Navigating Singapore’s Section 10L: A Guide on Economic Substance and the Application of Tax

Since the introduction of Section 10L, numerous inquiries have been made seeking clarity as to how to apply these rules practically. This article delves into the Singapore Section 10L economic substance requirements, aiming to illuminate these complexities.

Practical Application of Section 10L

The Inland Revenue Authority of Singapore (IRAS) distinguishes between “pure equity holding companies” and” non-pure equity holding companies”, each facing a distinct set of criteria to demonstrate economic substance in Singapore:

Pure Equity Holding Entities

These entities, primarily involved in holding shares or other equity interests, where income is generated solely from dividends, gains from selling shares, or income related to shareholding activities, are assessed under a less stringent economic substance test. To meet this requirement, they must:

• Submit all required statutory returns, statements, accounts and filings to the relevant government authorities;
• Manage and perform their operations in Singapore, either directly or through outsourcing to third parties; and
• Possess adequate human resources and office premises in Singapore to carry out their operations.
   

In essence, these entities must demonstrate that their core economic activities are performed in Singapore by employees employed and working within the country. In some instances, the economic substance test can also be applied at the holding company level of special purpose vehicles.

Non-Pure Equity-Holding Entities

Entities not considered a pure equity holding entity will be classified as a non-pure equity-holding entity and be subjected to a more rigorous economic substance test. All factors will be considered in determining if the economic substance requirement has been satisfied in the basis period in which the sale of the foreign asset occurs:

• The entities’ operations being managed and performed in Singapore;
• The number of full-time employees with relevant qualifications and experience in Singapore;
• The amount of business expenditure incurred in Singapore; and
• Whether key business decisions are made in Singapore.
   

While the IRAS has provided some guidance, it has yet to establish a minimum threshold or definitive targets (e.g. how much business expenditure is required to constitute economic substance). IRAS will consider all factors to assess if in-scope entities deriving a gain from disposal of foreign assets and remitting the foreign sourced gain into Singapore will be caught under Section 10L. 

Therefore, inscope entities contemplating the sale of foreign assets should consider delaying the remittance of foreign sourced gains until clearer guidance is issued or proactively seek a ruling from the IRAS for greater certainty on the adequacy of economic substance. Such ruling, if granted, would provide tax certainty up to five years of assessment. It is important to note that the ruling application should be made if the proposed sale or disposal of the foreign asset is expected to occur within one year from the date of the ruling application. The ruling, if issued, will be valid up to 5 years of assessment.

Need Assistance or Clarification?

At Forvis Mazars, our team is well-versed in navigating Singapore’s economic substance requirements. We can advise businesses on the relevant criteria and assist in applying for a ruling to achieve greater certainty in their tax position. By partnering with us, a dedicated team will be allocated to you to prioritise your company’s tax efficiency and compliance, offering tailored solutions to meet your specific needs.