Tax Considerations for an Equity Investment Holding Company in SG

Multinational companies utilise equity investment holding companies to hold shares of various subsidiaries in their group, providing centralised control and oversight. This structure offers certain advantages such as facilitating strategic acquisitions and divestitures. Singapore is a popular choice for setting up holding companies for investments in the Asia-Pacific region due to its favourable business environment.

This article discusses some of the tax considerations that foreign investors should consider when setting up or maintaining an equity investment holding company in Singapore. Investment holding companies set up to hold other investments, such as real property and intellectual property rights, are outside the scope of this discussion.

Repatriation of Profits to Shareholders

In an equity holding company structure, subsidiaries typically repatriate profits by paying dividends to the equity investment holding company, which then distributes the dividend income to its shareholders.

Foreign investors should consider the tax implications of the dividend distributions at each shareholding level of an equity investment holding company:

1. Foreign withholding tax on dividends paid by the subsidiaries to the Singapore equity investment holding company.

   If a subsidiary is in a jurisdiction that has a tax treaty with Singapore, the foreign withholding tax rate may be reduced under the tax treaty if the Singapore equity investment holding company is a tax resident of Singapore. A Certificate of Residence (COR) issued by the Inland Revenue Authority of Singapore (IRAS) certifying that the equity investment holding company is a tax resident of Singapore is usually required for the foreign subsidiary to apply the treaty withholding tax rate on the dividend payment.

2. Corporate income tax on foreign-sourced dividend income received by the Singapore equity investment holding company.

   The foreign-sourced dividend income received from the overseas subsidiaries is subject to corporate income tax when received in Singapore if it does not qualify for tax exemption under the foreign-sourced income exemption scheme, i.e. it does not meet the following conditions:

   • the foreign-sourced dividend income was subject to tax in the foreign country from which the income is received
   • the foreign headline tax rate, which is the highest corporate tax rate of the foreign country of source in the year the foreign-sourced dividend income is received in Singapore, is at least 15%, and
   • the tax exemption would be beneficial to the equity investment holding company who is a tax resident of Singapore.

   If tax exemption does not apply and double taxation is suffered, there is a requirement for the equity investment holding company to be tax resident in Singapore before it can claim double tax relief in the form of a foreign tax credit for the amount of tax paid in the foreign jurisdiction against the Singapore tax that is payable on the dividend income.

3. Withholding tax on dividends paid by the Singapore equity investment holding company to the foreign shareholders.

Singapore does not impose withholding tax on dividend payments.

As noted in items 1 and 2 above, it is crucial for the equity investment holding company to be tax resident in Singapore to ensure tax efficiency when the dividend income flows from the subsidiaries to the foreign investors through the equity investment holding company. This brings us to the critical issue of tax residency of the equity investment holding company.

Tax Residency

Under Singapore tax law, the tax residency of a company is determined on an annual basis, by where the company was managed and controlled in the preceding calendar year. Control and management is usually determined by the location of the company’s Board of Directors’ meetings where strategic decisions are made.

In certain circumstances, the mere holding of the Board of Directors’ meetings in Singapore may not be sufficient and IRAS will consider other factors to determine if the control and management of the company was indeed exercised in Singapore.

In the following scenarios, for example, IRAS does not consider the control and management of the company to be exercised in Singapore:

• there are no Board of Directors’ meetings held in Singapore and the director’s resolutions are passed by circulation
• the local director is a nominee director while the rest of the directors are based outside Singapore
• no strategic decisions are made by the local directors in Singapore
• no key employees are based in Singapore.

For foreign-owned investment holding companies set up in Singapore deriving purely passive sources of investment income, IRAS’ view is that such companies are generally not considered to be tax residents of Singapore because they act on the instructions of their foreign shareholders. A foreign-owned company is one where 50% or more of its shares are held by foreign companies or non-citizen individuals, determined at the ultimate holding company level.

However, IRAS may still issue a COR on a case-by-case basis if such foreign-owned investment holding companies have valid reasons for setting up an office in Singapore and can meet certain criteria.

In addition to commercial justification for setting up operations in Singapore, foreign investors will need to consider the issue of economic substance of the equity investment holding company, as explained in the next section.

Divestment Gains

Before 1 January 2024, Singapore did not impose tax on gains from the sale of foreign assets that are capital in nature. With the introduction of the foreign-sourced disposal gains tax regime from 1 January 2024, gains from the sale or disposal of foreign assets are chargeable to tax if the gains are:

• received in Singapore by an entity that is part of a group in which some entities are incorporated, registered, or established in Singapore, or some entities have a place of business outside Singapore, and
• derived by an entity without adequate economic substance in Singapore.

Foreign assets refer to immovable or movable property situated outside Singapore and include equity securities registered in a foreign exchange as well as unlisted shares issued by a company incorporated outside Singapore.

An equity investment holding company would fall within the scope of the foreign-sourced disposal gains tax regime when it sells or disposes of the shares in its foreign subsidiaries and be liable to corporate income tax on the gains unless it has adequate economic substance in Singapore.

To meet the economic substance requirement, a pure equity-holding entity, solely holding shares or equity interests, must meet criteria like filing regular returns, being managed in Singapore, and having adequate human resources and premises in Singapore. If the equity investment holding company in Singapore is a mere shell company without any physical office or employees based in Singapore, it will not satisfy the economic substance requirement.

If the equity investment holding company does not fall within the scope of the foreign-sourced disposal gains tax regime, any gains arising from the sale of its investment equities are not taxable unless it is trading in those investment equities.

Minimum Effective Tax Rules under Base Erosion and Profit Shifting (BEPS) 2.0

The Income Inclusion Rule (IIR) and Domestic Top-up Tax (DTT) will be implemented in Singapore from businesses’ financial years starting on or after 1 January 2025. The IIR ensures that the effective tax rate imposed on a multinational group's foreign entities is at least 15%, and the DTT ensures that the effective tax rate imposed on a multinational group’s Singapore entities is at least 15%.

If the equity investment holding company is part of a multinational group with annual group revenue of €750 million or more in at least two of the four preceding financial years in which the IIR and DTT would apply, it may be subject to top-up tax under the relevant rules. It should be noted that to avoid double counting, dividend income, which represents the distribution of corporate income that has already been taxed at the subsidiary level, is excluded from the equity investment holding company’s Global Anti-Base Erosion (GloBE) income when determining whether its effective tax rate is at least 15%. There are rules to determine if a dividend qualifies for exclusion from an entity's GloBE income.

Closing Comments

It is critical that proper tax planning is done before setting up an equity investment holding company in Singapore. This is particularly so as the equity investment holding company must be a Singapore tax resident to enjoy the applicable tax benefits. It is also important for the equity investment holding company to establish adequate economic substance so that any gains from the sale of the foreign shares will not be subject to corporate income tax under the foreign-sourced disposal gains tax regime. 

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Disclaimer

This article should be used as a general guide only. No reader should act solely upon any information found in this article. We recommend that professional advice be sought before taking action on specific issues and making significant business decisions. Crowe Singapore expressly disclaims all and any liability to any person in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of the above article. While every effort has been made to ensure the accuracy of the information contained herein, Crowe Singapore shall not be responsible whatsoever for any errors or omissions in it.