Singapore will begin taxing foreign-sourced disposable gains from January 1, 2024, with Parliament approving the amendments to the country’s Income Tax Act.
Under the amendments, dubbed Section 10L, capital gains from the sale of foreign assets will be subject to tax if they are received in Singapore and if the relevant entity does not have ‘economic substance’ in Singapore. How the entity is judged to have ‘economic substance’ in the city-state will be assessed on a case-by-case basis.
Singapore’s Ministry of Finance has stated that Section 10L is aligned with the EU’s Code of Conduct Group Guidance (COGC). EU member states created the COGC to promote a fair tax system.
Currently, foreign-sourced income is taxed only if it is received in Singapore. This only applies to income that is revenue in nature, such as dividends, royalties, and interest. There is also no capital gains tax in Singapore.
However, the enactment of Section 10L, effectively introduces a capital gains tax in Singapore – albeit for specific types of entities – and thus represents a fundamental shift in the country’s tax system.
What is a relevant entity?
Section 10L applies to entities that are part of consolidated multinational entities (MNE) groups where at least one member of the group has a place of business outside of Singapore. As such, domestic groups are excluded.
Further, entities that are excluded from the scope of Section 10L are those that fall within one of the following categories:
- Financial institutions;
- Entities that are exempt from income tax under specific incentives; and
- Excluded entities.
What are the excluded entities?
A party is considered an excluded entity based on its dependency on being a ‘pure equity-holding entity’. Such entities primarily serve the purpose of holding shares in other entities and do not generate income from any source other than dividends received from these shares.
|Type of entity||Conditions to qualify as an ‘excluded entity’|
|A pure equity holding entity||1. The entity must submit regular accounts or statements;2. The operations of the entity are conducted in Singapore; and3. Have adequate human resources in Singapore.|
|Other entities||1. The entity manages and performs operations in Singapore; and2. The entity has adequate economic substance in Singapore, taking into account the number of employees of the entity in Singapore, their qualifications, the amount of business expenditure incurred in Singapore, and whether key business decisions are made by persons in Singapore.|
Section 10L also determines whether an asset situated outside of Singapore can be considered a ‘foreign asset’. In particular:
- Shares in a company or securities issued by a company are situated where the company is incorporated;
- Immovable property and intangible movable property are situated where the property is physically located;
- Secured or unsecured debt is situated where the creditor is a resident; and
- Intangible movable property is located where the rights of ownership for the property can be most effectively upheld.
In addition to aligning Singapore’s tax system with the COGC’s, the government also aims to introduce a minimum effective tax rate of 15 percent for multinational companies from January 1, 2025.
These changes are part of the Base Erosion and Profit Shifting initiative, or BEPS 2.0, a global framework that aims to ensure a fairer distribution of tax rights on large MNEs through a global minimum tax rate. Base erosion is a practice where companies use tax strategies to exploit gaps in tax rules and shift profits to artificial locations where the tax rates are low or non-existent.
BEPS 2.0 is the outcome of cooperation among Organization for Economic Co-operation and Development (OECD) member countries to tackle tax evasion. Singapore was among 130 jurisdictions to join this agreement in October 2021.
From 2025, MNEs with consolidated annual revenues of EUR 750 million (US$797 million) or more, must pay a tax rate of 15 percent on profits earned in the jurisdiction in which they operate.
Singapore is set to implement a significant change in its tax system by introducing taxation on foreign-sourced disposable gains as of January 1, 2024. This marks a notable departure from the current tax regime, where only revenue-based foreign-sourced income — such as dividends, royalties, and interest—are taxed in Singapore, and no capital gains tax is in place.
Overall, these changes reflect Singapore’s commitment to international tax standards and its efforts to maintain a competitive and equitable tax environment in a global context.
Source: Asean Briefing