Taxation of Investment Holding Companies in Singapore
There are two types of investment companies, namely, investment dealing companies and investment holding companies.
Investment dealing company
The main activity of the above company is to make investments to then subsequently see it. The proceeds from the sale of investments are assessed under s10(1)(a). The deductibility of the expenses is also alike other companies whereby s14 and s15 apply and capital allowances can be claimed by the company.
Investment holding company
The main activity of an investment holding company is the passive holding of long-term investments. The company earns passive income in the form of rentals, dividends and interest. The income derived is assessed under s10(1)(d) or (f). Any subsequent sale of these long-term investments is considered to be capital gains.
The expenses allowable for deduction are that which are attributable to the investment income taxable in Singapore.
Deductibity of the expenses is administered by the following:
- The investment must be income-producing, and
- The expenses excess of income cannot be deducted against other sources of income and it cannot be carried forward as it is not a trade loss.
Direct expenses are expense directly incurred to earn each source of investment income. Examples of such expenses are custodian fees, property tax, insurance, repairs, maintenance & interest expenses. The expenses can be deducted against each income source.
These are deductible expenses incurred in accordance with the Companies Act or the requirements of the Singapore Exchange. Examples of such expenses will be audit fee, accounting fee, Income tax service fees, annual listing fees, insurance premiums, fees paid to the share registrar etc.
In substance, indirect expenses are not deductible. However, as a concession, an amount not exceeding 5% of the gross investment income that is chargeable to tax is deductible.
Examples of indirect expenses are:
- Director’s fees.
- Public utilities for office.
- Office rental.
- Administrative and Management fees.
- Fund management expenses.
- General expenses.
- Transport expenses (exclude motor vehicle expenses on “S”- plate cars which are not deductible).
Some expenses are not deductible for the purposes of Investment Holding Company (IHC). These include:
- Capital expenses.
- Expenses related to non-income producing investments.
- Cost of new assets e.g. furniture & fittings (Replacement cost for fixed assets are deductible expenses).
- Cost related to secure the first tenancy. e.g. advertising, legal costs etc.
- IHCs cannot claim capital allowances as it is not carrying on trade and business (Fixed assets replacements can be claimed as deductible expenses).
- IHCs incorporated after 25th of February 2013 is not eligible to claim the tax exemption for new start-up companies. Nevertheless, IHCs can claim partial exemption.
Basis of assessment
From Year of Assessment (YA) 2009, all investment income is assessed on an accounting year basis.
Prior to YA 2005, investment income is assessed on a preceding accounting year basis but effective YA 2005 concession has been given to companies which do not have a December 31st accounting year end.
These companies can have their investment income assessed on a preceding accounting year basis.
Investment holding company carrying on business of making investments
The principal activity of such a company is that of carrying on a business of making investments. The company owns investments such as properties and shares for the business of making investments e.g. a business of renting immovable properties or service apartments.
The companies derives investment income as a trade income S10(1)(a) which is subject to S10E restrictions.
Section 10E restrictions
a) Any non-income producing expenses incurred by the company or trustee of a property trust in respect of investments of that business are not deductible.
b) Any expenses incurred in respect of investments which produce income are only deductible against the income derived from such investments. The rest of the expenses not setoff in that year should be disregarded.
c) Capital allowances relating to that business are deductible only against income derived from the investments of that business and the excess in any year shall be disregarded.
d) Industrial Building Allowance (IBA) is only deductible against the income derived from investments which produce income. Any IBA which cannot be fully untilised by the entity in a year end is not disregarded.
A summary of the tax implications for each company is as follows:
|Investment dealing||Investment holding company in business of making investments||Investment holding|
|Charging section:||Section 10 (1)(a).||Section 10 (1)(a), however S10 provsisions apply.||Section 10 (1)(d).|
|Expenses:||Normal rules apply.||Restrictions under S10E.||Restrictions imposed per IRAS press release.|
|Loses:||Trade loss.||Excess not deductible against other income and cannot be carried forward or transferred under the group relief system.||Non-trade loss.|
|Capital allowances:||Normal rules apply.||Can be claimed but cannot be untilised against other income and cannot be carried forward or transferred under the group relief system (except for IBA).||Not available (except IBA claim for qualifying industrial building or structure).|
IRAS Practice: IRAS e-Tax Guide: ascertainment of income from business of making investment dated 11th of April 2012.