Company formation in brief
The law of Singapore provides for the registration of companies of various organizational and legal forms but Private Limited Company and Limited Liability Partnership are primarily of practical interest for a foreign investor.
Private Limited Company is established by at least one physical or legal person (resident or non-resident of Singapore) and is characterized as follows:
• maximum number of shareholders is 50;
• capital is not required to be paid up;
• only registered shares which may not be freely transferred to third parties without the shareholders’ meeting approval may be issued;
• company is managed by at least two directors with one of them being a Singapore resident;
• only physical persons may be directors;
• each director may hold office for no more than 3 consecutive years but may be reappointed one year after the date of his dismissal;
• company must have a secretary (physical or legal person) – a Singapore resident;
• if the registrar of companies has recorded three or more violations by a director or a secretary in preparing or keeping reports and other documents, such person will be disqualified and may not be involved in the company management in any way;
• meetings’ minutes and financial statements may be kept outside Singapore provided that copies of all those documents are kept at the company’s registered office;
• company has to appoint an auditor and to file annual financial and statistical statements.
Limited Liability Partnership (LLP) is an alternative tool for doing business in Singapore.
LLP is considered in Singapore as an independent legal entity separate from its partners. Unlike, for example, English limited partnerships (where a partnership is subject to liquidation if one of the partners exits the partnership without transferring his business share to someone else), LLP is distinguished by indefinite succession, i.e., no changes of LLP partners affect its existence.
• Bring legal actions on its own behalf and be brought as a defendant in a claim;
• Purchase property in its own name and possess it;
• Have a corporate seal in its own name, and
• Carry out activities on its own behalf on legal grounds as a separate commercial legal entity.
The term “partner” is defined in Singapore as any person accepted as an LLP partner under the Memorandum of Association of LLP. Each LLP must have at least two partners, and each of them may be an individual, a local or foreign company, or another LLP.
LLP Partners are not personally liable for LLP debts, however, this does not apply to cases where claims against LLP are filed in connection with losses arising from its partners’ illegal actions or inaction. However, each individual partner is not personally liable for payments on claims for losses arising from other LLP partners’ illegal actions or inaction.
The term “director” is defined in Singapore as any person interested in or involved in LLP management. Each LLP must have at least one director - capable physical person of legal age (over 18 years of age) domiciled in Singapore.
A foreigner may be an LLP director if it is proved that the person is legally entitled to stay in Singapore as a holder of the Employment Pass, the Approved-In-Principle Employment Pass, or the Dependent's Pass.
Any existing Singapore company may be transferred into LLP if all the shareholders become the new LLP partners and provided that the existing company has no outstanding liabilities as at the time of applying for the transformation.
Pursuant to Section 24 (1) of the LLP Act, each LLP director is required to file the LLP solvency or bankruptcy declaration (i.e. whether the LLP is capable/not capable to pay its debts). Pursuant to Section 24 (2), the first annual declaration must be filed within 15 months of the LLP registration. Subsequent declarations shall be filed once per calendar year and no later than 15 months from the date of filing the most recent declaration.
Under Section 25 (1) of the LLP Act, a partnership is required to maintain accounting and other records to reflect its transactions and financial position. LLP is also required to prepare profit and loss accounts and the balance sheet. However, filing such documents with the Accounting and Corporate Regulatory Authority (ACRA) is not required. Pursuant to Section 25 (2), LLP is required to keep accounting books for five years.
Singapore is not a tax-free jurisdiction and the aggregate corporate tax rate here may be up to 30%.
For tax purposes, Singapore distinguishes between resident and non-resident businesses. A company is considered resident if its business management and control are performed from Singapore and directors’ meetings are held here. Since all Singaporean companies must have a local director, a company must have at least two foreign directors to obtain a non-resident status (NOTE - such companies are not subject to double taxation agreements). It should be noted that the Singapore directors’ register is available to the public.
Resident companies are subject to general tax treatment in Singapore.
In order for a non-resident company to obtain a tax-exempt status in Singapore, it must meet the following criteria:
• Corporate governance and directors’ meetings are held outside Singapore;
• Corporate business includes only passive investments outside Singapore and no income is transferred to Singapore.
If a non-resident company is engaged in sales or providing services outside Singapore, for the company to obtain tax exemption in Singapore, it must prove that its income is received through a duly established place of business operation abroad (a branch, a representative office, etc.), and that taxes from that business operation are paid at the place of income generation.
Since a limited liability partnership is considered by Singapore lawyers a very effective tax planning tool, let us review the LLP tax treatment in more detail.
In general, LLP is not subject to taxation in Singapore at the level of a legal entity, however, any physical persons’ and partner companies’ income is taxed as follows:
• If a partner is a legal entity, its share in the LLP income is charged at a rate of the prevailing corporate income tax.
• If a partner is a physical person, his share in the LLP income is charged at a rate of the personal income tax;
To begin with, let us consider practical scenarios referred to by Singapore lawyers to illustrate the above provisions for partners - legal entities.
• Two Seychelles international trading companies become partners of a Singapore LLP and appoint a sole Singapore resident director to manage and control the corporate business done in Singapore exclusively;
• The LLP opens a bank account in Singapore and carries out all its operations through this local account exclusively and transfers all its income to this account in Singapore.
By law, if a partner company is not a Singapore resident, it may be partially exempt from taxes in Singapore. Companies may be partially exempt from taxes if their income is up to S$ 300’000 in the following way:
First S$10’000 @75% ...............S$7’500
Further S$290’000 @50% .......S$145’000
In aggregate S$152’000 are tax exempt
Let us suppose that each partner company received S$500’000 of income in the reporting period. The corporate income tax rate in Singapore is 17%. And in line with the above example, the amount of S$152’000 is tax exempt. Therefore, the remaining S$148’000 are taxed for each partner company at a rate of 17%; this means that the amount due is S$25’160. Further S$200’000 are taxed at a rate of 17%, with the amount due being S$34’000. In total, the tax due on the taxable amount of S$500’000 is S$25’160 + S$34’000 = S$59’150.
• Two Seychelles international sales companies become partners of LLP in Singapore and appoint a “nominee” resident director of Singapore who is required to be appointed there by law;
• One more director is appointed to manage the partnership business done exclusively outside Singapore; he is authorised to act outside Singapore by the general power of attorney issued to him by Singapore resident director.
This scenario provides for three options in respect of the bank account:
1. LLP opens a bank account in Singapore and carries out all its operations through this local account exclusively and transfers all its income ($500’000) to this account in Singapore;
2. Bank accounts are opened both in Singapore and abroad, and a portion of the income ($400’000) remains outside Singapore while the rest income ($100’000) is transferred to Singapore;
3. A bank account is opened outside Singapore and all income ($500’000) remains outside Singapore.
What is the tax rate in each of those cases? Singaporean lawyers respond as follows:
- in the first case, foreign income received in Singapore is not taxed in Singapore, if:
• corporate tax rate in the country where the foreign income is generated is no less than 15%; and
• the foreign income is taxed in the country where it was generated.
- in the second case, the part of the income transferred to Singapore is taxed, except for tax exempt instances provided for by existing agreements.
- in the third case, the income is not taxed in Singapore.
At the same time, Singapore lawyers point out that Singapore tax regime is based on the principle of territorial taxation, i.e. the subject of taxation is either the income generated by the company in Singapore or its income generated by offshore business if it is transferred to the company’s account in Singapore.
Let us come back to the case when the partnership’s partner is a physical person (regardless of the partner’s residency status in Singapore), and the partnership’s bank account (or one of them) is opened in Singapore. Singapore lawyers argue that the partner's income from a foreign source received in Singapore from outside Singapore is not taxable in Singapore, except in the following situations:
1. if the partner is employed in Singapore, and his employment abroad is related to his work in Singapore. Therefore, in addition to working in Singapore, the partner has to travel abroad;
2. if the partner is employed outside Singapore on behalf of the Government of Singapore.
Singapore has two types of schemes for companies which result in a lower tax base.
Let us look at them one by one.
i) Exemption for newly formed companies
1. company is incorporated in Singapore;
2. company is a tax resident in Singapore for the respective year of assessment (YA); and
3. company has no more than 20 shareholders for that YA, however:
• all the shareholders are physical persons having beneficial and direct rights to the shares on their own behalf; or
• at least one shareholder is an physical person having beneficial and direct rights to at least 10% of outstanding ordinary shares.
The company is recognised resident in Singapore if its business control and management is exercised in Singapore.
The newly formed qualified company receives full tax exemption from the first $100’000 and receives 50% tax exemption from the further $200’000 within the first three years after incorporation.
For example, if the taxable income is $150’000,
• the first $100’000 are 100% tax exempt
• the further $50’000 are 50% tax exempt.
Therefore, the remaining $25’000 only are charged at the standard tax rate of 17%.
This Tax Exemption scheme is not applicable to the following companies incorporated after 25 February 2013:
• holding companies; and
• companies engaged mainly in the preparation of real estate to sale, investment or to investment and sale.
After the first 3 consecutive YAs, the company will enjoy a partial tax exemption.
ii) Partial Tax Exemption
A partial tax exemption in Singapore is provided on ordinary chargeable income (excluding tax-exempt dividends) up to $300’000 as follows:
• 75% of the first $10’000 are tax-exempt,
• 50% of the next $290’000 are tax-exempt.
Royalties are included in a Singapore company’s taxable income.
If the tax at the source is withheld when paying royalties, the Singapore company may claim a credit against the tax paid outside Singapore but it has to meet all of the following conditions:
• the company is a tax resident in Singapore for the relevant accounting year;
• the tax is paid or is due in a foreign country; and
• the same royalty income (gross amount before deducting the withholding tax) is subject to taxation in Singapore.
There are 2 types of credits of tax paid outside Singapore: tax exemption if the double taxation agreement is signed, and a unilateral tax credit.
The foreign tax credit depends on the nature of income and compliance with specific terms and conditions as provided in the double taxation agreement with the relevant country.
In practice, the credit of taxes paid outside Singapore takes into account the lower of the following amounts:
• actual amount of the foreign tax paid; or
• Singapore tax amount applicable to the foreign income (net of expenses).
The calculations may seem not quite transparent, and therefore, to be on the safe side, we strongly recommend that all those who are planning to establish a business in Singapore get detailed advice.
Singapore is not a tax heaven or offshore jurisdiction and a concept of Singapore tax exempt company (and/or Singapore international business company (IBC), offshore company, trust, foundation etc. registration) does not exist in Singapore as such. A company formation in Singapore could be arranged with a professional registered agent providing incorporation, virtual office and other corporate services in Singapore. To set up a company in Singapore is possible by correspondence, but to open a bank account in Singapore will, most probably, require a personal visit.
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