1.A company incorporated or registered under the Companies Act 1967 or any law in force in Singapore has to file Corporate Income Tax Returns with IRAS every year – Form C-S/ Form C-S (Lite)/ Form C. Corporate Income Tax is assessed on a preceding year basis in Singapore. This means that income earned in the financial year 2020 will be assessed and taxed in 2021. Singapore’s Corporate Income Tax rate is 17%.
2. For new start-up companies there is a tax exemption scheme available to reduce companies’ tax bills. The tax exemption scheme for new start-up companies was introduced under Section 43 of the Income Tax Act 1947 in the Year of Assessment (YA) 2005 to support entrepreneurship, grow local enterprises and build their capabilities.
3. The tax exemptions for qualifying companies for their first 3 consecutive years are as follows:
4. The qualifying conditions for tax exemption scheme for new start-up companies are:
- Be incorporated in Singapore
- Be a tax resident of Singapore
- Have its total share capital beneficially held directly by no more than 20 shareholders throughout the basis period
- All the shareholders are individuals; or
- At least 1 shareholder is an individual holding at least 10% of the issued ordinary shares of the company
5. All new start-up companies are eligible for the tax exemption scheme, except:
- Companies whose principal activity are that of investment holding
- Companies that undertake property development for sale, investment, or both
6. There are companies that are set up to abuse this scheme and are not incorporated for entrepreneurship and genuine commercial reasons.
Abuse of the tax exemption scheme includes:
- Allocating the income of an existing profitable going concern to a few shell companies so that the chargeable income of each shell company is within the threshold for tax exemption
- Charging fees/ expenses to an existing profitable going concern by shell companies without any bona fide commercial reasons
7. The shell companies claim tax exemption on the income they receive from the profitable going concern, while the latter claims tax deduction on the fees/ expenses paid to the shell companies. These shell companies do not carry out any activities or significant activities and have no or few employees. Their accounts usually show few transactions and low capitalisation (usually at $2). These forms of arrangement result in an overall net reduction of tax for the profitable going concern and the shell companies.
8. According to IRAS, more than 300 companies have been audited for possible abuse of the tax exemption scheme for new start-up companies. This has resulted in total tax recovery and penalties of more than $25 million.
It is a criminal offence punishable under the law and the Court imposes severe penalties for businesses or individuals who engage in abusive tax arrangements, such as setting up of shell companies to take advantage of the tax exemption scheme for new start-up companies or individuals who assist others with abusive tax arrangements.
9. Please contact us if you require help in filing your company’s ECI. At PL Biz Consulting Pte Ltd, we have the tax experts with many years of experience to advise and help you to compute and file the correct ECI amount. Filing the correct ECI amount will ensure that you pay the correct amount of tax to IRAS.
