This article highlights the main options of using Singapore overseas companies in international trade, tax planning and asset management.
It should be noted that listing the whole range of aspects related to Singapore offshores can take much more than this single article. So we recommend studying other materials dedicated to Singapore companies that are widely available on this website. You may also regularly attend our weekly free webinars on company law, international taxes, trusts, and other related topics. Should you have any other questions, feel free to contact us via e-mail or personally.
Eltoma Corporate Services: what we can offer in Singapore.
We’ve gained our foothold in Singapore since 2009, when I obtained my work permit there. It was a period full of learning and accomplishment.
For example, I took special courses followed by an exam in the IRAS Tax Academy and became an IRAS accredited Tax Practitioner (for income tax) in Singapore. I regularly calculate taxes and fill out tax forms for Singapore overseas companies, constantly keeping in touch with the IRAS (a tax authority in Singapore) on a number of tax-related enquiries from clients.
There are two main tax-related activities we specialise in: local taxation in Singapore, the UK, Hong Kong, Russia, Ukraine and Cyprus, as well as international tax planning through a combination of several jurisdictions in order to legitimately conduct effective tax optimisation.
My colleague successfully graduated from the Singapore Institute of the Association of Chartered Secretaries and Administrators (SAICSA), having passed all exams in only two and a half years. Now we can arrange a complete servicing of Singapore companies that are listed on the local stock exchange.
To establish and serve corporations in Singapore, foreign citizens need to obtain a special license called the ACRA Filing Agent, which is renewed on annual basis.
What makes Eltoma Corporate Services different from other Russian and Ukrainian service providers, offering to register Singapore overseas companies? Others act as facilitators, in fact providing a type of marketing services; while we do everything by ourselves, employing highly professional staff and obtaining the relevant permissions and licenses.
Due to this approach, we eliminate intermediary firms that only do marketing by promoting and selling Singapore companies, and thus creating a reliable structure in terms of the relevant Company Law and tax legislation of Singapore. Eltoma Corporate Services is relying on professionalism and extensive knowledge within all jurisdictions where we provide corporate support for international businesses.
The unique character of overseas companies in Singapore
What makes Singapore unique?
The first factor that gives the Singapore tax system its distinctive character is that the tax is only imposed on the income earned within Singapore or transferred to a local bank account from outside. This principle is called ‘territorial taxation’, and provides definite benefits for international tax planning. That is why Singapore offshore companies gained popularity in international tax planning.
This unique character, as with everything, has both pros and cons. A reduced rate of 0% income tax is the advantage, while the negative aspect lies with the necessity to appoint a local Director, who in case of default will bear full responsibility and pay innumerous Singapore penalties. Among other advantages, is the participation of the country in international organisations, such as the FATF & OECD.
These factors contribute to the high running costs associated with Singapore overseas companies compared to those in Cyprus.
What are Singapore offshore companies recommended for?
There are main spheres of international activity where overseas companies can be used:
- International trade.
- Financial corporations.
- Investment companies that own shares of other companies.
- Intellectual property in the form of trademarks, patents, etc.
Let’s have a closer look at the options associated with using Singapore companies in the above cases.
To use a company in the general sphere of international trade, an offshore jurisdiction normally has the following characteristics:
- Zero or low income tax rate.
- Low incorporation and servicing costs.
- Low taxes on dividends paid to Shareholders.
- Zero or low VAT rates.
Along with the corporate tax rate of 17%, Singapore has a territorial principle, which implies that only the income earned in Singapore or gained from trade operations outside the country are subject to taxation.
Singapore tax system: an overview
How is the principle construed?
According to the Singapore Income Tax Act s10 (1), the tax is accrued only on the profit gained within the country or transferred to Singapore bank accounts. This mode of taxation is called “territorial principle” and used mainly in Hong Kong, Panama and other jurisdictions globally. However in most countries, tax is due on profits gained from any part of the world.
Which is why the Singapore tax system is considered to be so unique; allowing companies to pay a zero rate of taxation as long as they are located in countries that meet all OECD and FATF requirements.
However, the modern business world implies that not paying taxes is extremely dangerous! Before long, tax authorities from many countries will wonder where businesses are paying their taxes, and require evidence that payment obligations have been fulfilled in another country.
In this respect, Singapore offers a unique possibility to divide profits into offshore and onshore subsidiaries respectively and thus adjust the income tax burden of Singapore companies.
How does the income of a Singapore company get its offshore status to enable income tax avoidance?
The territorial status of income gained within or outside Singapore is determined through a so-called ‘connecting factors’ test.
Unfortunately, Singapore has no examples that involve the whole set of these factors to be used as an example. This is done deliberately not to create another BVI from Singapore.
That’s why, when working with our clients to establish a Singapore overseas company, we consider the subject-matter of a commercial transaction and carry out a thorough analysis to avoid unpleasant surprises with tax reporting regarding offshore income.
A concept of the Singapore tax resident
One of the basic concepts of the Singapore tax system is tax residency. It should be noted that the registration of an offshore company in Singapore does not necessarily imply becoming a tax resident. Tax residency can be established following the company management and appropriate control testing.
What is the main point of this test? Through a number of set parameters the test defines:
- Who controls a company and how.
- Who manages the company and from where.
What indeed plays a part here is the company’s strategic decision making.
Who adopts these strategic decisions in overseas companies?
Pursuant to the Singapore Companies Law Act and Constitution of a Singapore company (Constitution is a modern concept of the Memorandum & Articles of Association in Singapore), all strategic decisions are taken by the company Directors. However, daily management has absolutely no meaning in terms of management and control testing.
Directors of overseas companies make decisions during the Board of Director meetings. So the venue of the meeting takes place in the main location of the company’s management and control.
Quite commonly, a situation when a Singapore overseas company doesn’t have a tax resident in the country, consequently having most Board of Director meetings outside the territory of Singapore.
In case the entire board is represented by one Director, the venue of making strategic decisions is the place of the Director’s permanent residence.
Whether to be a tax resident of Singapore or not?
What are the advantages of obtaining tax residency status in Singapore?
Firstly, it gives an opportunity to use tax benefits provided by the Singapore tax system.
It includes particular privileges with respect to double taxation avoidance agreements signed between Singapore and other countries. These privileges enable tax reduction and avoidance of double taxation, because under the agreement provisions, the income is taxed only once in one of the countries.
It is also important to note that international contracts prevail over national laws, which means the provisions and practical application of international contracts should be taken into consideration as a priority.
Secondly, tax residence assumes generous tax allowances and rebates provided by Singapore legilslation. They include significant preferences for newly registered companies that enable reduction of the effective tax rate and exemption from taxes for the first $150,000 earned. Apart from that there are other rebates that promote minimisation of the tax burden for tax residents of Singapore offshore companies.
A tax residence certificate is not hard to obtain, especially for companies that are paying at least some taxes in Singapore.
Singapore corporate tax rate
The Singapore corporate tax rate amounts to 17%.
Dividend taxation in Singapore
Tax assessment for outgoing dividends
Singapore has a one-tier tax system, which implies taxation only at the company’s level. So there are no other income taxes in Singapore apart from corporate tax.
This means that outgoing dividends are not subject to taxation at Shareholder level, who must independently declare their income in a form of dividends in their own country of residence.
Taxation of incoming dividends
This issue is much more complex. All incoming dividends are not taxed in Singapore unless the corporate tax rate in the country where the dividends come from is below 15%. The fact that the profit was not levied with corporate tax is not important. The best example is the dividends that are transferred from Hong Kong where Pro forma corporate tax is 16.5%. However there is a territorial principle similar to that of Singapore. Thus an offshore profit of a Hong Kong company is not subject to corporate tax. As a result, dividends received from Hong Kong are not imposed with the income tax levy.
If a 15% corporate tax requirement is not met, the dividends are subject to corporate tax. This is true for Cyprus that has a corporate tax rate of 12.5%.
Taxation of income earned abroad and transferred to Singapore
Offshore profit is considered to be earned inside Singapore once it has been transferred to a Singapore bank account or used as payment for deliveries to local suppliers. This explains why Singapore companies with bank accounts opened in other countries are so popular among those willing to reduce the tax burden significantly.
However, there are a number of exceptions.
Examples of a reduced corporate tax rate in Singapore
A reduced corporate tax rate is applied for specific economic sectors which the Singapore government is promoting. Common examples include ship ownership and marine transportations.
Tax imposed on Singapore holding companies
A holding company is considered to have a passive income, so it has some limitations in terms of cost allocation on the reduction of a tax base.
Taxes for Singapore non-residents
Singapore tax residents pay corporate tax, while non-residential foreign and Singapore companies pay taxes only from the profit earned within Singapore. Obligations to charge income tax and transfer the relevant payments are fulfilled by contracting companies that have Singapore tax residency.
The main problems are connected with the interest paid by Singapore companies for loans granted by foreign companies or for management fees. In the first case, the withholding tax amounts to 15%, while in the second case, 20% derives from the management fees.
We strongly recommend appointing tax specialists in Singapore to avoid adversities, as well as financial penalties and losses when applying for a loan to foreign companies or charging management fees to a holding company in favour of a Singapore company.
We constantly have to deal with Singapore tax authorities on the above issues; when our clients’ Singapore offshore companies have to enforce a backdating withholding tax, transfer it to tax authorities’ accounts or pay it out of their own pocket. Million-dollar turnovers can entail substantial tax amounts.
Singapore companies have to deduct the withholding tax and pay it to the tax authorities within 45 days from the moment of crediting the respective amount to the bank account of a foreign agent or recording the respective debt on the books, whichever comes first.
Capital gain tax in Singapore
Singapore has no capital gain tax. Whether the income earned is a trade profit imposed with the corporate tax or simply the capital gain, is decided using a special test – badges of trade.
In order for the income to be acknowledged as capital gain and thus exempt from corporate taxation, the respective asset has to be recorded on the balance sheet for at least 24 months.
Fighting tax evasion in Singapore
Like any other country, Singapore attempts to combat tax evasion.
For example, preferences and rebates are not granted to Singapore companies established purely for tax reduction. Apart from that, tax authorities can acknowledge the income as not being offshore and accrue the tax in their sole discretion.
On the other hand, the establishment of a Singapore offshore company and carrying out offshore transactions with commercial purposes are not considered tax evasion.
Trade between interdependent companies
Singapore has a law that regulates minimum extra charges for trade operations between interdependent companies. To get extra information and consultation on this account you can contact us.
Tax reporting in Singapore
Provisional income report
Within 3 months upon the completion of a financial year, which does not necessarily end on December, 31st due to the possibility to select a month for the financial year end in Singapore, an offshore company has to submit a report on provisional taxable income.
Based on this report, Singapore tax authorities make relevant calculations and send the tax amount due within 30 days after the chosen year end.
Tax returns together with income tax calculations must be drafted and submitted before November, 30th irrespective of the financial year end date.
Singapore offshore companies that are not Singapore tax residents also have to draft and submit tax returns with the only difference: they indicate that the company is managed and controlled from outside Singapore, which makes the company non-resident.
Offshore company registration in Singapore
Incorporation process for Singapore overseas companies
Singapore offshore companies can be registered online. Incorporation requires arrival to Singapore.
Before establishing an offshore company a client has to finalise the following information:
- Company name
- Corporate structure:
- List of Shareholders.
- List of Directors.
- Company Secretary.
- Company’s registered legal address.
- Charter capital.
- Company constitution: Memorandum & Articles of Association (detailing Directors’ rights, company management, Shareholder Agreement if required etc.).
Upon ACRA’s (the regulatory authority in Singapore) approval of the company name, a filing agent uploads the company’s constitution, duly signed by all Shareholders, to the ACRA website. The same day, ACRA then forwards an email confirming the company’s registration.
The filing agent can subsequently download the incorporation certificate and constitution certified by ACRA.
Other corporate documents are drafted and prepared by the company Secretary.
Peculiarities of a Singapore offshore company
One of the most remarkable features about Singapore companies is the requirement to appoint a native Director. This regulation was implemented deliberately in order to have someone liable for any activity conducted by the company. That’s why local Directors have no resignation rights without finding a substitute.
Due to higher risks that local Directors are exposed to, it is common in Singapore for Directors to take a deposit payment for their services. As a general rule, the deposit amount is equal to the sum of annual fees in order to maintain the company’s good standing status. This implies the submission of all relevant reports and settlement of all accounts with tax authorities, and if necessary, the company’s liquidation. Sadly enough for many businessmen, a Singapore offshore company cannot be simply abandoned, like in other jurisdictions.
The local Director does not necessarily have to be a citizen of Singapore – the position can also be filled by a foreigner who has resident status in the country.
I would like to point out, once again that there is no such legal term as Nominee Director. It is jargon used in the offshore sphere. A Director is always Director, with all emanating rights and obligations. There are of course, certain limitations to Director’s rights.
Nevertheless, the legal term Nominee Shareholder indeed exists. The rights and responsibilities of Nominee Shareholders and Beneficiaries are governed by a Trust Agreement.
Singapore overseas servicing
Maintaining good standing status
Servicing a Singapore offshore company implies maintenance of its good standing, which means drafting and submission of all reports in due time; as well as the availability of correctly filled registries, such as the registry of Shareholders, registry of Directors, etc.
Every Singapore offshore company has to submit annual reports to ACRA and IRAS (the local tax authority).
Tax accounting and audit
Maintaining accounting records is a must for offshore companies in Singapore.
However, some exemptions from mandatory annual audit are provided to small companies. For example, according to one of regulations, all companies with an annual turnover of less than S$10m can be exempt from this annual audit, which grants substantial savings on their annual maintenance.
Drafting XBRL financial reports
ACRA also requires XBRL to be prepared and filed together with the annual report. Small companies are also exempt from mandatory XBRL reporting.
Drafting and submission of annual report
In case a company has no exemption, it should prepare and submit the annual report together with financial and audit reports within 6 months after the end of every financial year. One should remember that financial and audit reports are subject to approval at the annual Shareholders’ meeting.
Failure to prepare and submit the annual report to ACRA results in penalties that grow annually. If a company doesn’t manage to comply with the necessary reporting timeframe, it can pay additional fees to extend the deadline of report submission for an additional two months.
Opening bank accounts for offshore companies in Singapore and other jurisdictions
Singapore – a global financial hub
As stated in the analysis carried out by financial centres in 2016, Singapore is the world’s third financial hub superseded only by London and New York. Singapore appeared to be ahead of Hong Kong, which is fourth in the list. This exemplifies Singapore’s ability to a sustainable, reliable and effective banking system.
Despite the fact that there are only 200 registered banks in Singapore, not all of them have comprehensive licenses with the right to open corporate accounts. Most banks specialise in private wealth management, leaving only 10-15 banks that can open accounts for Singapore or overseas companies.
To open a legitimate corporate account with Singapore local banks, choices such as DBS, OCBC or UOB, would all be suitable. As for world banks, HSBC, Standard Chartered Bank, CITIBANK also deserve special notion. In addition, there are regional Malay banks such as MayBank and CIMB that are reputable.
Procedure for opening corporate bank accounts
For Singapore and overseas companies, the procedure is quite similar, with the only difference in minimum balance amounts and turnover requirements. Apart from that, some banks take payments for opening bank accounts. As a general rule, the payment rates are much higher for overseas companies.
Opening a bank account in Singapore requires personal attendance, as well as good working knowledge of the English language; because banks want to be sure their clients are fully aware of the relevant regulations.
The Company Shareholders, Directors and CEOs all have to be present in Singapore to open an account. That’s why we advise our customers against complicated corporations in favour of simple and transparent company structures. An ideal variant is when the Shareholder, Director or CEO are all represented by one person.
What is the attitude of Singapore banks to appointing Nominee Shareholders? This is commonplace, as long as their appointment can be explained logically.
Drafting documents required to open a bank account in Singapore
Eltoma Corporate Services has developed an effective approach in opening corporate accounts for offshore companies. We cooperate with more than 30 banks around the globe. These strong links enable us to provide well-founded guarantees of opening bank accounts for our clients’ offshore companies. Our company prepares a detailed description of a particular business and its demands in terms of bank servicing, and sends the documents to one of our partner banks beforehand in order to settle any potential issues prior to the client’s arrival in Singapore. We make the necessary arrangements so that the visit to Singapore has a formal structure for our customers: for a bank to meet them and verify their signatures. Very often, our clients cannot draw up a sound business model description. Having extensive experience, professionals at Eltoma Corporate Services can assist with the proper description to make your business model understandable, which makes the meeting with any bank a mere formality.
Our company sticks to the idea that a client has to pay a personal visit to a bank to build direct relations with them and guarantee that no third parties will have access to their funds. It’s no secret that clients acquiring a shelf company with an open bank account have no relation to either the company or its account. So fraudulent cases of stealing substantial amounts are quite commonplace and rest upon the businessmen’s unhealthy desire for secrecy, impatience or trivial inclination to have everything written off, which implies significant gaps in planning and conducting business.
Eltoma Corporate Services delivers highly qualified assistance in managing bank accounts; becoming the second signatory or the primary point of contact.
This service proved to be efficient indeed, taking into account the poor English knowledge of some clients, who faced great problems understanding Singapore-English and getting adjusted to time differences.
Many find it extremely difficult to answer questions on bank transactions at 4 or 5 am, when it is 10-11 o’clock in Singapore – the most popular time that Bank Officers are making such calls.
Acting as second signatories or contact persons, employees from our Singapore office take the responsibility of doing interviews with banks, having received all relevant information from clients at their convenience. So we always recommend allowing us to provide this service.
Documents required to open a corporate bank account in Singapore
The following documents are considered mandatory:
- Company documents. Since Singapore has not joined the Hague Convention in terms of document apostilation, it is necessary to submit a set of legitimate documents required for overseas companies with the only exception made for Hong Kong.
- Documents that certify client’s identity (international passport) and prove residence, issued no longer than 3 months ago.
- So-called business proof that certifies the client owns the business.
- Shareholder’s and Director’s resumes.
- Reference letter from the bank where the client’s personal account was initially opened.
Interview with a Bank Clerk
An interview with a Bank Clerk is normally arranged at Eltoma Corporate Services Singapore offices. As mentioned before, the language of interview is English. Our specialists prepare their clients for the interview to avoid unnecessary complications, making the process as smooth as possible.
It is worth mentioning that there is no point in taking an interpreter to the interview. Singapore banks never open accounts for those who don’t speak English to a professional standard.
Opening a bank account
The bank needs approximately 2 to 3 weeks to carry out an internal audit of the client and his documents. During this period, the client is sent an informal notification confirming the opening of the bank account with details of the account number. Later on, a bank token will be sent by post for managing the account online and conducting internet banking. After the token activation is completed, the client can start using the bank account.
How to ensure the bank account is not lost?
Besides the opening procedure, a bank account also needs to be maintained. The main reasons for closing accounts of offshore companies include:
- Remittances from accounts linked to suspicious grey or black listed companies.
- Transfers to the accounts from above companies.
- Dormant accounts, i.e. accounts with no cash flow.
- Continual low balance on the bank account.
- Inflows are not kept in the account and transferred at the day of receiving.
- Inflows and outflows do not correspond to the declared business model (regarding suppliers, buyers, amounts and frequency of payments).
- Delays in responses to bank enquiries, or ignoring all contact from the bank. (This can happen when a client deliberately gives a wrong phone number to purposefully avoid contact).
Clients should understand the pressure imposed on banks by the government and should appreciate the bank accounts that have already been opened, because year after they are getting increasingly difficult to open.
We always advise our clients to consult us first for cooperation with banks. This will help avoid unpleasant surprises. Living and working in Singapore, we see the latest trends in the local banking sector and can actively assist in conducting business via Singapore.
What to do if the bank account is not required anymore?
There can be situations when the account that took a lot of effort to be opened becomes redundant. In this case, we suggest applying to the bank and closing down the account so as not to lose on monthly commissions and, what is more important, to maintain good relations with the bank.
Singapore offshore shutdown
As mentioned above, one cannot simply leave a Singapore company. With this respect, we recommend one of the following ways to shut down an overseas company:
- Strike off or removal from the ACRA registry;
- Complete liquidation of a Singapore company.
Removal from the ACRA registrar (Strike off)
Striking a Singapore offshore company off the registrar means the company has no obligations to submit annual reports and tax returns anymore. This is the only advantage of this legal procedure. The company continues to bear responsibility to its Creditors that can bring it back to life within 6 years. Apart from Creditors, Shareholders also have a right to recover the company.
To complete the strike off, the company has to free their balance sheets regarding assets and liabilities, closing their accounts, etc.
The full strike off process takes approximately 6 months.
Complete liquidation of a Singapore company
Complete liquidation of a company means suspension of all its activities. The liquidated company can be “revived” in exceptional cases through court rulings.
Compared to Striking off, this procedure requires more time and money. It requires making a formal appointment with a Liquidation Manager, who is paid via an hourly rate.
Those who can apply for complete liquidation are the company’s Shareholders, Directors and Creditors.