Withholding tax in Singapore: Interest

Definition:

Whether a payment is considered "interest" depends on the substance of the transaction. The intrinsic nature of said interest is compensation for not being able to use or the delayed payment of money by another. The interest must be charged against a primary sum of money which must be owed to the person entitled to the interest.
Interest


Section 45A (1) applies to the payment of any income referred to in Section 12(6) or (7) by any person to another person not known to him to be resident in Singapore. Section 12(6) refers to interest deemed to be sourced in Singapore. Therefore withholding tax is applicable on the interest income of a non-resident that is deemed to be sourced in Singapore.


a. Any interest, commission, fee or other payment connected with any loan or indebtedness, or with any arrangement, management, guarantee or service (related to services) relating to any loan or indebtedness:


i. Borne directly or indirectly by a Singapore resident or permanent establishment in Singapore except in respect of any business conducted outside Singapore through a permanent establishment outside Singapore or any immovable property situated outside Singapore. (e.g. A Singapore company has a branch in Indonesia, a permanent establishment outside Singapore and the company takes a loan to finance Indonesian permanent establishment and headquarters pays interest. No withholding tax comes into play as the permanent establishment is outside Singapore.) or;
ii. Deductible against any income accruing in or derived from Singapore (e.g. If a Singapore company claims expenses against income then it is necessary to pay withholding tax. Most of the time this happens and therefore the interest income gets caught under this provision); or

 

b. Any income derived from loans where the funds provided by such loans are brought into or used in Singapore.
Interest deemed to be derived from Singapore if it is connected with any loan or indebtedness and:
• Where the interest is borne directly or indirectly by a person resident in Singapore or a PE in Singapore.
• Where the interest is deductible against any income accruing in or derived from Singapore.
• The funds from which the interest is derived are brought into or are used in Singapore
• Income not deemed to be derived from Singapore
• Income not deemed to be derived from Singapore is:
• Interest on any loan or indebtedness where the management, arrangement or service is rendered outside Singapore by non-resident person who:


i. Is not incorporated, formed or registered in Singapore,
ii. Does not carry on a business in Singapore, and
iii. Does not have a PE in Singapore.


For example when you take up a loan, the bank can change syndication fee or arrangement fee and such services are rendered outside and the other three points i), ii) & iii) are met, then withholding tax does not apply.

• With effect from the 29th December 2009, any payments for a guarantee relating to a loan or indebtedness provided by a non-resident guarantor will not be deemed derived from Singapore if it:


i. Is not incorporated, formed or registered in Singapore.
ii. Does not carry on a business in Singapore, and
iii. Does not have a PE in Singapore.

Withholding tax rate

Tax rates applicable are either:
• Tax rates under the DTA; or
• The final withholding tax rate of 15% will apply for interest and deemed payments under S12(6) provided such payments:
i. are not derived by a non-resident from any trade, business, profession or vocation carried on in Singapore; and
ii. Are not effectively connected with any PE of the non-resident in Singapore.
• Prevailing corporate tax rate if conditions (i) and (ii) are not met (for example payments made to branch of a foreign company that has not obtained a waiver).

Withholding Tax under Tax Treaties

The above guidelines are for European countries and this model is widely used. The tax treaty eliminates double taxation and one country gives a tax credit.

Organisation for Economic Cooperation and Development (OECD) Model Tax Convention 2010 Article 11:

1. Interest arising in a contracting state and paid to a resident of the other contracting state may be taxed in that other state. For example two parties to the agreement.
2. The interest can also be taxed in the contracting state if the right to the income belongs to a resident of the other contracting state. The tax so charged shall not exceed 10% of the gross amount of interest. For example Singapore has a treaty with Japan. The recipient of the interest is resident of Japan then the lower rate will apply.
3. The term "interest" as used in this Article means income from debt-claims of every kind, whether or not secured by mortgage or carried a right to participate in the debtor's profits, and in particular, income from government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures.


Types of Interest Payments Subject to Withholding Tax

• Swap payments:
Withholding tax is not charged to payments exchanged or made in respect of non-financial derivatives if the conditions set by IRAS are met:
a. The derivatives does not effectively give rise to the creation of any loan or indebtedness

b. The payment is not, or is not effectively , a return for the use of money or provision of credit, and

c. The payment made is at arm's length.


• Interest on overdue trade accounts and interest on credit terms paid to a non-resident supplier are subject to withholding tax.
• Payments made under a securities lending or repurchase arrangement by a transferee, who is PE in Singapore or resident in Singapore, to a transferor who is not a resident of Singapore:


a. Any distribution of interest in respect of transferred securities;


b. And compensatory payment in place of:


(i) Any distribution of income derived from outside Singapore,
(ii) Any dividend derived from Singapore from which tax has been deducted under Section 44, or
(iii) Any interest (other than interest derived from qualifying debt securities).

Effective Interest Method
With FRS 39 under the effective interest method, the interest expense on financial liabilities is measured at the remunerated cost.

Tax Incentives and Exemptions

• Interest is payable by a manufacturer or an approved foreign loan for productive equipment is exempt.
• Interest and qualifying related payments arising from qualifying foreign loans taken to finance the purchase of aircrafts or aircraft engines; Aircraft Leasing scheme administered by EDB.
• Interest and related payments made on or after the 17th of February 2012 to 31st of May 2016, arising from loans taken to finance qualifying containers and intermodal equipment; Automatic Withholding Tax with the Maritime Sector Incentive and Maritime Leasing (Container) award.
• Interest and other qualifying payments payable on a loan taken by a shipping enterprise from a lender outside Singapore to acquire a Singapore flagged ship or acquire 100% of the shares in a special purpose company owning 100% of Singapore flagged ship is exempt (entered into on or before the 31st of May 2016).
• Interest payments on loans from banks and approved network companies for FTC activities (e.g. company acts like a bank for its subsidiary) and Finance & Treasury Incentive administered by EDB.

There are also various withholding tax exemptions available to:

1. Financial institutions.

2. Individuals who receive interest income from deposits with approved banks.

3. Certain recipients of qualifying income from debt securities, qualifying debt securities and qualifying project debt securities.


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