The Inland Revenue Authority of Singapore ('IRAS') recognises that travel restrictions imposed by various countries in connection with the COVID-19 situation may result in some unanticipated tax uncertainties or exposure for certain companies.
IRAS has therefore released a COVID-19 Support Measures and Tax Guidance ('Guidance Note') on 28 October 2020 to help address 2 specific issues.
Tax residency status of a company
The Singapore tax residency status of a company may be important for various purposes including allowing the company to claim Singapore tax treaty benefits(1) and protection.
In the case of a company enjoying the Resident Fund Tax exemption under Section 13R of the Income Tax Act (Cap. 134) ('ITA') administered by the Monetary Authority of Singapore ('MAS'), the continued enjoyment of such tax exemption depends on the company maintaining its Singapore tax residency status. The MAS has indicated in the context of the Resident Fund Tax exemption that they will accept that a Singapore incorporated company as being controlled and managed in Singapore where the meetings of the board are held in Singapore. This clarification is however not intended to change or replace the common law principles of tax residency status of companies under Singapore income tax laws.
The ITA provides that a company is a resident of Singapore for tax purposes if the "control and management" of its business is exercised in Singapore. As control and management is usually delegated to and exercised by the board of directors, a company is generally deemed to be resident where the board of directors meets. In general, periodic physical board meetings in Singapore will therefore be a clear way to demonstrate control and management of a company in Singapore, provided that the board meetings are not shown to be mere formalities to 'rubber stamp' decisions which have already been substantively made elsewhere.
During COVID-19, if the directors of a company are not able to enter Singapore to hold any board meetings or carry on its usual business operations from Singapore, there may therefore be legitimate concerns that the company's Singapore tax residency status may be jeopardised.
Hence, it is announced by IRAS in the Guidance Note that it is prepared to consider that a company is a Singapore tax resident in that Year of Assessment ('YA') 2021 if it meets all of the following conditions:
- the company is a Singapore tax resident for YA 2020;
- there are no other changes to the economic circumstances of the company. These include the principal activities and business model of the company, the nature of the business operations and the conduct of the business in Singapore and elsewhere, and the usual locations in which the company operates; and
- the directors of the company have to attend the board of directors meeting held outside Singapore or the meeting is held via electronic means (e.g. via video-conferencing, tele-conferencing, etc.) due to the directors being temporarily restricted in their travel as a consequence of COVID-19.
Conversely, the IRAS is prepared to consider that a company is not a Singapore tax resident for YA 2021 if it meets all of the following conditions:
- the company is not a Singapore tax resident for YA 2020;
- there are no other changes to the economic circumstances of the company. These include the principal activities and business model of the company, the nature of the business operations and the conduct of the business in Singapore and elsewhere, and the usual locations in which the company operates; and
- the directors of the company have to attend the board of directors meeting held in Singapore due to the directors being temporarily restricted in their travel as a consequence of COVID-19.
Proper records should be kept so as to be able to support that the above stated conditions are met in case queries are raised by the IRAS. It should also be noted that the Guidance Note appears to apply only to companies that have already claimed Singapore tax residency status/offshore tax residency status in YA 2020 and thus it does not apply to a company newly incorporated in 2020. For such new companies, the general principles in determining Singapore tax residency status shall continue to be applicable.
Permanent establishment created by any employee's presence in Singapore
Where the employees of a foreign company have to remain in Singapore due to travel restrictions relating to COVID-19, the Guidance Note also announced that IRAS will consider such unplanned presence as not automatically resulting in the creation of a permanent establishment ('PE') in Singapore for the foreign company, provided that all of the following conditions are met:
- the foreign company does not have a PE in Singapore for YA 2020;
- there are no other changes to the economic circumstances of the company. These include the principal activities and business model of the company, the nature of the business operations and the conduct of the business in Singapore and/or elsewhere, and the usual locations in which the company operates;
- the unplanned presence of the employees in Singapore is due to travel restrictions relating to COVID-19 in 2020 and their physical presence in Singapore up to 31 December 2020 (such date may be reviewed by IRAS as the COVID-19 situation evolves) is temporary; and
- the activities performed by the employees during the unplanned presence would not have been performed in Singapore if not for the travel restrictions.
How this update impacts you
Maintaining tax residency within or outside Singapore may be important to your overall corporate structure and planning. For a fund entity that is claiming the Offshore Fund Tax exemption (under Section 13CA of the ITA), it should carefully monitor and maintain the offshore tax residency status of the entity and may wish to take steps to ensure or confirm that the entity does not have a PE in Singapore. The significance of a PE or lack thereof will also be relevant and important for withholding tax purposes.
Furthermore, a change in tax residency status of a company may also impact on its requisite registration and reporting status under the applicable Common Reporting Standard regime.
If you have any queries on the tax residency status of your companies and its relevant implications, please feel free to reach out to any of us and we will be happy to assist and advise.
