Proposed tax on gains from sale of foreign assets won’t hurt most companies, but may affect investment vehicles: experts

A PROPOSED change by the Ministry of Finance (MOF) to tax certain gains from the sale of foreign assets may require companies to consider the best place to receive such gains. However, experts said this is likely to affect just a few multinational enterprises (MNEs).

This is because the proposed amendment affects only companies that have entities without economic substance in Singapore, but hold foreign assets. If they sell those assets and receive the gains here, they may be taxed.

There is, however, some uncertainty about the impact on investment vehicles.

The proposed change is part of 33 legislative amendments proposed by MOF to the Income Tax Act. The changes incorporate measures announced in Budget 2023, and are meant to align Singapore’s tax regime with international tax developments.

The proposed tax takes effect from Jan 1, 2024. Sales that occur before this date but which are received after it will not be taxed, based on MOF’s draft bill. 

Allen Tan, principal and head of the tax, trade and wealth management practice at Baker McKenzie Wong & Leow, said: “As long as you don’t receive the capital gains from the sale of foreign assets in Singapore, there’s no tax. The only change is companies now have to determine whether the gains should be received here.”

Companies will also not be taxed if they can show “reasonable” economic substance in Singapore, said Simon Poh, associate professor of accounting (practice) at the National University of Singapore.

Economic substance could be assessed on three criteria: the number, qualifications and experience of the company’s employees; business expenditures incurred here; and whether business decisions are made in Singapore.

This could mean that MNEs will incur taxes if assets are sold as part of an internal restructuring, said Loh Eng Kiat, tax partner at Deloitte Singapore. This would happen if the entity making the sale is judged to not have economic substance.

Tan of Baker McKenzie Wong & Leow said companies can apply to the Inland Revenue Authority of Singapore (Iras) for an advanced ruling, should they be concerned over the sufficiency of their economic substance in Singapore.

Meanwhile, businesses should start reviewing their Singapore structures and commence an impact analysis soon due to the short lead-up to Jan 1, said Deloitte’s Loh. 

Another potential area of ambiguity concerns investment entities, such as special purpose vehicles (SPVs) set up by investment funds and family offices.

Financial institutions licensed or approved by the Monetary Authority of Singapore, as well as entities accorded preferential tax regimes in Singapore, will be exempted from the tax.

However, an SPV that may not have applied for the fund tax incentive schemes would have to prove that it is a pure equity-holding entity to qualify for exclusion, said Pearlyn Chew, tax partner at KPMG. Those that extend loans may not fulfil this condition based on the proposed legislation.

“Depending on the final tax legislation and guidance issued, the extent of impact arising from the proposed changes remains to be seen for such passive investment-holding entities,” said Chew.

Desmond Teo, Asean private tax leader at EY, said: “For investment companies, investment funds and SFO (single-family office) investment vehicles that carry on their businesses in Singapore through Singapore-based fund managers and Singapore-based SFOs with Singapore-based operations, they could be excluded from this proposed change.”

PwC tax leader Chris Woo pointed out that investment-focused companies could be affected if they are required to meet the economic substance thresholds of a normal operating company.

“It is hoped that (Iras) will give due consideration to the nature of the entity’s business when applying the substance requirement to (it),” he said.

The proposed change would close a loophole in gains taxation. Sum Yee Loong, professor of accounting (practice) at Singapore Management University, said the proposed amendment prevents double non-taxation, which occurs when a deal is not taxed in either the source country or the country of residence due to differences in tax treatments.

He explained: “We have treaties with many countries which state capital gains can only be taxed in the country of residence. If a Singapore-based company makes capital gains in another country, they cannot be taxed there; but they also cannot be taxed here, as we don’t have capital gains tax.”

EY’s Teo noted: “The significance of this proposal should not be missed, as it marks a key and fundamental shift in Singapore’s longstanding policy of not taxing capital gains.”

Singapore is not implementing the change in a vacuum. Experts noted that other administrations are undertaking similar reviews or changes.

For example, Hong Kong in December last year passed a bill to refine its foreign-source income exemption regime. Following the change, specified foreign-source income became subject to profits tax.

This proposed change is therefore “harmonising Singapore with international tax practices, going forward”, said Baker McKenzie Wong & Leow’s Tan. 

A public consultation was launched on Jun 6. It will close on Jun 30.