Section 10L: Disposal of Foreign-Sourced Capital Assets [Part 1]

Tax Treatment of Foreign-Sourced Capital Disposal Gains and Losses

(Before 1 January 2024)

Singapore taxes gains from the sale or disposal of assets as income when the gains are revenue in nature, regardless of whether the income is Singapore-sourced or foreign-sourced (taxed when received in Singapore). Singapore does not tax gains from the sale or disposal of assets that are capital in nature, whether they are foreign-sourced or Singapore-sourced.

(From 1 January 2024)

Section 10L of the Income Tax Act 1947 (“ITA”) has been passed into legislation on 1 January 2024.

Under Section 10L, certain gains from the sale or disposal of foreign assets are treated as income chargeable to tax when received in Singapore. Foreign-sourced disposal gains from the sale or disposal of a foreign asset (other than an intellectual property right) will not be treated as income chargeable to tax in Singapore if the entity making the sale or disposal has adequate economic substance in Singapore. On 8 December 2023, IRAS had published an e-Tax Guide on “Tax Treatment of Gains or Losses from the Sale of Foreign Assets”. We hereby provide the main points extracted from the e-Tax Guide as follows:

Under the new foreign-sourced disposal gains tax regime (legislated in “section 10L of the ITA”), foreign-sourced disposal gains received in Singapore by an entity of a relevant group from the sale or disposal of a foreign asset, will be treated as income chargeable to tax under section 10(1)(g) of the ITA under certain circumstances.

Generally, the foreign-sourced disposal gains are deemed to be received in Singapore only if such gains belong to an entity that is located in Singapore. Thus, foreign entities (i.e., not incorporated, registered or established in Singapore) that are not operating in or from Singapore will not be within the scope of section 10L of the ITA.

These initiatives aim to curb aggressive tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations.

By implementing Section 10L, Singapore aligns its tax system with these international standards, demonstrating its commitment to fair tax competition and discouraging profit-shifting practices.

The focus on economic substance ensures that tax benefits are accorded to entities with authentic business activities in Singapore, thus fostering genuine economic growth.

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Covered Income

The gains from the sale or disposal of any movable or immovable property situated outside Singapore of a covered entity will be subject to tax under section 10L of the ITA.

Examples where assets are determined to be situated outside Singapore are as follows:

1. immovable property is situated outside Singapore;
2. equity securities and debt securities are registered in a foreign exchange
3. unlisted shares are issued by a company incorporated outside Singapore;
4. loans where the creditor is a resident in a jurisdiction outside Singapore;
5. IPRs where the owner is a resident in a jurisdiction outside Singapore;

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Scenarios where the Sale or Disposal of Foreign Assets (Excluding IPRs) are Not Subject to Tax

Section 10L of the ITA will not apply to gains from the sale or disposal of a foreign asset (not being a foreign IPR) when it is:

carried out as part of, or incidental to, the business activities of

1. carried out as part of, or incidental to, the business activities of
   1. a bank licensed under the Banking Act 1970;
   2. a merchant bank licensed under the Banking Act 1970;
   3. a finance company licensed under the Finance Companies Act 1967;
   4. an insurer licensed or regulated under the Insurance Act 1966; or
   5. a holder of a capital markets services licence under the Securities and Futures Act 2001;
2. carried out as part of, or incidental to, the business activities or operations of an entity which are incentivised under the following tax incentives in Singapore in the basis period in which the sale or disposal occurred:
   1. Aircraft Leasing Scheme;
   2. Development and Expansion Incentive;
   3. Finance and Treasury Centre Incentive;
   4. Financial Sector Incentive;
   5. Global Trader Programme;
   6. Insurance Business Development Incentive;
   7. Maritime Sector Incentive;
   8. Pioneer Certificate Incentive;
3. carried out by an entity that is able to meet the economic substance requirement in Singapore in the basis period in which the sale or disposal occurred.

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In the event that funds fall within the scope of Section 10L, funds whose income are exempted under Section S13O, S13U, subject to fulfilling certain necessary conditions, would have met the economic substance requirements for the period.

In the event that the Fund falls within the scope of Section 10L and do not meet the necessary conditions under Section S13O or S13U, the Fund may be exposed to Singapore tax on its income and gains, wholly or partially, as the case may be, at the prevailing corporate tax rate.

Meeting of Economic substance requirements for the purposes of Section 10L

Foreign-sourced disposal gains from the sale or disposal of a foreign asset (not being an Intellectual Property Rights) will not be brought to tax if the entity has adequate economic substance in the basis period in which the sale or disposal occurs. The economic substance requirement will not be applied at a jurisdictional level for a group. It will generally be assessed at the entity level. 

Pure Equity Holding Company

Under the e-Tax Guide, a Pure Equity Holding Company is defined as:

1. whose function is to hold shares or equity interests in any other entity; and
2. has no income other than:
   1. dividends or similar payments from the shares or equity interests;
   2. gains on the sale or disposal of the shares or equity interests; or
   3. income incidental to its activities of holding shares or equity interests.

To meet the economic substance requirement, the entity is required to satisfy all the following conditions in the basis period in which the sale or disposal occurs:

1. the entity submits to a public authority any return, statement or account required under the written law under which it is incorporated or registered, being a return, statement or account which it is required by that law to submit to that authority on a regular basis;
2. the operations of the entity are managed and performed in Singapore (whether by its employees or outsourced to third parties or group entities); and
3. the entity has adequate human resources and premises in Singapore to carry out the operations of the entity.

A pure equity-holding entity will be considered as meeting the “adequate premises” criterion if:

1. it has an office in Singapore for the use of its employee(s) (including rented premises or co-working office spaces);
2. it shares a premise with an associated entity for the use of its employee(s); or
3. the outsourced service provider performing the pure equity-holding entity’s core income generating activity has an office in Singapore.

A pure registered address (e.g., address of the corporate secretary) that is not used by the pure equity-holding entity’s employees or outsourced service provider to perform the pure equity-holding entity’s core income generating activity will not meet the “adequate premises” criterion. 

Non-pure Equity Holding Company

Under the e-Tax Guide, a non-pure equity-holding entity is an entity that is not a pure equity-holding entity. The economic substance requirement will be determined based on an analysis of the entity’s core income generating activities in Singapore.

In the event that the Gains on Disposal of Foreign Assets are subjected to tax in Singapore, if the Company is a Singapore Tax Resident, it would be able to claim tax credits for taxes paid in the overseas jurisdiction in relation to the Gains on Disposal of the Foreign Asset.

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Income Tax Advance Ruling on Adequacy of Economic Substance

The foreign-sourced disposal gains from the sale or disposal of a foreign asset (other than an intellectual property right) will not be treated as income chargeable to tax in Singapore if the entity making the sale or disposal has adequate economic substance in Singapore.

To obtain certainty, Companies may apply to the IRAS for an advance ruling to seek assurance on the adequacy of economic substance (known as an “ESR AR application”) if their proposed sale or disposal of a foreign asset is expected to occur within one year from the date of the application.

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Considerations for Companies, Venture Capital Funds and their portfolios who are Pure Equity Holding Companies

The economic substance requirements for a Singapore Company due to Section 10L, Singapore Tax Residency and Obtaining Certificate of Residence has provided both certainty on tax treatments and challenges ahead.

It is important to note that the e-Tax Guide also provides several examples that emphasises on the roles to be performed by the Singapore based directors such as managing the operations of the Singapore Company or monitoring the activities if they are performed by a third-party service provider.

Companies need to focus on ensuring that they fulfil the necessary economic substance. For Venture Capital Funds, the Fund Manager should not only focus on the Fund fulfilling the necessary economic substance but they should ensure that their portfolio companies (who are pure equity Company) domiciled in Singapore fulfils the necessary economic substance through proper board meetings and various initiatives.

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