Disclaimer
This is purely regarded as academic information sharing. We hold absolutely no liability over any of the notes below, what you choose to do with this information, or any actions individuals or companies choose to make arising from these notes.
The analysis below represents our views as to the interpretation of existing legislation as at the date of this paper and, accordingly, no assurance can be given that the relevant tax authorities or the Courts will agree with this analysis. It should be noted that further tax legislation could be introduced, or the Courts could come to decisions, which may affect the body of case law and, in turn, affect the expected tax treatment of the current and future state, as described in this memo. We are not responsible for advising of any changes in guidance or interpretation subsequent to the date of this paper.
Your specific facts and circumstances and relevant intercompany relationships and corporate structures should be considered on an individual basis against the contemporary UK/Singapore tax rules prevailing at that time.
Introduction
Principally, Singapore has a lower corporation tax rate than the UK (17% vs 19%), with additional discounts for start-up companies, which makes the disparity for corporation tax even more significant. Singapore also has, on the whole, a more favourable business environment for where companies can do business. UK businesses and individuals can therefore leverage a Singapore entity to:
- Protect the long term interests of their business; and
- Potentially save tax.
The most straightforward way to utilise a Singapore entity within a Group is to transfer as much profit as possible to the Singapore entity. This will maximise profit in a lower tax jurisdiction.
Additionally, any decisions that maximise the underlying value of the Singapore entity may also be tax efficient, as Singapore has no capital gains tax, so if the business was to eventually be sold, the tax charge in Singapore would be lower than in the UK.
There are many ways to transfer profits from the UK entity to Singapore, with each method with its own benefits and drawbacks. I have listed a few of these out here:
Option 1 – Management fees from Singapore to UK
If there is any kind of employee or personnel substance, this is the most straightforward way of moving profits from the UK to Singapore. A management fee, sales fee, business support fee, administrative support fee or finance fee charge can be levied on the UK from Singapore, via an intercompany business agreement.
As a result of this charge, the Singapore entity could provide a fixed mark up on costs, profit share or target operating margin which is then set out within the intercompany service agreement. The Singapore entity would then be able to retain profits with the eventual outcome of profits being shifted from the UK entity to the Singapore entity, reducing the overall tax bill for the Group.
The benefit of this arrangement is that it is incredibly straightforward and simple to understand – in most cases the transaction will be VAT free (a similar transaction could take place with the ownership of actual goods being passed along, but if there are VAT charges this would make this scheme unviable).
Additionally, depending on the size of the business, it is quite difficult from HMRC to challenge the amount payable provided that it is in exchange for an actual service, which makes it a comparatively robust structure. As a general rule, the larger the size of the UK business, the larger the chance of an HMRC enquiry, so if the overall quantum of this transaction is generally small, it is unlikely that HMRC will take interest. Additionally, the transfer pricing rules do not generally apply to companies that are small or medium-sized enterprises in the relevant accounting period (but HMRC could still challenge these transactions on other grounds)
Where HMRC can challenge this transaction in on the basis of substance – if there are not underlying personnel carrying out the relevant services, then HMRC might challenge the legitimacy of this transaction. Therefore, as much substance as possible should be created in Singapore if possible. This could include:
- Assets being owned in Singapore (cash / tangible and intangible assets);
- Employees being hired in Singapore; and
- Fixed place of business (such as an office – even if just a virtual office) being rented.
The use of this substance can then be leveraged to charge the UK entity as much as possible, with other options included as per Option 2 and 3 below.
Option 2 – Royalty fees from Singapore to UK
If there is any kind of intellectual property (IP) or other intangible asset that a UK company possesses, the company could then sell/transfer that IP to the Singapore entity. This gives the Singapore entity sufficient substance (i.e. if it holds the asset in Singapore) and a valuable asset which can be sub-licenced for use back to the UK entity. However, given that there is 8% withholding tax usually applied to royalties between the UK and Singapore, this may not be a viable option to save tax in the short term, but could be beneficial if the business is a group with a larger global presence beyond just the UK (as the royalty could be charged from Singapore to these countries instead).
There are rules around the transferring of intangible assets between companies, so it is important businesses consult with their advisors if they are unsure of the value of the asset the company is transferring.
The additional value of this option is that it inflates the value of the Singapore entity while deflating the value of the UK entity. As Singapore has a lower capital gains tax than the UK, ultimately any gains eventually crystallised if and when the company is sold, or when the underlying asset is sold, will incur a lower overall tax charge.
Provided that the asset can be transferred out of the UK relatively easily and with a low tax charge, this probably the most difficult item for HMRC to challenge, as the value of intangible assets and licence fees are highly difficult to value.
Option 3 – Loans from Singapore to UK
If the company has large amounts of capital to move around, it may be possible to set up a intercompany loan, with the Singapore entity lending capital to the UK entity, charging interest in the process. Any interest charged will move profits from the UK entity to the Singapore entity.
Unfortunately there is a 5% withholding tax on interest charged between the UK and Singapore, so the only viable way to save money on loans is via a third country, explained in the paragraph immediately below:
If an entity is set up in Singapore, then the Group has an option to operate cross-border transactions either from the UK or Singapore. It may be the case that the UK’s double tax treaty has an non-preferential withholding tax applied to interest, royalties, income, or other cross-border transactions. However, if the Group holds an entity in Singapore, then the relevant transaction could be carried through the Singapore entity instead. For example, where the UK and another country (country A) has a 10% withholding tax applied to interest earned from cross-border loans, but Singapore and country A has a 0% withholding tax applied to interest earned from cross-border loans, then the Group could set up a loan from Singapore to Country A and therefore avoid paying the withholding tax.
HMRC could challenge such an arrangement under ‘treaty shopping’ rules, so it is important to check your specific arrangements with your tax advisor.
Remarks on how to set up the Group company structure
From a UK perspective, there are a number of variables to consider when deciding on how to set up the Group structure. Options include:
- Having one individual own both the UK and Singapore company
- Have the UK company own the Singapore company, or vice versa
- Set up a UK or Singapore holding company, which owns both the Singapore company and the UK company
It may depend on the long term plan of the business owner how best to structure the Group. If the company is to eventually sell the business, it might make more sense to set up a holding company in the UK or Singapore, which then owns the new Singapore entity. This allows parts of the business to be sold relatively easily and provides flexibility for then how to proceed.
Alternatively, the business owner could own the Singapore entity directly. This is where the business owner might want to keep the UK entity and Singapore entity separate.
If the company in the UK is a real estate investment company, a dividend withholding tax of 15%, so it would make sense for an individual to own the Singapore company (i.e. it can operate independently as a management / financial company, such that dividends back to the UK do not levy a 15% withholding tax charge)
Viability to save on personal taxes
Having an entity in Singapore provides flexibility and support for an individual’s tax residency. The individual could reside in Singapore, particularly if they anticipated a sudden increase in capital gains or income (i.e. a business was due to be sold) and they wanted to take advantage of significant short-term income and capital gain increases.
This would be subject to the ‘temporary non-resident’ rules in the UK so the business owner should act carefully and plan accordingly if planning to live temporarily abroad to utilise a lower tax rate.
Withdrawing funds from a Singapore entity to an individual in the UK
In short, it is preferable for a UK individual who is UK tax resident to withdraw income via dividends, rather than via salary. Principally, UK individuals are taxed at a lower rate on dividends than salary.
Moreover, dividends in the UK have an additional £2,000 minimum allowance that salary does not have, so UK individuals only start paying tax on dividends at £14,500. Therefore, the individual will suffer less UK tax on dividends than they do on income.
Additionally, there is a challenge of employing overseas individuals that causes challenges to the overall structure of the business. If a Singapore entity employees an individual in the UK (or most likely, any international country – the specific agreement will be explained in the relevant double tax treaty for Singapore and that entity) and that individual:
“is acting on behalf of an enterprise and has, and habitually exercises, in a Contracting State an authority to conclude contracts on behalf of the enterprise”
it will create what is known as a Permanent Establishment (PE) in the country where the individual resides. The outcome of this process is that any profit attributed to that individual is liable to corporation tax in the country where the PE exists. Given that clients who are potentially interested in setting up a Singapore entity will be entrepreneurs / high-value employees, there is an increased risk of their activities falling under the “authority to conclude contracts” as per the legislation above.
In summary – this means that the overall benefit of utilising Singapore in the structure is negated, because there is no corporation tax saving. Therefore any individual should generally only withdraw dividends from the company and not seek to be employed by that company.
Other remarks
It is important to clarify that UK individuals pay tax at the same rate for both foreign income and UK income. In effect, where a UK tax resident has UK income and Singapore income arising, both this income is generally taxed at the same rate. Therefore all tax savings from utilising the Singapore entity will arise at the corporate, rather than personal level. (i.e. all savings arise from the Singapore entity paying a lower rate of tax than a UK entity, where both entities would incur the same income).
