor of the royalties Signup and view all the answers

Which section of the Income Tax Act (ITA) defines royalties as Singapore-sourced income when borne by certain entities?

Section 12(7) Signup and view all the answers

When a royalty payment is deemed Singapore-sourced, which financial action is taken regarding withholding tax?

The tax is withheld from the gross payment amount Signup and view all the answers

What might shift the economic burden of withholding tax from the payor to the non-Singapore tax resident?

Contractual agreements between the parties Signup and view all the answers

What is one distinguishing feature of a payment categorized as a royalty under the withholding tax guidelines?

It can either be a lump sum or in installments Signup and view all the answers

Which tax treaty provides a concessionary withholding tax rate for royalties paid from Singapore?

Singapore-Germany tax treaty Signup and view all the answers

Study Notes

Exemption from Income Tax

If an exemption is granted, the ‘Same Business’ test will apply.
Any loss may only be deducted against the profits of the same trade or business of the company in respect of which that loss was incurred.

Stamp Duty

Stamp duty is a tax on instruments.
Generally, stamp duty is imposed on instruments effecting the transfer of:
- Shares in a Singapore company, or a foreign company that maintains a share or branch register in Singapore.
- Singapore immovable property (including leases).
If the instrument is executed within Singapore, it is payable within 14 days after it is executed.
If the instrument is executed outside of Singapore, it is payable within 30 days after it has been received in Singapore.
For a transfer of shares, the instrument or agreement effecting the share transfer is subject to stamp duty at the rate of 0.2% on the higher of:
- The consideration
- The market value of the shares transferred.
If there is no market value and no fair market valuation of the shares, the net asset value can be used as a proxy for the value of the shares transferred.

Additional Conveyance Duty (ACD)

ACD may also be applicable on the transfer of equity interests (including shares) in an entity that:
- Holds Singapore residential property.
- Beneficially owns more than 50% equity interest, directly or indirectly, in one or more entities that hold Singapore residential property.
ACD, if applicable, applies in addition to any stamp duty.
"Residential property" is defined broadly for ACD purposes and includes (among others):
- Commercial and residential property.
- Property zoned for mixed purposes one of which is residential.

Tax Due Diligence

Potential tax liabilities that may otherwise go unnoticed.
Information to understand the current tax profile of the Target.
Future issues.
Review tax positions taken in tax returns.
Identifying potential tax exposure / risk.
Scope: can be very broad, e.g., income tax, GST / VAT, stamp duty, withholding tax, transfer pricing, tax incentive / grants.
Covered period: periods not subject to statutory limitations.
Quantum: materiality threshold.
May lead to further warranties, negotiation for tax deed / indemnity.
Possible impact on purchase price.
Need for a retention (e.g., specific tax escrow), completion accounts, pre-transaction restructuring and financial limitations.

Tax Warranties

Provides a remedy for Buyer (damages) if Seller’s statements are incorrect, subject to Buyer proving loss and restrictions on the recovery of damages.
Provokes disclosure of any tax issues.
Key warranties for all transactions:
- All returns filed, completed and correct.
- All liabilities on or before accounts date provided for.
- Disputes and investigations.
- No tax avoidance.
- No tax liability in other jurisdictions.
- No non-ordinary course transactions post the accounts date.
- All inter-company transactions on an arm’s length basis.

Tax Indemnity

General indemnity covering tax liabilities of Target arising from pre-completion income, profits and gains and events.
Seller covenants with Buyer to pay an amount equal to any Tax Liability of the Target resulting from or by reference to:
- Any income, profits or gains earned, accrued or received on or before the Completion Date.
- Any Tax Liability of the Target that would not have been payable had there been no breach of any Tax Warranties.
- Other specific concerns for tax liabilities of target arising from pre- and post- completion tax risks identified in due diligence.

Definition of Tax Liability

Any liability of the target to make an actual payment of Tax.
The loss or reduction in the amount of any Tax asset which is reflected in the target’s accounts.
The loss or reduction in the amount of a tax asset of the target arising post-Completion.

Limitations and Exclusions

Discharged prior to completion or provided for in accounts.
Breach of SPA or tax deed by Buyer.
Windfall income and gains.
Claims or elections assumed in the target’s account.
Financial limitations.
Time Limits.

As Singapore is a common jurisdiction for holding companies, an indirect share transfer of foreign subsidiaries may trigger indirect transfer tax issues in other jurisdictions.
Certain jurisdictions such as China and Indonesia may “see through” the share transfer and deem that the transaction is in substance a transfer / acquisition of the foreign entity and impute tax accordingly in that jurisdiction.

Often no tax burden for the seller (from an income tax perspective).
Carry over of tax attributes available for the buyer.
Tax issues follow the sale  need for tax due diligence, tax warranties / indemnities.
Generally, GST-exempt.
Stamp duty implications.

Asset Sale

No carry over of tax attributes.
No GST if the transfer qualifies as a transfer as a going concern.
Tax issues do not follow the sale.
Seller may be liable to income tax due to balancing charge on disposal of capital assets / sale of trading stock at OMV.
Stamp duty implications – depends on whether there is transfer of chargeable property

Acquisition of IP

Singapore has no capital gains tax.
Section 19B writing down allowances are available for capital expenditure incurred by a company carrying on a trade or business in acquiring intellectual property rights for use in the trade or business.
Subject to certain exclusions.
The company is required to make an election to claim the writing down allowances over a 5-, 10- or 15-year period on a straight-line basis.

Definition of “intellectual property rights”

“the right to do or authorise the doing of anything which would, but for that right, be an infringement of any patent, copyright, trade mark, registered design, geographical indication, layout-design of integrated circuit, trade secret or information that has commercial value, or the grant of protection of a plant variety”.
It does not include customer information, customer lists, information on work processes and compilations of such information.

Section 19B Writing Down Allowances

No further writing down allowances may be made if the intellectual property rights:
- Come to an end without being subsequently revived.
- Are sold, transferred or assigned.
- The company permanently ceases to carry on the trade or business.
A balancing charge may be triggered where the intellectual property rights are sold, transferred or assigned.

Royalties

Introduction to Withholding Tax

Generally, withholding tax is imposed on certain prescribed payments that are deemed sourced in Singapore and paid to non-Singapore tax residents, unless certain exemptions or concessions apply.
A “royalty or other payment in one lump sum or otherwise for the use of or the right to use any movable property” is deemed to be Singapore-sourced income if it is:
- Borne by a Singapore tax resident or permanent establishment in Singapore (except in respect of any business carried on outside Singapore through a permanent establishment outside Singapore).
- Deductible against any Singapore-sourced income.
The payment of such royalty to a non-Singapore tax resident is generally subject to withholding tax at 10% on the gross payment.

Who Pays?

It is the payor’s obligation to withhold the amount of tax payable and pay such amount to IRAS.
The economic burden can be shifted by contractual agreement between the parties.

Note

The applicable withholding tax rate may be reduced under an applicable tax treaty if the relevant conditions are met (for e.g., the non-Singapore resident is tax resident in an applicable treaty jurisdiction.
For e.g., the Singapore-Germany tax treaty imposes a concessionary rate of 8%.

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Description

This quiz covers critical concepts related to exemptions from income tax and stamp duty in Singapore. It includes the 'Same Business' test for income tax exemptions and details on how stamp duty applies to property and share transfers. Test your understanding of these essential tax regulations and their implications on businesses in Singapore.