Corporate Restructurings in Singapore Tax (PDF)

Corporate Restructurings - Restructuring options - Share sale Asset sale a\. Option 1: Liquidation - Tax consequences - Loss of tax attributes forever - b\. Option 2: Striking-off - Tax consequences - Corporate **[amalgamations]** (**[s34C Stam...

Corporate Restructurings - Restructuring options - Share sale Asset sale a\. Option 1: Liquidation - Tax consequences - Loss of tax attributes forever - b\. Option 2: Striking-off - Tax consequences - Corporate **[amalgamations]** (**[s34C Stamp Duty Act]**) - Key advantage of **[s34C Stamp Duty Act Election]** - GST implications - Stamp duty implications **[s32C Stamp Duty Act]** - Stamp Duty relief **[s15(1) Stamp Duties Act]** - Background - Timeline / process - Applicability of relief rules - Borrowing costs; withholding tax and deductibility of interest expenses - **[Deduction]** under **[s14(1)(a) ITA]** - The **[Direct Link test]** - Interaction between **[s14(1)(a) ITA]** and **[s15 prohibition]** - Withholding tax implications - Stamp duty; exemptions Takeaways Section 10L imposes tax on gains from disposal of foreign assets received in Singapore Pillar 2 introduces a global minimum effective tax rate of 15% for multinational groups Section 10L and Pillar 2 have implications for corporate restructuring and M&A transactions Understanding the rules and exceptions of these tax regimes is important for tax planning Andrew Yip (00:01) Hi everyone, welcome to the fourth lecture on the text module. So you will recall that in the first lecture we have covered corporate income tax, what is income chargeable to tax, the deduction for expenditure and the capital allowance regime. You will have also recall that in Singapore we don\'t tax capital gains. In the second lecture, I covered the different tile &A options, share sale versus asset sale. We talked about text due diligence and also covered stand duty implications on transactions. You will recall that in lecture three, we discussed the different restructuring options, i.e. liquidation, striking off, copper amalgamation, and we talked further about stamp duty and stamp duty relief. Now, the reason why we are having this fourth lecture is to introduce to you these two new regimen. One has come into play, i.e. the Section 10L tax, which is introduced into our income tax and a proposed new tax regime, what we call Pillar 2, on global minimum tax. And this will come into play for in -scope companies. from next year, from their financial year beginning on or after 1st January 2025. for example, if a company has a financial year of 1st July, then this new tax will come into play for them from 1st July next year, not from 1st January. But if it\'s a 31st December company, so their financial year starts 1st January, then this new tax\... in pillar 2 text will come into play for them from 1st January 2025. Now let\'s look at Section 10L first. So you will recall that in Singapore, we only tax income. We don\'t tax capital gain. And for Singapore source income, it is taxed regardless of whether the income is received in Singapore or outside Singapore. where if it is a foreign source income, it is only subject to tax if the income is received in Singapore. Now this new Section 10L imposes a tax on any gain from disposal of a foreign asset where the gain is received in Singapore. And this is the case even if the gain is capital in nature. So in the past, before 1st January 2024, if a relevant entity sells foreign asset and derive a capital gain. Even if the capital gain is received in Singapore, it is not subject to tax. This changes for sale of foreign asset that happens on or after 1st January this year, where the gain from the sale of a foreign asset, if it is received in Singapore, it will be subject to tax. Now, what is receipt in Singapore? This refers to the same set of rules in Section 1025 of the Income Tax Act that I discussed in Lecture 1. So, if a company sells a foreign asset and the gain from that foreign asset is received in a Singapore bank account, for example, let\'s consider receipt in Singapore. If the gain is used settle any debt incurred in respect of a trade or business carry -on in Singapore that is considered received in Singapore. If the gains is used to buy any mover property that is bought into Singapore, that is considered received in Singapore. So for example, if the game is used to buy a piece of equipment and the piece of equipment is brought into Singapore that gain is considered to be received in Singapore and subject to tax under Section 10L. You will see from this slide that the Inland Revenue has actually issued an e -tax guide to help companies understand how Section 10L works. Now, because of how broadly drafted the law is, a lot of entities does not even have any nexus in Singapore is arguably caught under the law which is why IRAS in its e -tax guide clarified that for example if a foreign business has no nexus to Singapore then Section 10L will not apply. Section 10L also has certain exceptions. Essentially, Section 10L is enacted in order for Singapore to comply with certain rules in the EU, where the EU would like to prevent companies or taxpayers from aggressive tax planning where they structure transactions that are not subject to tax anywhere. Now, what\'s underpinning tax planning in a lot of transactions is that such planning should not be objectionable if there\'s sufficient economic substance, for example, the sale of assets. So in this case, there is specific exception to Section 10L, which is connected to the economic substance of the entity. So in this case, you will see that, for example, if the entity\'s making a sale of the foreign asset has certain tax incentives in Singapore, which you can only obtain if you have a certain economic activity i.e. have headcount, you have certain business spending, then as a matter of law, if you fall within the exception in section This will not apply to those entities that have tax incentives or if you fall within the definition of an excluded entity where this excluded entity has adequate economic substance in Singapore. And the e -tax card that I just mentioned earlier sets out some of these examples that you can refer Now there are also specific rules, right? In terms of where you look at the status of the property. So this only applies on the sale of foreign asset and foreign asset means movable or immobile property situated outside Singapore at the time of sale or disposal. So please look at section 10L, subsection 15, which sets out where some of these assets are situated. So for example, for intellectual property right, to determine where the IP is, whether this is a Singapore asset or foreign asset, we look at where the owner of the IP right is tax resident. So if a Singapore company is also a tax resident in Singapore and you own certain IP rights such as patent, this IP asset will be considered Singapore asset and outside the scope of Section 10L. So why is this Section 10L important? This Section 10L is important because if you have clients undertaking corporate restructuring, you need to be mindful whether Section 10L will apply even if on the sale of an asset, a foreign asset, that gain is capital in nature because in the past, capital gains tax, foreign source capital gains tax, even if received in Singapore, is not subject to Singapore tax. For disposal on or after 1st January 2024, if you have a company selling for an asset and derive a capital gain and that gain is received in Singapore, Section 10L will apply to impose a tax on what would not have been taxable if the disposal had happened last year. So this is very relevant either in M &A transactions or in intra -group restructuring. Now let\'s move to the second topic of today\'s lecture, which is on pillar 2, global minimum tax. Some of you will have read about global minimum tax, the introduction of global minimum tax in the press. This is essentially an effort by the OECD. The OECD has what we call a two pillar program. Pillar 1 is really a reallocation of residual profit, booked by very large multinationals. That\'s not the topic that we are going to discuss today. We are focusing on pillar two, which is the introduction of a global minimum effective tax rate of 15 % for in -scope multinational groups, meaning that they have a global total turnover of more than EUR 750 million. Then you will be in -scope. And how this is meant to work is that in every country that this M &E group is operating, there should be a minimum effective tax rate of 15 % peak in these countries. And how this is meant to work is basically implemented through a series of rules. The income inclusion rule, qualified domestic minimum top up tax, QDMTT. or the Under -Tax Payment Rule, UDPR, and subject to tax rule. Now, for Singapore, we are only going to introduce the ILR and the QDMTT, so we will not be discussing the UDPR. As I said earlier, Singapore will be implementing these rules next year. Draft legislation is now available for public consultation. This was issued by the Ministry of Finance, and there is now a proposed multinational enterprise minimum tax bill. that\'s under consultation and this will be read together with the assisting income tax act. Now, what does bill 2 means and why is this important and why do you need to know Now what Pillar 2 does is that it will introduce a minimum tax of 15 % for multinational group that is in scope. And there will be a top -up tax that needs to be collected either at the ultimate parent entity level or at the subsidiary level. So maybe the best way to explain this is through an example. If we look at this slide, as I was saying earlier, Pillar tool is basically going to be implemented by various countries. I think more than 135 countries now are part of the inclusive framework that has signed up to this project. So essentially, the OECD has introduced a pretty complex set of model rules. that sets out how countries will be implementing this global minimum tax through domestic legislation. This model rule basically sets out a set of rules that countries can adopt and implement into their domestic legislation to introduce this. And the implementation actually staggers, right? So some European countries and even in Asia, countries like Japan will be introducing this from 31st December, 2023. So some of them have started a regime already. For example, France, even in Asia, Japan has a regime that came into play in April. Whereas countries like Singapore will only introduce this later part. For Singapore, it\'s next year. Some other countries will be later part of this year or next year. Now, let\'s look at this example. You have a whole code, which is the ultimate parent entity jurisdiction. Let\'s just say that that is France. and France has a subsidiary in Singapore and If you look at the example on the far right, there\'s a Singapore subsidiary and let\'s say that the Singapore subsidiary has a Tax rate of zero because it has a tax incentive because this entity does manufacturing in Singapore So it qualifies for a tax incentive that has a 0 % tax rate versus 17 % statutory rate So this company is not paying any taxes in Singapore. Now, because France has a Payler 2 regime this year in 2024, if this subsidiary in Singapore pays no tax in Singapore, the France IIR will pick up a top -up tax of 15 % and that 15 % will be collected in France. Now, because Singapore still don\'t have QDMTT this there is no top up tax in Singapore. But using the same example, next year, when Singapore has a QDMTT or what we call domestic top up tax regime, that 15 % tax will now be levied in Singapore next year. And because it is a qualified regime, France will recognize the tax paid in Singapore and the 15 % tax that you were able to collect in 2024. France won\'t be able to collect the same amount of tax in 2025 because Singapore has now imposed a top -up tax that basically switches off the IRR in France. So this is basically how the regime under pillar 2 is supposed to work. And why is this important? This is important because, for example, in an M &A transaction, if you are buying certain targets, you need to consider whether By buying the target, you have now crossed that 750 million euro threshold where pillar 2 is a concern. Or if you are in jurisdiction like the US where there is no implementation of pillar 2, but you are buying a group that has pillar 2 legislation in place, for example in Europe, now pillar 2 becomes relevant for the entire group because of how the regime is set up. This lecture is meant to just give you an introduction to the concept of how Pillar 2 and global minimum text works. Takeaways Corporate restructuring is driven by various commercial objectives, such as streamlining legal entities, addressing regulatory issues, or preparing for future corporate actions. Liquidation and striking off are common options for removing surplus legal entities from a company\'s structure. Amalgamation allows companies to merge two legal entities together, preserving tax attributes and potentially qualifying for stamp duty relief. Borrowing costs incurred for income-producing purposes may be deductible under section 41A of the Singapore Income Tax Act. Withholding tax may apply to interest payments made by Singapore payors to non-residents, but reductions or exemptions may be available through applicable treaties or incentives. Andrew Yip (00:00) Hi, everyone. Welcome back to the third and last lecture for the text practice module. Today, we will cover key text considerations arising from corporate restructuring. In the last lecture, I\'ve already touched on the key text considerations arising from the different &A options. So you will recall that we covered asset sale, as well as share sale. So in this lecture, we will be looking at the other restructuring options. such as liquidation, striking off, and corporate amalgamation. We will also look at the stamp duty implications and possibility for relief from stamp duty in the context of corporate restructuring. You\'ll recall that we touched on stamp duty in the last lecture. Finally, I wanted to use this opportunity to touch on a key tax costs or other expenses that most companies face. which is in financing costs and how that\'s treated from a tax perspective. Let\'s go to the restructuring options. So for companies embarking on corporate restructuring, it\'s typically driven by different commercial objectives. One of it could be to streamline the number of legal entities to move certain part of the business aligned with their reporting structure to deal with a regulatory issue. or to reposition the business for subsequent corporate action. For example, there are cases where companies move a specific segment of their business into a corporate structure before spinning it off through either an IPO or potentially through a sale of that particular business segment by silent shares. So how companies get to the final desired shareholding structure or business segregation or streamlining that they want will be through various complex actions. I think we discussed share sale and asset sale in the last lecture. So today we will look into liquidation and amalgamation, specifically how companies were removed, entities that they still are surplus. requirement from their structure. If you do an asset sale of a particular entity, you\'re still left with the legal entity at the end. And if the legal entity is no longer required because the main asset has been removed by your asset sale, one way to remove that legal entity would really be going through a members voluntary running out. That\'s one of the liquidation options. Another option that is commonly seen is striking off. And these options that are available to companies in terms of trying to remove a little entity from that structure. Now, specifically, one of the considerations is that if you have a liquidation what will happen to any liquidating distribution that you will be making pursuant to the degradation. You will recall that in Singapore, we do not tax capital gains. We don\'t have a capital gains tax rating. So in general, liquidating distribution should be treated as capital in nature, although there is no specific Singapore case law on this point. And we will really need rely upon cases in determining whether the liquidating distribution is treated as a return of capital and not a distribution of income. we will still need to look at case by case basis how to treat a specific liquidity distribution. And if it\'s not true that just because you see it\'s a liquidity distribution, it will be definitely true that it was capital. So you have to look at the facts underlined. Now, one other consideration that we need to consider is that if you actually decide to liquidate the entity, either through striking off or until it\'s running you will lose any unutilized tax attributes that\'s in the legal entity. You will recall that we talked about unutilized losses and capital allowances which could be used to offset future taxable income. If you liquidate the entity, those attributes are lost forever. There is actually a possibility to preserve such attributes through a proper amalgamation which we will talk about in the next few slides. One other thing to consider is that if you liquidate the entity, you also have to check whether the legal entity is GST registered. If it is GST registered, you will need to be registered for GST purposes and the company will need to ensure that it\'s complied with all its GST compliance obligation after that point in time before deregistration is announced. So striking off is a process that\'s commonly used as an alternative to members wondering why they\'re winding up. And this is only possible typically for a company with their adornment because essentially before striking off can take place, the company must clear out its assets and liabilities. In other words, you will rise to that machine. So if the company has been an active trading company, you will have significant assets and liabilities to clear and in practice, will not be eligible to conduct striking off. Typically a striking off process could be a lot shorter and also from a cost perspective cheaper to undertake than the members for the very running up which is also why companies a lot of times would like to consider this option if it\'s feasible Let\'s go to corporate amalgamation. So corporate amalgamation was introduced into our company\'s law, into the Companies Act, to facilitate companies to actually merge two legal entities together. Essentially, the thinking there is that when A merged into B, and B being the surviving entity, A has stepped into the shoes of B, and essentially, you have the same legal entity and the tax outcome there is meant to be taxed also. If the companies decide to elect what we call a Section 34C election to get to a position where all assets and liabilities are transferred to the surviving entity at netbook value, in other words, it stepped into the shoes of the amount. the surviving and being stuck into the shoes of the malformator and continue with this. So for this election, the amalgamation has been qualifying amalgamation, which includes, among others, a short form amalgamation under Section 2150, which is a pretty common form of amalgamation. And we typically see short form amalgamation conducted via a vertical amalgamation or horizontal amalgamation. What that means is that you can have a parent subsidiary amalgamation or a sister or brother. company amalgamation and that is the most common and most straightforward. Now, sometimes you will need to do what we call pre -positioning before you can conduct the amalgamation. So for example, if you to amalgamate NBPA and NBPB but they are a different part of the shareholding structure, you may need to move the entity as a parent subsidiary or a brother sister company before you can do the amalgamation. Now, in doing we will trigger certain tax consequences like stamp duty on the transfer of Singapore shares. So there\'s possibility to apply for stamp duty with this. We\'ll talk about in the next couple of slides. But these are additional costs and steps that need to be factor in into the proper amalgamation of part of property structure. Key advantages of a Section 34C tax eviction is really to try to get the taxpayer to a tax neutral outcome on an amalgamation. One of the benefits of doing a proper amalgamation is that you don\'t have to do a asset transfer and then try to liquidate the company. That\'s actually an additional step. Now, of course, we then need to think about whether you make an eviction for the amalgamated entity, instead of choose an amalgamating entity. Now, essentially one of A clear benefit here is that you will able to preserve potentially the transfer of unresolved capital allowances and losses, which typically you cannot move the losses of company A to company B. When you do asset transfer, remember from the last lecture, any losses in the transfer role entity will be lost because the losses and unutilized losses do not go over the assets. Whereas in the copper amalgamation regime, it is possible upon amalgamation for the amalgamated entity to continue utilizing the unutilized losses or capital allowances subject to certain prescribed conditions. This will be really the same business as Chevrolet, as we talked about in the last section. Now, before companies decide whether to conduct a proper amalgamation and after conducting a proper amalgamation, whether to make a Section 34C reduction, companies will need to consider what is the tax profile of the amalgamating or disappearing entity as it will be everything or the tax liability. GSD, I think we talked about transfer of ongoing concern exemption in the last lecture. If you qualify for the TOGC conditions, then the asset transfer will be treated as a split transaction for GSD purposes. If companies make a section 34C election here, the TOGC exemption is equally available, provided that certain conditions are not. This would actually be another reason why you can conduct the restructuring through an amalgamation rather than a set transfer because you get the same GST outcome in a corporate amalgamation. Stem Duty Under Section 32C of the Stem Duty Act, Stem Duty is triggered on a deemed conveyance on sale pursuant to a notice of amalgamation of any chargeable property held by each amalgamating company, meaning disappearing entity which is transferred to and tested in the amalgamated company or surviving entity. Chargeable asset here is defined to include interest in the roof of all property in Singapore, or stock and shares registered in a registered cap in Singapore. So in doing the amalgamation, we will need to identify whether the amalgamating entity owns any shares with another Singapore company, for example, or interests in Singapore real estate. That could be triggered when the certificate or notice of amalgamation under 215X of the company\'s act is issued. That\'s actually a deemed containment on sale. We will have to face them duty. And actually, It\'s time to leave you with the details. Now, let\'s look at stamp duty relief. Stamp duty relief is basically a mechanism for companies to apply for an exemption or relief from stamp duty that will otherwise be payable. In general, under section 15.1 of the Stamp Duty Act, it\'s possible to apply for stamp duty relief, whether it\'s a reconstruction or non -aggression of company or there\'s a transfer of assets between associated companies. And this is further prescribed in two sets of rules, what we call the reconstruction rules, as well as the associated committed entity rules that you can see in the third bullet point in this slide. Now, essentially, it is important to note that the STEM duty consequences here will need to be identified quite early on, as I said in the earlier slide. If there\'s a STEM duty impact, on the awkward restructuring step. You will need to identify what the stamp duty liability is, compute it, and understand whether stamp duty relief is available, where this is a related party, or rather internal group restructure. So timing is critical. We will need to factor in the timing to apply for stamp duty relief. Now a lot of times, the stamp duty amount payable is significant and let\'s not forget stamp duty is a tax on the instrument. So you will basically need to submit the stamp duty relief application within 14 days of the transfer instrument signed in Singapore or 30 days from the date that the instrument is executed outside Singapore, regardless of whether you will still be in Singapore or not. And the STEM office will take some time. The STEM office within the Inner Revenue Authority of Singapore will take some time to renew the application, checking through whether all the conditions in, all the prescribed conditions in the reconstruction rules or the associated permitted entities due to unmet and if they are met, then the fee will be legally granted and you won\'t have to pay STEM duty on transfer. Now sometimes, because of the necessity of transferring both legal and beneficial interests in the title to face shares and you can\'t do that until you pay the stamp duty. Companies may need to pay the stamp duty upfront and then apply for stamp duty relief and then the refund subsequently if the stamp duty relief is not occurred. But this would necessarily mean that the company would need to be aware of the stamp duty cost that you have to pay upfront. and we will use the cache flow in order to make that payment. So as I said earlier, the rules can be very prescriptive. You will need to go through each of the rules and then also identify the supporting document to satisfy the stamp office that each rule can be kept. And there are also certain post transfer and post -relief conditions that you need to comply with. So there\'s a, for example, two -year moratorium on both the reconstruction rules as well as the associated permitted entity rules where the company cannot do. action unless it\'s pursuant to another restructuring for example. Okay, now with that, let\'s go to the final topic on borrowing costs. So in the first lecture, we talk about deduction of expenses in Singapore government under section 41, which is a general provision where if the expenses are fully and exclusively incurred in the production of income, you should be able to deduct it subject to the section 51 restriction on say capital expenditure, you can\'t deduct capital expenditure because we don\'t deduct capital again. Most specifically for borrowing cause, there\'s section 41A, and if you look at the language in section 41A here, any sum payable by way of interest and any sum payable with lieu of interest or the reduction there, as may be described by regulations, upon any money borrowed by that person where the controller is satisfied that such sum is payable on capital and point in acquiring So notwithstanding that you may be incurring the expense as long as it\'s on money borrowed by that person, payable on capital employed in applying the income, you\'ll be able to deduct. And what does payable on capital employed in applying the income mean? If you look at the case of Anamak, the part of the PEW has actually incurred this raise. would mean that there must be a direct link between the money borrowed and the income produced. If there\'s insufficient link, as we can see in case of Endermark, the deduction would not be allowed. This test is further elaborated by the Court of Appeal in case of JD, where the Court of Appeal in that case actually interpreted the direct link as even more. you basically will need to look at the income rather than any income in order to satisfy that direct interest. If you can meet the test, you will be able to do that. And this is important as companies go into looking at financing options or how they can finance acquisition or their daily operations. They need to understand whether any borrowing costs that they incur, whether it\'s interest or other borrowing costs, could be deductible. Of course, there are other of expenditure that\'s important for companies but I\'m using Boring Pulse as an example here and of course we talk about subject we three we talk about the restriction of division under section 15.1 in this case if you meet the 41A test the 41A test is actually wider than the general deduction formula that we talked about under the general 41 deduction. Lastly, wanted to also cover the withholding tax. In the last lecture, I made an introduction to the withholding tax on royalty payment. Likewise, for interest payment made by a Singapore payor to a non -resident, this could be subject to withholding tax of 15 % unless reduced by 3D. And a lot of time, will need to look into first of all, whether withholding tax applied because interest payment will be an in -source income under Section 12.6 of our Income Tax Act. If the provision of Section 45 of the income tax act of the ruling provision applies, then the payer will have to report tax failure to report with a track penalty and you then need to look at whether you report tax at 15 % domestic rate or whether there\'s an applicable treaty that you could use. There are also potential tax exemptions that tax payer could apply for from economic agencies. For example, if you run a financial insurance centre in Singapore, its possibility to apply for financial insecurity centre incentive which includes a withholding tax reduction or exemption on any interest, outbound interest payment that a company would have to make. Now, with that, we\'ve come to the end of Lecture 3. I hope that you have found the three lectures useful in giving you a flavour on the common issues that you will see in proper commercial practice. Now, I look forward to interacting and discussing more of these text issues or answering your questions in the contact sessions. Thank you so much. Bye bye.