Executive Summary of doing business in Singapore

Transcription

1 Executive Summary of doing business in Singapore

2 VoskampLawyers 2014 The material contained in this publication is not intended to be advice on any particular matter. No reader should act or refrain from acting on the basis of any matter contained in this publication without considering appropriate professional advice. VoskampLawyers expressly disclaims any and all liability to any person in all respects and of the consequences of any act or omission by any such person in reliance upon the contents of this publication. All rights reserved. No part of this book may be reproduced, stored in a retrieval system or disclosed in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without the prior permission in writing of VoskampLawyers.

3 TABLE OF CONTENTS 1. OVERVIEW BUSINESS VEHICLES TAX ASPECTS EMPLOYMENT ASPECTS..12 2

4 1. Overview Singapore is one of Southeast Asia s major financial hubs due to its developed financial infrastructure and political stability. Noteworthy investment features include numerous free trade agreements, tax treaties, and various tax incentives and concessions aimed at foreign investment as well as regional investment activity. Foreign investors can, for example, set up a representative office, a branch office or a private company with limited liability depending on their anticipated scope of operations in Singapore. There are no thin capitalisation rules in Singapore, the time required to set up a legal entity in Singapore is relatively short and the cost involved is relatively low. Foreign companies may hold 100% of a Singapore registered entity and repatriate profits without dividend withholding tax or capital gains tax. Various incentives are available to Singapore-based enterprises including direct subsidies, loans and grants, equity participation from (quasi-) government organisations, reduced rates for qualifying income and enhanced deductions. There are also government linked organisations such as the Economic Development Board of Singapore and International Enterprise Singapore, set up to provide assistance to companies that contribute to Singapore s economy and promote international trade. The language of trade in Singapore is English. More than one-quarter of Singapore s population consists of foreigners working, studying or living in Singapore on an impermanent basis. Employment passes are required for foreigners working in Singapore. In general, Singapore s immigration policy targets skilled expatriates who are able to contribute to the country s economic development. 3

5 2. Business vehicles As a general rule, a foreign company must set up an appropriate business entity before commencing business in Singapore. The three most common types of business entities used by foreign companies wishing to establish a presence in Singapore are: (i) a representative office; (ii) a branch office; or (iii) a private company with limited liability. Representative Office Foreign companies that are interested in exploring the market or managing company affairs without conducting any business activity of a profit yielding nature can set up a representative office ( Rep office ) in Singapore. A Rep office is a representative office of a foreign company that is restricted to non-profit yielding activities such as market research, feasibility studies and liaison work on behalf of the foreign company. Furthermore, a Rep office does not have a legal personality and as such, it cannot enter into any contract, engage in trading, raise invoices, open a letter of credit on behalf of the foreign company, or carry out any other activities that go beyond the restricted scope of work of a Rep office. The Rep office must have an office in Singapore registered with either International Enterprise Singapore or the Monetary Authority of Singapore. Establishing a Rep office usually takes 3 5 working days. A Rep office can be registered for a maximum of three (3) years, after which it must shut down. If the parent office wishes to continue operations in Singapore, it can set up either a branch office or a private company with limited liability. The Rep office must appoint one representative who is ordinarily resident in Singapore, and may engage a small number of support staff not exceeding five (5) employees. A Rep office is not required to file a corporate income tax return. Branch Office A branch office ( Branch ) can be established by the registration of the foreign company with the company registrar in Singapore, known as the Accounting and Corporate Regulatory Authority ( ACRA ). A Branch is considered to be an extension of the foreign company and as such, does not constitute a separate legal entity. A Branch cannot enter into legal contracts; the foreign company is always the engaging party and is thus liable for all activities of the Branch. The activities of the Branch must be the same as those of the foreign company or at least compliant with the scope of activities as described in the articles of association of the foreign company. Other than that, there is no limitation on permitted activities to be carried out by a Branch, unlike the Rep office. The name of the Branch must correspond with the foreign company and needs to be approved before registration. ACRA generally approves the proposed name unless it is identical to an existing company name. Registration of a Branch usually takes 1 2 working days to complete. The Singapore Companies Act requires that a Branch appoint two (2) persons who are ordinarily resident 4

6 in Singapore to act as agents for the Branch. The Branch must have a registered office located in Singapore. In addition, the accounts of both the Branch (audited) and the foreign company should be filed annually with ACRA. A Branch is taxed as a Singapore non-resident company at the prevailing rate of 17%. A Branch is not considered resident in Singapore for tax (treaty) purposes and is not eligible for tax incentives or exemptions. Losses incurred by the Branch may be offset against operational profits at the level of the foreign company in that fiscal year, provided that the tax laws of the country of which the foreign company is a tax resident allows this. Private company with limited liability A private company with limited liability is a locally incorporated company ( Pte Ltd ) whose shareholder(s) can be local or foreign companies or individuals. Singapore allows 100% foreign ownership in local companies. A Pte Ltd is a separate legal entity from its parent company and can enter into legal contracts in its own name. The liability of a parent company in a Pte Ltd is generally limited to its subscribed share capital. The Companies Act requires the appointment of one (1) or more directors of which at least one (1) director must be a Singapore resident (citizen, permanent resident, or employment pass holder). A Pte Ltd must have a registered office in Singapore and appoint a qualified company secretary within six (6) months of incorporation. There is no statutory minimum paid up share capital. However, a Pte Ltd must have a minimum issued capital of S$1. A Pte Ltd is incorporated by execution of the memorandum and articles of association and subsequent registration with ACRA. Such articles do not need to be executed by a notary. Registration with ACRA can be processed in three (3) working days, provided all required documentation is in order. A Pte Ltd must annually submit its accounts in accordance with Financial Reporting Standards ( FRS ) and subsequently lodge such accounts with ACRA. Small companies can be exempted from this requirement; however, they must still maintain proper accounting records. A company with a corporate shareholder must have its accounts audited, unless the company is dormant. A company needs to appoint an auditor within three (3) months from the date of incorporation. In 2013, the government extended the audit exemption to private limited companies whose shares are held by 20 or fewer non-corporate individual shareholders provided that the annual revenue of such company is less than S$5 million. Instead of filing audited annual accounts, such companies have to merely submit a declaration of solvency signed by the directors and company secretary. A Pte Ltd must file its corporate tax return annually. The taxable income will be taxed in Singapore at the prevailing corporate income tax rate of 17%. For taxation purposes, the Pte Ltd may be treated as a Singapore resident company and as such, is eligible for tax treaty relief, tax exemptions, incentives and concessions available to local companies. Losses incurred by the Pte Ltd can be set off against operational profits in the previous year (carry back of 1 year) or any profits in the following years (unlimited carry forward). A properly structured Pte Ltd can be a tax-effective entity due to 5

7 Singapore s tax treaty network, tax incentives and concessions that are available to Singapore resident companies. 6

8 3. Tax aspects Singapore adopts a semi-territorial system of taxation, taxing only income sourced within its jurisdiction and foreign-sourced income (for companies) that is received in Singapore, with particular rules and exceptions applicable in relation to foreign sourced dividends, overseas branches and service income. Corporate income tax Corporate income tax is levied on all Singapore companies and branch offices of foreign companies. Singapore business and trading income will be taxed at the prevailing corporate tax rate, currently a flat tax rate of 17%, with concessionary rates payable on the first S$300,000 earned and a tax rebate of 30% on the payable tax amount. 1 Generally, capital gains and dividend payments by Singapore companies are not taxed in Singapore. Taxable profits are calculated by taking total revenue less deductible expenses. Generally, all expenses incurred in producing income are deductible, however, costs relating to capital expenditure (plant, machinery, patents, trademarks etc.) are not directly deductible, but via a capital allowance scheme depending on the type of asset. Losses may be carried back one (1) year and may be carried forward indefinitely, subject to ownership requirements. Foreign-sourced dividends remitted to Singapore would generally be included in taxable income and are subject to the prevailing corporate tax rate unless they are exempt. To qualify for an exemption, the company paying the foreign-sourced dividends to the Singapore company must have been subject to tax in a foreign jurisdiction with a headline tax rate of at least 15%. Singapore typically does not impose a tax on capital gains; only receipts that are revenue in nature are taxable. In some instances, however, capital gains may be considered as part of the company s business operations, in which case the capital gains would be classified as trading revenue, which is subject to tax. Such determinations would be made on a case-by-case basis. As a general rule, it has been accepted that a gain made on the sale of an investment that was held as a long-term investment should qualify as a capital gain and hence is not subject to tax. However, it should be noted that the Inland Revenue Authority of Singapore ( IRAS ) takes a case-by-case approach and each case is decided on its own merits. Tax incentives The Productivity and Innovation Credit Scheme ( PIC ) allows companies to claim enhanced deductions at 400% on up to S$1,200,000 (up to S$1,800,000 for SMEs) of qualifying expenditure per year on: - acquisition or leasing of qualifying IT and automation equipment; - training expenditure of employees; 1 The tax rebate will only apply for the years of assessment 2014 and 2015 and is capped at S$30,000 per year of assessment. 7

9 - acquisition and in-licensing of IP rights; - registration of IP rights; - design expenditure; and - qualifying R&D. Alternatively, a company can opt for a cash reimbursement of 60% on a maximum of S$100,000 of qualifying expenditure per year. 2 The PIC scheme is set to expire after YA 2018 but may be extended. Depending on the scale of activity in Singapore, it may be possible to apply for a concessionary tax rate in Singapore. The concessionary tax rate will depend on the level of investment and headcount that a foreign company commits to establishing in Singapore, with the concessionary tax rates decreasing from 17% to 10%, 5% and even 0% in select circumstances. Corporate tax administration The tax imposed each year is based on the income earned in the preceding year. Thus taxes on income earned in the financial year ended in 2013 will be payable in 2014 (the Year of Assessment 2014 or YA2014 ). Taxes are collected by IRAS. Corporate income tax filing is carried out in two steps. A provisional assessment called Estimated Chargeable Income ( ECI ) needs to be filed within three (3) months of the company s financial year end. The ECI return is not binding; however, IRAS will make its estimate assessment on the basis of the ECI. By timely filing the ECI a company can become eligible to pay tax due in up to ten (10) interest-free monthly instalments. Subsequently, all companies must file their corporate income tax returns by 30 November of each year for income earned in the previous year. In general, no extensions to the filing deadline are granted and a failure to comply with the deadline may result in the imposition of fines and penalties. Companies can either file in paper by lodging their accounts and taxes with IRAS, or file electronically. The limitation period to issue additional tax assessments is four (4) years from the end of the relevant year of assessment (five years for loss carry-back cases). There is no limitation period in cases of fraud or wilful default. Transfer pricing For tax purposes, intercompany transactions should be conducted at arm s length. Various transfer pricing methods are accepted by IRAS, such as cost plus, uncontrolled price and resale price. In recent years, transfer pricing has been subject to attention from IRAS; transfer pricing transactions that are not commercially substantiated may be challenged. 2 This expenditure cap applies for YA2013 to YA2018 and is subject to conditions, such as to have at least three (3) local employees and to have active business operations in Singapore. Once you have applied for the cash reimbursement on a qualifying expenditure, you cannot claim a tax deduction on the same expenditure. 8

10 A company may obtain certainty in advance on the transfer pricing position by concluding an advance pricing agreement with the Singapore tax authorities or by entering into bilateral advance pricing agreements with foreign countries with which Singapore has a comprehensive tax treaty, to agree on the profitability of a company. Indirect taxes GST & Stamp duty Goods and Services Tax ( GST ) is a form of value-added tax that is imposed upon each supply of goods or services. Currently a general rate of 7% applies in Singapore. The tax base is the total amount charged for the transaction. There is a zero rate applicable for certain supplies, including goods for export, international services, and seagoing vessels and aircrafts used for international transport. The provision of financial services and the sale and lease of residential properties are exempt from GST. However, all goods that are imported into Singapore for sale in Singapore will be subject to the general GST rate. A business in Singapore that has, or expects to have, a taxable turnover of more than S$1 million in a 12-month period is obliged to register for GST and file GST returns on a quarterly basis. Businesses need to retain business and accounting records for a five (5) year period upon registration of GST and ensure that returns are filed promptly in order to avoid penalties and fines. A business that does not have, or expect to have, taxable supplies of more than S$1 million can still register for GST, although on a voluntary basis. The voluntary GST registration is subject to qualifying conditions in order to claim input credits for expenses incurred, and the business will have to comply with the administrative requirements mentioned above, regardless of revenue earned. 3 Additionally, the voluntary GST registration is subject to approval by the comptroller. Stamp duty is levied on the execution of certain documents relating to immovable properties and shares in Singapore. The applicable duty varies in relation to the nature of the document and the underlying asset, and can be based on the value of the transaction ( ad valorem ) in the case of a lease or full transfer of the asset, or a nominal fee in certain other cases. For transfer of immovable property the applicable stamp duty is subject to progressive ad valorem rates ranging from S$1 to S$3 per S$100 of value or part thereof. For a transfer of shares the ad valorem stamp duty rate is 0.20% of the purchase price or market value, whichever is higher. Relief exists for certain related company transfers and business restructurings. Withholding tax Dividends Singapore does not levy withholding tax on dividend distributions. 3 For voluntary GST registration you must comply with several conditions, such as remaining GST-registered for at least two (2) years and fulfilling the GST e-courses: Before I register and Introduction to GST. 9

11 Royalties Singapore-sourced royalty payments to a non-resident are subject to a withholding tax of 10%. The 10% withholding tax may be reduced under an applicable tax treaty. Interest Singapore levies a 15% withholding tax on any interest paid. The interest withholding tax is payable when the income is paid to a non-resident company or a non-resident person. The 15% withholding tax may be reduced under an applicable tax treaty. Personal income tax Singapore individual tax residents are subject to personal income tax on a semi-territorial basis of taxation. All income sourced or derived in Singapore is taxable under Singapore law. In principle, all foreign sourced income received in Singapore by an individual is tax exempt. Individuals who are considered to be tax residents of Singapore enjoy reduced progressive tax rates and other forms of deductions and relief. Whether an individual is considered a Singapore tax resident for a financial year is determined by meeting the criteria of either a qualitative test or a quantitative test. The qualitative test examines the connection of an individual to Singapore, including a permanent house, business and family in Singapore and is similar to the residency test found in standard tax treaties. Under the quantitative test, a person will be deemed to be a Singapore resident for tax purposes if the individual has resided or worked in Singapore for (i) at least 183 days in a financial year; (ii) at least 183 consecutive days straddling two (2) years; or (iii) three (3) consecutive years. For personal income tax purposes, generally only employment income and income from immovable assets are taxed. Income from shares, interest paid from local banks and capital gains are all tax exempt in the hands of an individual. For Singapore tax residents, the rate of taxation levied on taxable income ranges from 0% on the first S$20,000 to 20% on income exceeding S$320,000 (see table below). Deductions may be applied for charitable donations, child-related expenses, employment expenses and educational expenses. Relief includes fixed tax relief for supporting a spouse, child(ren), and parents. Chargeable income (S$) Rate (%) Cumulative tax payable on the previous bands (S$) 0 20,000 Nil Nil 20,001 30, ,001 40, ,001 80, ,350 80, , ,950 10

12 120, , , , , , , , , ,001 and above 20 For non-tax residents, the rate of taxation is a flat 15% or progressive rates, whichever is higher. Relief and deductions are not available. Personal income tax administration Unlike certain other countries that follow the pay as you earn approach, Singapore follows a selfassessment system of individual income tax, whereby all income earned by an individual is assessed in the year after it is earned (i.e. all income earned in 2013 will be taxed in 2014). Under this system, the employee has to file an annual tax return, reporting income that is subject to tax in Singapore by 15 April of the next year. Based on the filed tax return, IRAS will determine the tax liability of the individual for the previous year via a notice of assessment. The tax must then be paid within 30 days from the date of the notice, although it is possible to pay in monthly instalments if payment of taxes is made through the automatic GIRO deduction system. When an employee who is not a Singapore citizen ceases his or her employment or plans to leave Singapore for more than three (3) months, the income earned in the year of departure will be assessed immediately in order for IRAS to maintain its tax claim ( tax clearance ). The employer has to provide such details at least one month before the employment ceases or, if not possible, as soon as possible after the notification by the employer of the employee s departure from Singapore. From a reporting perspective, employers are required to provide remuneration details of their Singapore resident employees on an annual basis. Taxation of expatriates Expatriates can enjoy several benefits when coming to work in Singapore. These include a reduced tax base for employer-provided housing (up to year of assessment 2014), home leave tickets and automobile-related benefits, thereby reducing their overall tax payable. To promote Singapore s position as a regional hub and headquarters for regional business, IRAS introduced the Not-Ordinarily Resident ( NOR ) Scheme. Under the scheme, expatriates can enjoy preferential tax rates if they spend more than 90 days per calendar year outside Singapore for business purposes. The total tax payable would then be pro-rated according to the number of days spent in Singapore, subject to a minimum effective tax rate of 10%. Furthermore, contributions made by the employer to any non-mandatory overseas contribution scheme of the expatriate would be tax exempt, subject to a cap. The NOR Scheme is only applicable to expatriate employees in their 11

13 first five (5) years of tax residency in Singapore and who earn in excess of S$160,000 per year. It is not applicable to Singapore citizens or permanent residents. Tax treaties Singapore has an extensive tax treaty network and has signed 74 comprehensive double taxation agreements, with another nine (9) treaties signed but awaiting ratification. The tax treaty may provide, amongst others, reduced withholding taxes, certainty of tax treatment and access to the mutual agreement procedure (with the possibility of advance pricing agreements). 12

14 4. Employment aspects Foreign employees are only permitted to work in Singapore if they have a valid work pass. An Employment Pass ( EP ) is a type of work pass issued to foreign professional employees, managers and owners/directors of Singapore companies. Employers based in Singapore individuals/sole proprietorships or corporate entities can apply for work passes at the Ministry of Manpower ( MOM ). Representative offices and registered branches of foreign companies are also entitled to apply for work passes, as they have a registered office in Singapore. Foreign companies that do not have a registered office in Singapore cannot apply for a work pass; in that case another Singapore company must act as a sponsor and submit the application of behalf of the overseas employer. An EP is usually granted for a period of 1-2 years and is renewable thereafter. An EP enables a foreigner to live and work in Singapore and travel in and out of the country without applying for a Singapore entry visa. Possessing an EP may enable a foreigner to obtain permanent residence status in due course. The key requirements for an EP are: a) a minimum fixed salary of S$3,300 and above per month for young graduates, while older candidates must earn higher salaries in order to qualify; and b) a tertiary degree (i.e. bachelor s degree) from a reputable university and relevant professional experience. The proposed employment in Singapore must be relevant to prior experience. An EP holder can apply for a Dependant s pass ( DP ) for immediate family members (spouse and unmarried children under 21 years of age), which application is subject to separate approval by the MOM. The date of expiry of the DP is linked to the validity of the EP. Following the overall tightening of rules relating to the inflow of foreign employees, the criteria to sponsor dependants have also been raised: in order to apply for a DP, an EP holder needs to earn a fixed salary of at least S$4,000 per month. Employment law Employment carried out in Singapore is governed by the Employment Act ( EA ) as well as by the terms contained in the employment agreement between the employer and the employee. In general, employers are free to dictate working conditions for employees (i.e. working hours, leave etc.). However, for certain types of employees earning below a specified amount, the EA sets out mandatory provisions in terms of rest days, hours of work and other conditions of service.. The EA stipulates amongst others that these employees: May not work more than 88 hours per fortnight, with no more than 48 hours in any given week; May not work more than six (6) consecutive hours without a break; May not work more than 12 hours per day, unless in exceptional circumstances (accidents, unforeseeable circumstances, etc.); 13

15 Have one (1) rest day per week; and Have a minimum of seven (7) days of leave per year. Annual leave The amount of annual leave an employee receives is based on the contractual agreement between the employee and the employer. If the employee is covered by Part IV of the EA, 4 the contract must provide for a minimum of seven (7) days during the first year and one (1) extra day for each additional year of service. As a common practice in Singapore, employees are given an annual leave of around days per year. Any leave that is not used within 12 months of every year of continuous service is generally forfeited unless specified otherwise in the employment agreement. Other leave In the event of sickness, the standard practice is that an employee is required to visit a doctor to obtain a medical certificate as proof of sickness, even for just one (1) day of rest. Otherwise, medical leave will typically not be granted, and the employee s absence will be considered unauthorised. This could result in the absence being deducted from his or her annual leave or salary, and possible disciplinary action. Employees in Singapore are generally granted 14 days of paid medical leave. Women are entitled to 16 weeks of paid maternity leave if the child is a Singapore citizen. For the first two (2) confinements, the first eight (8) weeks of maternity leave will be paid by the employer, and the last eight (8) weeks will be funded by the government (capped at S$20,000 per confinement, including CPF). For the third and subsequent confinements, the full 16 weeks will be funded by the government (capped at S$40,000 per confinement, including CPF). If neither the employee nor her child is a Singapore citizen, the number of days of paid maternity leave will depend on the employment agreement. Common practice in this respect is a period of 12 weeks of maternity leave, of which the first eight (8) weeks are generally paid by the employer, up to the employee s third confinement. When the employee qualifies for government funded maternity leave, the working father may be entitled to one (1) week of paternity leave for all confinements (capped at S$2,500 per confinement, including CPF contributions), provided that the parents are lawfully married and the child is a Singapore citizen. Minimum wage and bonuses There is no minimum salary requirement; this is subject to negotiation between the employer and the employee. However, the salary must be paid at least once a month within seven (7) days of the 4 Generally, Part IV of the EA covers workmen earning not more than S$4,500 per month and other employees earning not more than S$2,500 per month. 14

16 end of the salary period. Overtime pay, if applicable, must be paid within 14 days of the stipulated salary period. There is no requirement for bonus payments under the EA. The salary paid to an employee depends on the position and skills required. The payment of an annual bonus is not compulsory by law, but can be agreed upon contractually by the parties. The amount of the contractual annual bonus can vary from employee to employee, depending on the respective policies of the company, and will normally be linked to the employee s performance as well as the performance of the company. The details of the annual bonus policy will normally be specified in the employment agreement. Termination of the employment agreement Under the EA, either party can terminate the employment agreement by giving a written notice or by making a payment in lieu of notice to the other party. The length of the notice period depends on what is agreed upon in the employment agreement and must be the same for both parties. If no written notice period has been agreed upon, the length of notice varies from one (1) day to one (1) month, based on the employee s length of service. The employee may be allowed to use accrued annual leave to offset the notice period. The employment agreement can be terminated by either party without notice if the other party willfully breaches the terms of the contract. Social security Singapore s social security system is comprised of four (4) pillars that enable Singapore citizens and permanent residents to: (i) set aside funds for retirement under the Central Provident Fund ( CPF ), (ii) encourage home ownership by providing public housing, (iii) enjoy subsidised healthcare through the 3Ms, i.e. Medisave, Medishield and Medifund, and (iv) meet their retirement and medical needs through the Workfare Income Supplement Scheme and the Workfare Training Support Scheme when they are older and earn a lower salary. Foreign employees who are not permanent residents have no entitlements under this social security system and must make their own arrangements. It is common practice, however, for the employer to provide (basic) insurance for employees. Central Provident Fund There is no CPF contribution for foreign employees. Contribution to the CFP is compulsory for Singapore citizens and permanent residents and may be deducted from the employee s salary. Both employee and employer make monthly contributions to the fund, capped at respectively 20% and 16%, 5 although this amount can be lower depending on certain factors such as an employee s age, residency status, etc. Each employee s CPF contributions are subsequently divided into three (3) accounts: (i) the Medisave Account (for hospitalization and medical insurance), (ii) Ordinary Account (housing, investment and education), and (iii) Special Account (retirement savings and investment in retirement related financial products). The employer is responsible for remitting the monthly 5 The employer s contribution of 16% will be increased to 17% with effect from 1 January

17 payment that includes both the employer s and the employee s contributions by the 14th of the following month. 16

18 We are a young and dynamic f irm of lawyers and tax lawyers working closely together. All of us have irms. We have loads of experience in cross border transact ions, which we love to share to help your business run more smoothly. There is this percept ion that mult inat ional companies are those global conglomerates operat ing in all countries of the world. In fact there are many medium-sized mult inat ional companies carrying out business in a handful of key locat ions. We advise them on a daily basis, looking at their needs as their out of house in-house counsel or on a project basis. With a pract ical view, keeping an eye on costs and benef its but always in line with our high quality standards. Amsterdam Kuala Lumpur Singapore Keizersgracht 62 Level 36, Menara Cit ibank 137 Market Street 1015 CS Amsterdam 165 Jalan Ampang Grace Global Raf f les The Netherlands Kuala Lumpur Malaysia Singapore