1. What are recent tax developments in your country which are relevant for M&A deals?

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1 Singapore

2 General Singapore 1. What are recent tax developments in your country which are relevant for M&A deals? The M&A scheme for income tax and stamp duty relief was revised in This scheme is only for a share deal. Under this revised scheme, 25% of purchase consideration paid by an aquirer for a qualifying M&A can be converted into an allowance, which can be deducted against taxable income. This allowance is given over 5 years, and is capped at SGD5 million a year. Relief from stamp duty is also granted on documents for transfer of shares in a qualifying M&A. This relief is capped at SGD40,000 a year. Further, double tax deduction is allowed for transaction costs incurred on qualifying M&A. Transaction costs are professional fees incurred for the qualifying M&A, such as legal fees and corporate finance advisor fees. This double tax deduction is subject to a cap of SGD100,000 of expenditure a year. 2. What is the general approach of your jurisdiction regarding the implementation of OECD BEPS actions (Action Plan 6 specifically). Singapore supports the OECD project to combat base erosion and profit shifting (BEPS). To this end, Singapore has actively participated in BEPS-related discussions through a number of platforms Therefore in response to Action Plan 13, the Inland Revenue Authority of Singapore has released a public consultation paper that asked for feedback on proposed revised guidelines on transfer pricing documentation to improve compliance. Subsequently, the Inland Revenue Authority of Singapore has released the revised guidelines. Singapore has been paying close attention to Action Plan 6, and will work with the global community to make coordinated effects to implement international tax rules. 3. Which are the main differences among acquisitions made through a share deal versus an asset deal in your country? In a share deal in Singapore, the buyer of shares in the target company holds an equity investment, not depreciable assets. The target company continues to enjoy depreciation relief for tangible and intangible property. Provided that the substantial shareholder change which comes with a takeover of the target company takes place for bona fide commercial reasons and not for the purpose of obtaining a tax benefit, relief for unabsorbed trading losses or capital allowances brought forward from prior years continues to be available post acquisition. Conversely, such unabsorbed losses or capital allowances do not avail to the acquirer in an asset deal post acquisition. In an asset deal, where capital allowance relief had been claimed for that asset, the selling company may be faced with a clawback ofcapital allowances namely, a balancing charge, unless the transaction is a qualifying amalgamation of companies to which the new amalgamation regime applies. (There is no such balancing charge in a share deal.) In a qualifying amalgamation, the amalgamating company and amalgamated company can elect to treat the asset transfer as being at tax written-down value (as if there is no transfer of ownership), notwithstanding the true consideration for the transfer. There would therefore be no balancing charge arising from the transfer. 2

3 Buy-side Relief from stamp duty, otherwise payable on a transfer of shares and/or real estate ownership interests, is available for company reconstruction and amalgamation transactions. As for Goods and Services Tax (GST) i.e. Singapore s Value-Added Tax, a transfer of undertaking is prima facie a taxable supply unless it meets the conditions of a transfer as a going concern. Conversely in a share deal, the transfer of shares is always exempt from GST. 4. Which strategies are in place, if any, to step up the value of the tangible and intangible assets in case of share deals? Assuming that open market values are higher than book value, the target company can sell its business as a going concern at open market value to a newly incorporated subsidiary. The consideration for sale can take the form of shares issued by the latter subsidiary to the target company which, if desired, can wind up and surrender these shares to its acquiring company as dividend in specie. Provisions for relief of stamp duty otherwise chargeable on a transfer of shares or real estate properties are available for company reconstruction and amalgamations. There is no capital gains tax in Singapore. However, where depreciated assets are sold for more than their tax written-down value, there is a clawback of depreciation allowance relief that has been granted in past years. 5. Which are the particular rules of depreciation of goodwill in your country? Where goodwill includes intellectual property (IP) which has been defined in the Singapore Income Tax Act to include: any patent, copyright, trademark, registered design, geographical indication, layout design of integrated circuit, trade secret or information that has commercial value; writing down allowance relief over a period of 5years is granted for the capital expenditure incurred on the acquisition of the intellectual property. However to counter potential abuse of the provisions of the law, the Revenue may require the support of a bona fide valuation of the IP acquired for the purpose of the taxpayer s trade as a condition for their applicability. For assessment years 2011 to 2018, special provisions have been enacted to incentivise the productivity and innovation movement in Singapore. Among other things, under these measures the value of writing down allowance relief can be considerably enhanced for acquisition of IP rights and/or automation equipment during the basis periods (ie the preceding calendar or accounting year) for those assessment years. 6. Are there any limitations to the deductibility on interest of borrowings? Singapore has strict rules that seek to inhibit the deductibility of interest expense to only income-producing assets which are funded by the borrowing that incurs the interest expense. These restrictions have, for example, resulted in an amalgamated company being denied deductibility of interest on debt inherited from an amalgamating company if that debt had been used by the latter company to fund its share purchase of another amalgamating company prior to the amalgamation event. Singapore s new amalgamation regime has not removed this constraint. Interest on debt incurred to fund an investment in shares can only be deducted against dividend income from those shares. And if this income consists of tax-exempt dividends all associated financing costs will not rank for deduction against taxable income from other sources. Consequently if an amalgamation results in the shareholdings being converted into hardware plant and buildings owned by the amalgamated company, continued payment of interest on the loan may be denied deductibility against operating income from those assets. 3

4 7. Which are usual strategies to push-down the debt on acquisitions? If the acquiring company pushes down debt that has been used to fund an acquisition of shares in a target company, the target company may be denied tax deductibility of interest on borrowings raised to repay any part of its share capital. A more tax-efficient, but rather unwieldy, option is for the target company to sell its business as a going concern to another incorporated subsidiary for cash which can be raised by the purchasing subsidiary from new borrowings. The vendor target company can then cease trading and return all surplus assets, including cash, to the first acquiring company to repay its own borrowings. Group relief for groups of companies under common control of not less than 75% can take the form of loss transfers from one group member that has losses to another for relief against the latter s profits. There are, however, detailed rules on what can qualify as transferable losses. But in general most losses, except brought forward losses, are transferable. 8. Are losses of the target company/ies available after an acquisition is made? Under Singapore s new amalgamation regime, the unabsorbed losses or capital allowances of amalgamating or target companies brought forward from prior years continue to be available to the amalgamated company for relief against income of the amalgamated company, where it represents income from the same trade or business of the amalgamating companies which have been transferred to the amalgamated company. Normally a substantial shareholder change test has to be passed for continued availability of relief from past, unabsorbed losses and capital allowances (unless expressly waived by the Minister of Finance) when a loss company undergoes a change of shareholders from one fiscal year to the next. In a qualifying amalgamation this test may be satisfied. But the relief for such past unabsorbed losses or capital allowance is restrictedto deductions against only income from the same trade as that of the amalgamating companies which produced those losses not income from other sources. Prior to amalgamation, the relief available to the loss amalgamating company for its brought forward unabsorbed losses against current and future years income is not restricted only to income from a continuing trade. It could also be granted against investment income. 9. Is there any indirect tax on transfer of shares (stamp duty, transfer tax, etc.)? Singapore has stamp duty relief provisions which exempt stamp duty on a transfer of shares or real estate properties that stems from a company reconstruction or amalgamation exercise. From a GST standpoint a transfer of shares is an exempt supply. Apart from company amalgamation and reconstruction exercises, a transfer of shares (but not an issue of new shares) attracts stamp duty at a rate of 0.2% of transfer consideration. 10. Are there any restrictions on the deductibility of acquisition costs? As mentioned, the allowance given for qualifying M&A is capped at SGD5 million a year. Double deduction allowed for transaction costs incurred on qualifying M&A is subject to a cap of SGD100,000 of expenditure a year. Transaction costs in excess of this cap are not allowed any double deduction or normal deduction. That is, transaction costs above this cap are disregarded. Transaction costs are professional fees incurred for the qualifying M&A, such as legal fees and corporate finance advisor fees. 4

5 11. Can VAT (if applicable) be recovered on acquisition costs? In Singapore, there is no GST on the transfer of shares. As for the GST incurred on acquisition costs, (e.g. transaction costs such as legal fees and corporate finance advisory fees), such GST generally cannot be recovered. 12. Are there any particular issues to consider in the acquisition by foreign companies? Singapore s tax system is semi-territorial. It does not tax unremitted offshore income. In other words, the gains from trading shares of foreign companies may well not be taxed in Singapore if the income therefrom is not remitted into Singapore. If the income is remitted, it is exempted from tax in Singapore if certain conditions are met i.e. the income has already borne tax in its source territory and the source territory s headline or maximum corporate tax rate is at least 15%. Even if the conditions for exemption cannot be met, Singapore provides unilateral tax credit relief for any foreign taxes charged on foreign income remitted into Singapore. The M&A scheme for income tax and stamp duty relief only avails to acquiring companies which are Singapore companies i.e. Singapore incorporated and tax resident. Foreign companies do not avail to this scheme. 13. Can the group reorganise after the acquisition in a tax neutral environment through mergers or a tax group? Under Singapore s 1-tier dividend system, it is inefficient for a holding company to fund its holdings of shares or equity with debt because all one-tier dividends from Singapore companies are tax exempt, so the interest on debt cannot be granted tax deduction. It is preferable for all debt financing to be raised by operating subsidiaries where taxable profits from the carrying on of a trade can be reduced by interest expense from debt financing. As for stamp duty, relief can apply to group reorganisation, subject to conditions. 14. Is there any particular issue to consider in case of companies of which main assets are real estate? Unless the ownership of a real estate investment is connected with an active trade eg management of hotels, property development, management of sports complexes rental from a real estate investment is treated as passive investment income, for which tax deductions for expenses and losses can be quite restrictive. There is no relief for carry forward losses. No capital allowance relief is available for taxation of passive investment income. Although the transfer of title in real estate assets attracts a higher stamp duty than stamp duty for transfer of shares (which is only 0.2% of consideration), transferring shares in a company whose assets are substantially real estate instead of transferring that underlying real estate may not result in lower stamp duty. This is because anti-avoidance legislation exists to enable the Inland Revenue of Singapore to counteract any artificial scheme that is designed to deliberately reduce stamp duty through a transfer of shares in SPV companies incorporated only to own real estate assets which are targeted for disposal. 5

6 Sell-side 15. How are capital gains taxed in your country? Is there any participation exemption regime available? There is no capital gains tax in Singapore. But when a person earns a profit from the sale of shares or a real estate property that profit may be characterised as income earned following a trade or adventure in the nature of trade. This depends on whether or not it is a one-off deal, on the asset s holding period and on whether the seller had pre-planned the transaction when acquiring the asset. This rule applies to both individuals and companies. In 2012 a new section 13Z of the Income Tax Act was enacted, covering the period between 1 June 2012 and 31 May 2017, to provide certainty that any gains secured by a divesting company from a disposal of shares in an investee company is expressly treated as a capital gain and therefore exempt from income tax on the condition that the divesting company has, at all times, during a continuous period of 24 months prior to the date of disposal of such shares legally and beneficially owned at least 20% of the ordinary shares in that investee company 16. Is there any fiscal advantage in case the proceeds from the sale are reinvested? There is no fiscal advantage to reinvesting the proceeds from a sale, although the reinvestment of proceeds can support an argument that the transaction, if infrequent, was entered into for changing the mix of an investment portfolio, not in pursuance of a trade. 17. Are there any local substance requirements for holding/finance companies? There are generally no local substance requirements for holding companies. However, holding companies with little substance in Singapore (e.g. have no business activities or have no key employees in Singapore) may have difficulty obtaining a certificate of residence. Your Taxand contact for further queries is: Singapore Leon Kwong Wing T E. leonkwongwing@khattarwong.com 6