Foreign Sourced Income and Avoidance of Double Taxation

For Singapore tax resident companies, who also do their business overseas, it’s quite common nowadays to have their foreign sourced income remitted to Singapore. Since the city-state follows a tax framework based on territorial policy, this foreign sourced income is also taxed.

Though, as detailed in Sections 13 (7A) to 13 (11) of the Income Tax Act (ITA) of Singapore, companies can benefit from the foreign sourced income exemption scheme (FSIE), which is applicable to foreign-sourced dividend, foreign branch profits, and foreign-sourced service income.

Sometimes, the foreign income of a Singapore tax resident company may be subject to double taxation – once overseas, and then a second time when the income is sent to Singapore.

For such cases, IRAS has a foreign tax credit (FTC) scheme, which allows the company to claim a tax credit for taxes paid in a foreign country against the Singapore payable tax on the same income.

 Two types of credit or relief that can be claimed: 

• Double Tax Relief (DTR)

  – a credit relief provided under Singapore’s Avoidance of Double Tax Agreements (DTAs);

• Unilateral Tax Credit (UTC)

  – granted on all foreign-sourced income received in Singapore by Singapore tax residents from jurisdictions that do not have DTAs with Singapore.

The government, in 2011, also introduced a Foreign Tax Credit (FTC) pooling system to give businesses greater flexibility in their FTC claims, reduce the taxes payable on foreign income, and to simplify tax compliance.

For Singapore-based companies to enjoy exemptions under the FTC or FSIE, the headline corporate tax rate in the foreign country from which the income is received must be at least 15 percent, and the income must have already been subjected to tax in that particular country.

Explore our corporate taxation services to ensure you take advantage of all exemptions and reliefs when filing for your tax.

Common mistakes to avoid while claiming tax exemption for foreign-sourced dividends include:

• dividends must meet the “headline tax rate” condition, i.e. the dividends were received from countries less than 15% headline tax rate; and
• dividends must meet the “subject to tax” condition, e.g. the dividends were distributed from a company which is part of a group and the income of the company was found not to be subject to tax

Finally, to claim these benefits, companies need to apply for a COR/ Tax Reclaim Form. A COR is a letter certifying that a company is a tax resident in Singapore for the purpose of claiming tax benefits under the Avoidance of Double Taxation Agreements (DTAs). A Singapore tax resident company applying for treaty benefits provided under the DTA with a tax treaty partner, may be required to submit a tax reclaim form issued by the tax treaty partner.