New section 10L to tax gains from the sale or disposal of foreign assets – clarifications from the Singapore tax authority

Introduction

From 1 January 2024, Singapore will introduce into law the new section 10L of the Income Tax Act 1947 (“ITA”). Prior to its introduction, capital gains received in Singapore from the sale of foreign assets are not subject to Singapore income tax.

However, under this new section 10L, Singapore will now tax capital gains received in Singapore from the sale or disposal of foreign assets, in certain specified situations. The scope of this new section 10L will however exclude certain entities – for instance, those entities with “adequate economic substance” in Singapore and whose operations are managed and performed in Singapore.

A key area of uncertainty concerns how the Singapore tax authority, the Inland Revenue of Singapore (“IRAS”), would interpret and apply the “adequate economic substance” requirement (“Economic Substance Requirement”).

On 8 December 2023, IRAS has published its e-Tax Guide on “Income Tax: Tax Treatment of Gains or Losses from the Sale of Foreign Assets” (“e-Tax Guide”). In this Singapore tax update, we will provide a summary of IRAS’ clarifications in this e-Tax Guide.

IRAS’ clarifications regarding the new section 10L

 Foreign-sourced gains from the sale or disposal of a foreign asset (not being an Intellectual Property Right (“IPR”)) will not be subject to Singapore income tax, if the entity concerned can meet the Economic Substance Requirement in the basis period in which the sale or disposal occurs. This Economic Substance Requirement differs depending on whether the concerned entity is:

A. a pure equity-holding entity – e., an entity:
i. whose function is to hold shares or equity interests in any other equity; and
ii. has no income other than –
a. dividends or similar payments from the shares or equity interests;
b. gains on the sale or disposal of the shares or equity interests; or
c. income incidental to its activities of holding shares or equity interest.
B. a non-pure equity-holding entity – e., an entity that is not a pure equity-holding entity.

For a pure equity-holding entity to meet the Economic Substance Requirement, the entity is required to satisfy the following conditions in the basis period in which the sale or disposal occurs:

a. the entity submits to a public authority any return, statement or account required under the written law under which it is incorporated or registered, being a return, statement or account which it is required by that law to submit to that authority on a regular basis;
b. the operations of the entity are managed and performed in Singapore (whether by its employees or outsourced to third parties or group entities); and
c. the entity has adequate human resources and premises in Singapore to carry out the operations of the entity – this requirement will be considered met if:
i. it has an office in Singapore for the use of its employees (including rented premises or co-working office spaces);
ii. it shares a premise with an associated entity for the use of its employees; or
iii. the outsourced service provider performing the pure equity-holding entity’s core income generating activities has an office in Singapore.

In this regard, IRAS clarified that a pure registered address (e.g., address of the corporate secretary) that is not used by the pure equity-holding entity’s employees or outsourced service provider to perform the pure equity-holding entity’s core income generating activity will not meet the “adequate premises” criterion.

As for a non-pure equity-holding entity, the new section 10L will not apply to an entity which satisfies all the following conditions in the relevant basis period:

a. the operations of the entity are managed or performed in Singapore (whether by its employees or outsourced to third parties or group entities); and
b. the entity meets the Economic Substance Requirement taking into account the following considerations –
i. the number of full-time employees of the entity (or other persons managing or performing the entity’s operations) in Singapore;
ii. the qualifications and experience of such employees or other persons;
iii. the amount of business expenditure incurred by the entity in respect of its operations in Singapore;
iv. whether the key business decisions of the entity are made by persons in Singapore.

The Economic Substance Requirement in respect of a non-pure equity-holding entity will be determined based on an analysis of the entity’s “core income generating activities”.

The Economic Substance Requirement will typically be assessed at the entity level, but there are exceptions whereby this requirement is applied at the holding company level on behalf of its Special Purpose Vehicles (“SPVs”).

This Economic Substance Requirement can also be met in an outsourcing arrangement, if that arrangement meets the following conditions:

a. the economic activities are to be carried out by the outsourced entity in Singapore;
b. the outsourcing entity has a direct and effective control over the outsourced activities to be carried out by the outsourced entity;
c. the outsourced entity must set aside dedicated resources (e.g., manhours) to provide the outsourced services.

However, for foreign-sourced gains received in Singapore from the sale or disposal of foreign IPRs, different rules apply.

For gains received in Singapore from the sale or disposal of foreign “qualifying” IPRs, a modified nexus approach is used to determine the extent of such gains which would not be taxable in Singapore.

On the other hand, for gains from the sale or disposal of foreign non-qualifying IPRs, the full amount of gains will be subject to tax when received in Singapore. This is regardless of whether the entity has adequate economic substance in Singapore.

The final point to note is that if the disposal gains are subject to tax under the new section 10L, then the exemptions under section 13 ITA will not apply to exempt such gains.

Brief thoughts on IRAS’ clarifications regarding the new section 10L  

IRAS’ publication of the new e-Tax Guide has served to clarify certain aspects regarding the new section 10L. Notwithstanding the publication of this new e-Tax Guide however, MNCs and businesses can still expect a fair degree of uncertainty over the implementation of the new section 10L in practice.

In particular, in determining whether a non-pure equity-holding entity has met the Economic Substance Requirement, much will still depend on the facts and circumstances unique to each entity and its industry.

In this regard, it may still be useful for MNCs and businesses to seek Advance Rulings to clarify the application of this Economic Substance Requirement, especially for those transactions of substantial economic value.

It also bears highlighting that the e-Tax Guides published by IRAS are merely guidelines – i.e., they are not law (Zhao Hui Fang v Comptroller of Stamp Duties [2017] 4 SLR 925 at [113]). Taxpayers who disagree with the application of the new section 10L can challenge the decisions in the tax tribunals and/or courts.

Conclusion

Despite the publication of the e-Tax Guide concerning the new section 10L, MNCs and businesses can still expect a fair degree of uncertainty over the interpretation and application of this new section 10L in practice. When in doubt, it may be prudent to seek the counsel of legal advisors.

This client update is authored by our firm’s Tax Partner, Mr. Ma HanFeng.

Please do not hesitate to get in touch with the author directly should you have any queries.