What Is A Double Taxation Agreement?
Double Tax Treaties (DTT) is an agreement between two countries used to regulate the taxation of income received in one state by a resident of another state.
The DTT clearly states:
- types of income
- criteria for companies and individuals that meet the DTT conditions
- features of a collection of fiscal payments.
Such agreements allow companies and citizens to consider taxes paid at the place of profit (other countries) in their home countries and thus avoid fulfilling typical fiscal obligations on one income twice. For example, the paid tax on dividends in one state is taken into account when calculating the tax in the resident’s home country. Such agreements describe the procedure for paying taxes at the source of payment. The agreements provide for a reduction in the tax rate. Double taxation treaties apply to legal entities and individuals.
After you figure out ‘what is a double tax?’, you need to understand the payment of which taxes are regulated by agreements on the elimination of double taxation in Singapore.
Typically, DTT provisions govern the processes related to the fulfillment of the following fiscal obligations:
- income tax
- Personal income tax
- property tax
- for capital gains.
Excise, VAT, and other indirect taxes are not subject to the regulations of such agreements. It should be noted that the number and name of fiscal obligations depend on national tax laws and agreements between the parties.
What income is usually regulated by double taxation in Singapore?
Similar agreements apply to income derived from foreign sources. Usually, these are the following types of income:
- from real estate
- from entrepreneurial activity
- from international transport
- from the sale of property (capital gains)
- from the provision of professional services
- from employment
- fees of directors, artists, athletes
The above list is not final; it directly depends on the agreements between the countries. However, in most cases, it considers almost all options for earning income for individuals and legal entities. The main reason for using such agreements is to reduce the fiscal burden by eliminating double taxation. They make it possible:
- for residents who receive income in another state, reduce the amount of tax payment in their home country or avoid paying it altogether by providing the relevant documents.
- for non-residents, a similar rule applies.
For example, non-residents who receive income in their own country, if they have supporting documents, may not pay tax on income from which they were taxed in their home state. You can apply for tax benefits by choosing one of the following options:
- by providing in the country of residence a certificate (other documents) issued by the competent authority of another country confirming the payment of tax
- by providing a tax residency certificate in another country.
The first option makes it possible to reduce fiscal payments in the home country, the other in a foreign country. The required documents to avoid double taxation in Singapore are specified in international treaties and national tax codes.
Examples of using benefits with DTT
Taxation of the latter is carried out, taking into account the following principles:
- subject to withholding tax (if local legislation provides such requirements), but at the rate specified in the DTT
- are taxed at the resident’s home country, however, taking into account the tax already paid at the source of payment.
For example, if the agreement between the countries provides for the following tax rates on dividends:
- 5% of the gross amount, if the resident has invested in the authorized capital of the company at least $50,000
- 15% in other cases.
The above means a businessman-resident of one country, having received dividends from an enterprise located in another country. He invested more than $50,000; he pays 5% to the budget of this country and then 8% to the treasury of his country.
Suppose the size of the investment is less than $50,000, then during the payment of dividends the tax at the source of payment is withheld in the amount of 15%.
In the home country, the resident does not pay anything, as he has already kept everything with the principle that the resident has paid everything because 15% is more than 13%. The principle of eliminating interest and royalties is similar to that applied to dividends.
On other types of income, for example, from wages, taxes are usually withheld only at the source of payment, and that’s all. However, it is necessary to take into account the specifics of each international agreement.
Organizational and legal forms of double taxation Singapore
In Singapore, you can be an individual entrepreneur, or you can create a company or partnership.
- Singapore is an effective jurisdiction for the creation of holding companies, for conducting international trade, and for centralizing marketing operations in Asia.
- Singapore is an effective jurisdiction for centralizing financial (treasury) functions for companies.
- Singapore is an effective tax jurisdiction for establishing a research and development center.
Companies can be public or non-public.
- Public Company limited by shares. A company can have more than 50 shareholders and raise the necessary capital by issuing shares and issuing bonds. Still, first, the company must register the prospectus with the Singapore Monetary Authority.
- Public Company limited by guarantee. This is a company whose shareholders have contributed or are committed to depositing a fixed amount as guarantees for the performance of the company’s obligations. This organizational and legal form is usually intended for the implementation of non-commercial activities.
Private Company limited by shares:
- Private Company. The maximum number of shareholders is 50.
- Exempt Private Company. A private company with no more than 20 shareholders and none of the shareholders is a legal entity.
What taxes do Singapore companies pay?
- Income tax.
- Withholding tax on payments of interest and royalties to non-residents.
- Property tax.
- Stamp duty on the sale of shares of Singapore companies.
- Domestic consumption tax.
The place of registration of a company does not affect its acquisition of tax resident status.
Tax residency and double taxation in Singapore
First, you should figure out ‘what is a double tax?’. If a company is managed and controlled from the territory of Singapore, then it is recognized as a tax resident of Singapore. A company is recognized as a resident if its business was controlled and managed in Singapore in the previous tax period; for example, a company is recognized as a resident in 2017 if control and management were carried out in Singapore throughout 2016.
Control and management are decision-making on strategic issues such as corporate policy and development strategy. The location of the company’s board of directors meetings, where strategic decisions are made, is a key factor in determining where control and management are exercised.
To confirm the company’s location, the company must establish a real economic presence in the country. For example, this is necessary for preferential rates under treaties for the avoidance of double taxation. There is an official document that confirms the tax status of the company (Certificate of Residence).
The principle of income taxation
In Singapore, the taxation of companies is based on a territorial principle. Income derived from sources within the country is taxed. And the income that came to a foreign account is not. For tax matters, please contact the Inland Revenue Authority of Singapore.
Taxation in Singapore is built on a progressive scale. The higher the income, the higher the tax rate.
- The first S $10,000 effective rate is 4.25%.
- The next S $290k is an effective rate of 8.50%.
- Income exceeding S $300,000 is taxed at the standard rate of 17%.
Taxation of dividends
Dividends received are not taxed. Moreover, it does not depend on who receives dividends from a tax resident of Singapore or a resident of a foreign state.
Recognition of expenses
To calculate the tax base, the expenses of the organization must simultaneously satisfy the following conditions:
- The company incurred expenses as part of its income-generating activities.
- The company actually incurred costs.
- The tax laws of Singapore do not prohibit the expenses incurred by the company.
Tax exemption for new companies
A new Singaporean company may be exempt from income tax on the first S $100,000 of profits, and 50% exempt from income tax on the next S $200,000 for the first three years of the new company’s life, provided the following conditions are met:
- The company must be registered in Singapore.
- The company must be a Singapore tax resident.
- The total number of shareholders of the company should not exceed 20. In this case, one shareholder must own at least 10% of the shares.
The exemption does not apply to new companies that are engaged in construction or investment.
Capital gains tax
There is no capital gains tax in Singapore. However, local tax authorities may re-qualify a transaction to purchase and sell real estate or shares into a trade in some cases. Subsequently, they tax the income from such transactions in a general manner. To determine whether income from the sale of shares or real estate is taxed, you need to analyze in detail all the facts and circumstances of the transaction.