Singapore Dividend Tax: A Comprehensive Read

Singapore Dividend Tax

Dividends are a primary method for companies to distribute profits to their shareholders. In Singapore, the tax treatment of dividends is designed to be straightforward and investor-friendly. This article provides a detailed overview of dividend taxation in Singapore, focusing on the perspectives of both paying and receiving entities, as well as how businesses can ensure compliance.

Singapore as a choice destination for Tax policies

Singapore has been an attractive option for investors seeking to set up business and headquarters. For international companies alike, a favorable corporate tax rate, impartial tax authorities, and no tax on capital gains are significant advantages for capital assets that fluctuate in value. The corporate income tax comprises progressive rates, while allowing for business expenses and capital allowances, making it one of the most competitive destinations, comparable to Hong Kong.

With a reduced tax burden as a key benefit, business owners are more likely to include Singapore as part of their long-term business planning and, thus, place substantive business activities in Singapore.

What Is Dividend Tax?

Dividend tax refers to the taxation imposed on the investment income received by shareholders from their investments in a company. In many jurisdictions, this involves a two-tier tax system: first, the company pays tax on its profits, and then shareholders are taxed again on the dividends they receive. However, Singapore operates under a one-tier corporate tax system, which simplifies the taxation process and eliminates double taxation.

Under this system, the tax paid by a company on its income is final, and dividends to shareholders are generally exempt from further taxation. This approach makes Singapore an attractive destination for investment and business operations. It also offers more value in meeting shareholder expectations, considering that the distribution of dividends will not incur additional taxes or be subject to further tax implications. It also facilitates the filing of income tax returns, thereby avoiding potential issues.

Types of Dividend

Understanding the different shareholding structures and share types will give us a deeper appreciation of dividend taxes. The board of directors generally declares the issuance of Dividend payouts as a form of income distribution. Depending on the type of share (common stock/ordinary shares, corporate stock, or preference shares), the dividend payouts may differ.

Dividends are usually declared annually, as payment of dividends is typically made from actual profits and cash flow. Having adequate profits or an annual profit is traditionally established after the financial year's end; hence, it is common for dividends to be declared annually. In some cases, special dividends or interim dividends are declared. Interim dividend payments are relatively common in the real estate and banking sectors, where the boards of directors of public companies send positive signals to investors.

The form of dividend may also differ. From cash dividends and stock dividends (also known as stock dividends) to preferred dividends, the form may vary depending on the company directors' intention. It does not alter the tax treatment.

Paying Dividends – From a Singapore Entity Perspective

Dividend Tax in Singapore – 0%

In Singapore, dividends paid by resident companies are typically exempt from tax in the hands of shareholders, thanks to the one-tier corporate tax system. This means that the tax paid by the company on its income is final, and dividends distributed to shareholders are not subject to further taxation. However, it's important to note that this exemption does not apply to co-operatives.

Conditions for Tax-Exempt Dividends

For dividends to qualify for tax exemption under the one-tier corporate tax system, the following conditions must be met:

• Dividend Source: The dividend must be paid by a Singapore resident company.

• No Deduction of Expenses: The company must not have claimed a deduction for expenses related to earning the dividend income.

• Proper Documentation: The company must maintain proper records and documentation to substantiate the dividend payments and ensure compliance with tax regulations.

It's essential to note that while Singapore's one-tier corporate tax system simplifies the taxation of dividends, companies must adhere to specific conditions to maintain the tax-exempt status of their dividend distributions.

Withholding Tax on Dividends

Singapore does not impose withholding tax on dividend payments, even when these payments are made to foreign shareholders. This policy enhances Singapore's attractiveness as an investment destination, as it allows foreign investors to receive the full amount of dividends without tax deductions. However, foreign shareholders may be subject to tax on the dividends they receive, depending on the tax laws of their home country. Such income tax implications are usually managed by detailed tax planning.

Receiving Dividends – Local or Foreign Sourced

Local Dividends

Dividends received by Singapore tax residents from Singapore resident companies are generally exempt from tax, provided they meet the conditions outlined in the one-tier corporate tax system. This exemption applies to both individuals and companies.

Foreign-Sourced Dividends

Foreign-sourced dividends received by a Singapore tax-resident company may be exempt from tax under the Foreign-Sourced Income Exemption (FSIE) scheme, provided certain conditions are met. These conditions include:

• Subject to Tax Condition: The foreign income must have been subject to tax in the foreign jurisdiction from which it is received. This means that the income of the foreign companies should have been taxed in the source country, either through a dividend tax or underlying tax.

• Headline Tax Rate Condition: The headline tax rate of the foreign jurisdiction must be at least 15% at the time the foreign income is received in Singapore.

• Beneficial Ownership Condition: The Comptroller of Income Tax must be satisfied that the tax exemption would be beneficial to the Singapore tax resident company.

  
  

To substantiate that the income has been subject to tax, companies should maintain proper documentation, such as:

• Audited accounts of the foreign dividend-paying company, showing a positive current-year tax (excluding deferred tax expense).

• Dividend vouchers or certificates indicating that the foreign dividend is exempt from tax due to tax incentives granted for substantive business activities carried out in the foreign jurisdiction.

• Confirmation letters from the foreign dividend-paying company stating that foreign tax has been paid on the income out of which the dividends are paid.

These documents should be retained for at least five years from the relevant Year of Assessment (YA).

Non-taxable dividends are a key benefit of choosing Singapore as a destination for holding companies.

How OakTree Can Help Ensure Compliance

Navigating the complexities of dividend taxation requires a thorough understanding of both local and international tax regulations. OakTree, with its expertise in accounting, corporate secretarial, taxation, payroll, and HR consulting, is well-positioned to assist businesses in ensuring compliance with dividend tax laws from a multi-pronged approach.

Services Offered by OakTree

• Tax Advisory: OakTree offers expert guidance on structuring dividend distributions to maximize tax efficiency and ensure compliance with Singapore's tax laws and international tax treaties.

• Documentation and Record-Keeping: Our Tax advisors assist companies in maintaining proper records and documentation to substantiate dividend payments, ensuring adherence to tax regulations.

• Cross-Border Tax Planning: For MNCs with international operations, OakTree offers professional advice on managing withholding taxes and leveraging Double Taxation Agreements (DTAs) to minimize tax liabilities on cross-border dividend payments.

• Regulatory Compliance: OakTree keeps businesses informed about changes in tax laws and regulations, as well as applicable tax rates, to ensure companies remain compliant with evolving tax requirements. With clear knowledge of taxation, the possibility of deductible expenses, and experience in international services, we ensure compliance with your company's financial returns.

By partnering with OakTree, businesses can navigate the complexities of dividend taxation with confidence, ensuring compliance and optimizing tax efficiency in their dividend distribution strategies. This is especially crucial for business owners and investment companies on a corporate level.

Conclusion

Understanding the tax implications of dividend distributions is crucial for businesses operating in Singapore. The one-tier corporate tax system offers significant advantages, including the exemption of tax for shareholders and the absence of withholding tax on dividend payments. However, to fully benefit from these advantages, companies must adhere to the conditions set forth by the IRAS and maintain proper documentation.

A one-tier system certainly simplifies tax returns and offers an attractive option for investors seeking an efficient model for repatriating profits. However, proper tax reporting, including the need for adequate documentation and financial reports (P&L, Balance Sheet), is a key requisite for tax compliance.

For SMEs and MNCs seeking to navigate the complexities of dividend taxation, OakTree offers comprehensive services to ensure compliance and optimize tax efficiency. As an accounting firm with extensive experience, we are well-equipped to assist you. From planning income from dividends and exemption of tax to proper tax reporting, we got it all covered. Get in touch with us now!

DISCLAIMER: The views and opinions expressed in this article are those of the author and do not necessarily represent the views and opinions of any individuals or organizations with which the author may be affiliated, either in a professional or personal capacity, unless explicitly stated.