Do you know what is the effective company tax rate in Singapore? If your answer is 17%, we will tell you why its much lower than that and why in this article.
Every year there are many new businesses getting set up in Singapore. It is primarily because of the conducive business environment offered by the Singapore government to entrepreneurs. One can get access to capital, suitable location (our airport is a major transit hub), and even the pro-business unions which are not allowed to disrupt operations or organize strikes.
The reason for that can be traced back to the founder, when Singapore became independent, it was decided that we will need to attract Multi-National Companies (MNCs) to set up in Singapore as we do not have much natural resources and is a relatively small country (Total square area is only 721 square km, you can barely see it on a world map).
Hence, we need companies to set up in Singapore to provide both employment and tax revenue. To attract these companies, Singapore had to provide a stable, friendly, efficient place to do business and it had to be economically attractive for business to operate in Singapore which leads to the main points in this article.
One of the major economic reason that attracts new startups and companies placing their subsidiaries here is the city-state tax friendliness. To understand how competitive corporate taxes rates are in Singapore, we will only need to look at the ranking from trading economics which ranked the Corporate Tax Rate of all the countries. Out of 195 countries, Singapore was ranked at number 28 (excluding tax havens that have zero corporate tax).
So, here is everything you need to know about the three essential tax considerations for Singapore Companies.
What is the Singapore Company Tax Rate?
The corporate tax in Singapore is 17% flat on its chargeable income. Although it is already one of the lowest in the world market, most companies do not pay close to 17% tax rates in Singapore.
Three major reasons why most companies pay less than the 17% tax rate are:
- Tax exemption scheme for startups
- Partial Tax Exemption for Companies
- Corporate Tax Rebates
Tax exemption scheme for startups (Updated 2020)
According to the annual Doing Business Report of the World Bank, if you are seeking a place to do business easily, Singapore is the right place for you. In fact, Singapore is ranked second best by the World bank for the world’s easiest place to do business. There’s no added bureaucracy on business compliance and setting up. (A Company can be set up in less than one day!).
The tax authority has provided a tax exemption scheme for newly incorporated companies to support entrepreneurship and help the local businesses grow. Under this scheme, the startup that comes under this scheme from year 2020 onwards will get a 75% exemption on the first $100,000 of normal chargeable income. This reduces the tax rate from 17% to 4.25% for the first $100,000 and for the next $100,000, a 50% exemption is provided. This means that for the next $100,000, the effective tax rate is only 8.5%. Taken together, for the first $200,000 of taxable income, a Singapore company will only be paying 6.3% of tax.
The even better news is that this exemption is given for the first 3 consecutive years. If we refer back to the Corporate tax rate ranking by trading economics, a 4.5% of tax rate will put Singapore as the second lowest tax regime after Micronesia (excluding all tax havens with zero corporate tax).
Is the Tax exemption scheme for startups applicable to all newly incorporated companies? No, unfortunately if your new company is an investment holding company or a company which undertakes property development for sale, for investment, or for both investment and sale. The tax exemption scheme will not be applicable.
A common question that you may be wondering is what happens after the first 3 years, do you have to pay 17% corporate income tax on all your income? Read on for the next scheme below: (Spoiler alert: No, you don’t have to.)
Partial Tax Exemption for Companies (Updated 2020)
For Companies that have been registered more than 3 years, they are eligible for the partial tax exemption for Companies scheme. Under this scheme, the first 75% of the first $10,000 of chargeable income will be exempted with 50% of the next $190,000 of normal chargeable income being exempted.
This lowers the effective tax rate for the first $200,000 of profits to be single digits. To be precise, the effective tax rate will be only 8.28% maximizing the tax exemption scheme.
Corporate Tax Rebates
It is highly likely that most Companies in Singapore pay an even lower rate of tax than what is computed after the two scheme above. The reason is that since 2013, the government has implemented the Corporate Tax Rebates scheme. This scheme rebates 25% of the income tax which is payable to the government capped at $15,000.
This means that for the first $60,000 of tax payable, you will get a 25% rebate, this is on top of the two schemes which we discussed above. Hence, the effective tax rate under the tax exemption scheme for new startups will be 4.7% while the effective tax rate under partial tax exemption scheme will be further reduced to 6.2%.
The Corporate Tax Rebate is only announced each year but it has been in place for a number of years.
All these schemes and tax incentives are the reason why Singapore is really on the verge of being declared a tax haven by the world economies and makes it economically so attractive to foreigners to start their Companies here.
Capital Gains Tax Is Nil
Capital gains tax is the tax on the profit by the sale of an asset that is non-inventory. Most common sources of capital gains are coming from the sales of bonds, real estate, stocks, and property.
For an entrepreneur, this will be really beneficial when considering an exit plan for your Company. When a business owner divests his shares in a Company, it could be for a substantial amount running into the millions and the tax bill can be hefty given the amounts at stake here. In Singapore. there will be no tax on the amount you receive for the shares. This may be surprising but Capital gains in Singapore are non-taxable. Therefore, there is no requirement for you to declare the gains as an income in your tax returns.
The reason is the encouragement of entrepreneurial business activities and also because due to the lack of natural resources, the government’s strategy plan is for Singapore to become a financial powerhouse. In order to attract investors with significant capital to invest into funds in Singapore, it was maintained that Capital gains tax should be nil. Hence, any capital appreciation will not be taxed in Singapore.
However, you must take note of stamp duties when selling shares to another party.
Dividends Are Tax-Exempt
The system in which we can classify the Singapore tax system is One-tier. This means that the company paying the tax as a separate legal corporate entity is the final tax of the company’s profit. All the dividends will be exempted from further taxation in the hands of the shareholders.
It wasn’t always the situation though, before 2002, dividends was taxed at the shareholder’s level after the Company had paid corporate tax on it. There was some discussion on the same profits being taxed twice making it unattractive for companies to declare dividends to their shareholders and the new One-tier system was implemented in the year of 2002.
Singapore is an attractive place to start a Company. Taking into consideration the tax schemes and exemptions above, we can understand why most foreigners decide to choose Singapore as their preferred place to incorporate a Company.
To find out more about the process to start a Singapore Company, you can always take a look at our incorporation packages. or drop us a note here for discussion.