How is Tax Residence Status Determined?
Considering the tax benefits, it is no small matter to obtain a tax residence status. So how does Inland Revenue Authority of Singapore (IRAS) determine tax residence status? In accordance with the Singapore Income Tax Act, the tax residence status of a company is determined based on where the ‘control and management of its business is exercised.’ A company is tax resident in Singapore if the control and management of its business is exercised in Singapore. Consequently, a Singapore branch office of a foreign company is not deemed a tax resident since the ‘control and management’ of its business’ is commissioned by the parent company outside Singapore.
‘Control and Management’
A company incorporated in Singapore is required to draw up a Memorandum and Articles of Association during its incorporation process. The Articles of Association outlines the company’s rules governing the relationship between the directors and shareholders of the company, the organizational structure and the roles of the directors in managing the operations of the company (together with the Memorandum of Association, the Articles of Association constitute the constitution of a company). Determination of tax residence status will be evident if the key decision-making, institution of policies and central management of the company are exercised in Singapore. Company activities in Singapore that include financial management of expenditure and banking, declaration of dividends, appointments of management executives, authorization to use the company’s seal or the ability to call shareholders’ meetings and etc are good indicators of ‘control and management’ within the jurisdiction.
Approving Tax Residence Status
Although IRAS, apart from citation of the Income Tax Act, has no criteria outlined for determination of the tax residence status; however, it is circumspect in examining each application for the Certificate of Residency (COR). A company that applies for a COR has to provide supportive evidence to show that the ‘control and management’ is in place in Singapore for the year that precedes the year of assessment. IRAS examines the status each year to determine eligibility of status. Approval for tax residence status is, therefore, short-lived as It is necessary to prove the ‘control and management’ is exercised the following years.
Companies that are newly incorporated and with 50% foreign ownership, individual or company, are often subject to a closer scrutiny. And this is more so for investment holding companies with no active business activities. Oftentimes, further documentation is required to claim the tax residence status. IRAS can request for Directors’ Report, business plan and a detailed description of roles and responsibilities of the directors. It is, therefore, imperative to keep proper and adequate records of all board meetings. The role of a company or corporate secretary becomes necessarily more important, which should not be overlooked.
With investment opportunities more globalized investors seek for new marketplace and more favorable tax benefits outside of their countries or regions. Even though it has a pro-business policy, Singapore is more conscious than ever that its tax benefits are not liable to abuse. It’s wide tax treaty network signifies greater responsibilities in adjudicating the tax residence status prudently. This will ensure, not only greater benefits for all investors, but also Singapore’s reputation as one of the key players in the global financial community.