31 July, 2012


Legal News & Analysis – Asia Pacific – Singapore – Tax


That Singapore does not tax capital gains is certain. Only income is charged to tax. The uncertainty arises when a gain made or loss incurred is sought to be characterised as being either income or capital in nature.
This distinction has become a highly contentious issue where companies
dispose of their investments in other companies as part of a corporate restructuring. While the restructuring may also raise other tax issues, whether a gain made is income or capital in nature can be the most critical issue and produce an unwelcome tax burden. Where the Inland Revenue Authority of Singapore (IRAS) considers that the gain was made in the course of carrying on a trade or business, it will tax the gain. On the other hand, where a loss has been incurred in disposal of shares bought as an investment, IRAS may not necessarily agree that the loss was incurred in a trade or business so as to be deductible.  
Lobbying by industry and professional groups and a recent review by the Ministry of Finance has resulted in a tax change in Budget 2012 to have more certainty on whether gains from disposal of equity investments would be taxed. The Ministry has just released the Income Tax (Amendment) Bill 2012 for public consultation from 24 July 2012 to 13 August 2012. The draft Bill provides for an exemption from tax for gains made from disposal of equity investments.  The IRAS had earlier published a tax guide on 30 May 2012 on its administrative position on this issue. However, in the event of a legal dispute on the correct tax treatment to be accorded to a business transaction, it is the legislative provisions that will prevail over the tax guide where there is a difference between them.
For companies to avail themselves of the tax exemption, the disposal must be of ordinary shares and the gains must have been derived during the period from 1 June 2012 to 31 May 2017, inclusive of both dates. Additionally, the divesting company must also directly and beneficially own at least 20% of the ordinary shares in the investee company at all times during a continuous period of at least 24 months. The period of holding must also end on the date immediately before the date of disposal of the shares. Both the legal and beneficial interests in the shares must be transferred to the purchaser.
Only certain costs and expenses may be deducted in ascertaining the taxable profit or gain from a qualifying disposal of shares. Three classes of disposal are excluded from the tax exemption. These are:
1) disposal of shares where the gains or profits are part of the income of an insurance company;
2) disposal of shares in a company which is in the business of trading or holding immovable properties in Singapore other than the business of property development, where the shares are not listed on a stock exchange; and
3) disposal of shares of a partnership, limited partnership or limited liability partnership where at least one of the partners is a company.
There are also certain claw-back provisions as part and parcel of the exemption. This allows IRAS to recover tax deductions, etc. previously allowed for an earlier year of assessment before the year of assessment in which the disposal of the shares takes place. 
A company proposing to acquire or divest a share investment may wish to consider its tax position carefully before going ahead. 




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