We will show a couple of company structures an Australian can use that includes a Singapore company and that will save taxes.
Companies, jurisdictions, and tax – where is a company tax resident?
As a general rule, a company will be deemed to be resident in the country or territory where it is incorporated. In the old days, this was always the case. However, today most jurisdictions demand a certain presence to consider it a tax resident in that jurisdiction. This applies both ways, but it is especially high tax jurisdictions – typically the jurisdictions where the company owner resides – that refuses to accept structures where a company is set up in another jurisdiction whereas most or all activity does not take place in that said jurisdiction.
What type of substance or presence that is required is not always that easy to determine, but the thought behind this is to protect the tax base of the high taxed countries.
In practical terms, this is how you should think about it:
- The default position is still that a Singapore company will be considered a tax resident in Singapore. So, if the Singapore company is owned by an Australian or an Australian company, the Australian tax authorities will have to actively make a decision for this company to be considered an Australian company for tax purposes.
- It matters a lot where the owners and the customers are. The typical situation is where you have Australian owners and Australian customers. If the owners then set up a Singapore company to serve those Australian customers, they need to have a very good reason to do so, except for paying fewer taxes. If, on the other hand, an Australian owner sets up a Singapore company to serve customers in Asia, it is much harder for the Australian tax authorities to deem that company tax resident in Australia.
- The type of presence that is required will depend on the type of company. A holding company will need a lot less than a trading company.
Australian CFC-rules (Controlled Foreign Company)
In addition to the resident test, most OECD countries – Australian included – has what is called CFC-rules. In general, these rules state that under certain conditions the tax authorities can disregard a foreign entity completely for tax purposes. The effect of this is that the owner – a person or a company – is taxed directly. The terms vary a lot between countries, but Australia has one of the strictest CFC-rules in the world.
In Australia, the CFC-rules is designed to hit three types of company setups.
- The offshore holding or investment company. A company that typically are designed to receive passive income from other companies or other sources – especially where this is not tied to ownership (dividends).
- The “sales to Australia Company”. This is a type of company that sell goods or services to Australian residents or another company that has a presence in Australia.
- The “service company”. This is the type of company that deliver services to a tangible company. This often raises the question of transfer pricing but under Australian law, this is part of the CFC rules.
Keep in mind that the rules apply to Australian taxpayers only. The rules are fairly complicated, with a lot of exceptions and adjustments. But, the above layout is the essence of these rules.
Basic Company Structures
These are some basic company structures that you will encounter:
The Singapore trading company
In this scenario, an Australian company or individual opens a company in Singapore. The simple setup is:
Australian company/individual 100% ⇨ Singapore company
As long as the Singapore company is an operative company, meaning that you sell goods or services from this company to customers, and the customers are not in Australia, there will not be any CFC problems.
In addition, the Singapore company would need to have some presence in Singapore. In Singapore, you need to have a local director and that will normally be sufficient together with an operative address. If this is the case the company will be deemed tax resident in Singapore.
The Singapore investment company
Opening a Singapore investment company as an Australian company/individual can trigger a CFC situation. Again, we are looking at a simple setup:
Australian company/individual 100% ⇨ Singapore company
Whether there will be a CFC situation depends on two factors.
i) How the income of the company is classified. If it is classified as a passive income, you will have a CFC situation.
ii) How many owners the company has. As long as the UBOs (Ultimate Beneficiary Owners) consists of more than five people, CFC rules do not apply.
The Singapore holding company
The same simple setup:
Australian company/individual 100% ⇨ Singapore company
A Singapore holding company will nearly always create a CFC situation. The reason here is that the company’s income will nearly always be deemed as passive.
In reality, the only way to get away from a CFC situation with a holding company is for the holding company to have more than five UBOs.
But, since Singapore is a section 404 country the CFC situation is not that bad. When a company in a 404 country pays or receives dividends this is not counted as an attributional income. This Basically means that the dividends as such will not be attributed to the Australian company/resident for tax purposes.
So, the effect here is that as long as the company only receives dividends, and not royalties, interests and other types of passive income this is a type of company that will not have any CFC problems.
As can be seen from the above, although the Australian CFC rules are pretty tight, the most common company structures for Australians doing business abroad will not really be affected. This is intentional. The target for the CFC rules is the type of income that is easy to move out of the Australian tax base, not stopping Australians to do business abroad.
As noted earlier a CFC situation will not occur if:
- If the Australian tax resident owns less than 10% of the foreign entity
- If the Australian tax resident owns less than 40% of the foreign entity provided that five or fewer Australian tax residents control 50% or more of the company.
Tax in Singapore and Australia
The corporate tax in Australia is 26% to 30% (full rate). In Singapore, the corporate tax rate is 17%, but there are some incentives that will bring the effective tax rate substantially lower (from 4,5%) especially for small and mid-sized companies.
Based on this alone it is obvious that Australian companies/residents will save a lot of tax by moving their offshore operations to a Singapore company instead of operating from Australia.
Company structures for Australians including Singapore companies
Scenario 1:
Scenario 2:
This is a typical structure where an Australian company uses a Singapore company to hold shares in other foreign companies. When receiving dividends that are foreign-sourced, both jurisdictions tax this, but Singapore has some exceptions.
The tax implications here will depend on a number of factors, but in general, it is favourable to use a Singapore holding company. You will need to make a specific assessment for each case.
Since Australia uses “franking” credits on dividends from local companies, it might in some cases be more favourable to use an Australian company if you want all dividends paid out to the UBO.
Conclusion
As we have seen it can be a very good idea for an Australian company/resident to make use of a Singapore company.
However, this only applies to business conducted outside of Australia.
For operational businesses, tax savings can be huge as taxes in Singapore is way lower than taxes in Australia. For holding companies it will in many cases be more favourable to use a Singapore holding company than to use an Australian one.
