The Income Tax Act does not give a definition for royalties. However, royalties can be defined as a payment for the right to use a patent, copyright and other intellectual property. E.g. payment for every book sold or an artist album sold on VCD.
Royalties are defined in Article 12 of the OECD Model Double Taxation Agreement as:
“Payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience.”
Although the Act does not define “royalties” Section 3 of the EEIA defines the expression “royalties or technical assistance fees”.
As per S3 of Economic Expansion Incentives Act (EEIA) “royalties or technical assistance fees” includes:
a.) Any royalties, rental or other amounts paid as consideration for the use of, or the right to use, copyright, scientific works, patents, designs, plans, secret processes, formulae, trademarks, licences or other like property or rights;
b.) Income derived from the alienation of property or information mentioned in paragraph (a).
Royalty Payments Subject to Withholding Tax
Section 45A (1) – Section 45 shall apply in relation to payment of any income referred to in Section 12(6) or (7) by any person to a non-resident. Section 45 will impose withholding tax payments on S12(6) or 12(7).
Section 12(7) (a) – Royalties and other lump sum payments received by non-residents for the use of, or the right to use, movable property deemed to be derived from Singapore.
First part of Section 12(7) (b) – Payments received by non-residents for the use of scientific, technical, industrial, or commercial knowledge or information.
Royalties under Double Tax Agreement
OECD Model Tax Convention (2010 Version) Article 12:
1. Royalties arising in a Contracting State (e.g. Singapore) and beneficially owned by a resident of the other Contracting State (a country which is not Singapore) shall be taxable only in that other State (different from Treaty).
2. The term “royalties” as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literacy, artistic or scientific work including cinematography films any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience.
Software & Digitised Goods
Generally, any payment made for software is considered royalty and subject to withholding tax. There are 4 types of software payments made by end-users where exemption is granted. To qualify for the exemption, the buyer should not have the right to:
- Make copies of the software.
- Do any kind of modification to the software.
Payment for the use or right to use digitised software/information is considered royalty/know-how and subject to withholding tax.
A 10 years exemption is granted on payments made by end-users to non-residents for income accruing in or derived from Singapore on or after the 28th of February 2003. To qualify for the exemption:
- The end-users must use it for their personal consumption or use within business operations.
- The copyright of information should not be exploited in any way.