Effective 1 January 2024, Singapore introduced Section 10L to the Income Tax Act, marking a significant shift in its treatment of foreign-sourced capital gains. This change is to address international tax avoidance risks relating to non-taxation of disposal gains in the absence of real economic activities. This amendment is line with Singapore’s focus on anchoring substantive economic activities in Singapore and our longstanding policy to align key areas of our tax regime with international norms.
We can break Section 10L into 4 key components:
1. When will Section 10L apply?
Section 10L targets foreign-sourced disposal gains that are received in Singapore. These gains are taxable if:
- The entity lacks adequate economic substance in Singapore; or
- The gains arise from the disposal of foreign Intellectual Property Rights (IPRs). Gains are considered “received in Singapore” if they are:
a) Remitted or transmitted or brought into Singapore;
b) Used to settle debts related to Singapore business activities;
c) Used to purchase movable property brought into Singapore.
2. Who will be affected?
Only entities of the relevant group will fall within the scope of Section 10L
- A group is a relevant group if:
a) the entities of the group are not all incorporated, registered or established in Singapore; or
b) any entity of the group has a place of business outside Singapore.
- An entity is a member of a group of entities if its assets, liabilities, income, expenses and cashflow are:
a) included in the consolidated financial statements of the parent entity of the group; or
b) excluded from the consolidated financial statements of the parent entity of the group solely on size or materiality grounds or on the grounds that the entity is held for sale.
Excluded entities:
- Entities with adequate economic substance in Singapore;
- Certain prescribed financial institutions and incentivised entities under schemes like Financial Sector Incentive or Global Trader Programme
3. What income does Section 10L cover?
Section 10L covers gains from the sale or disposal of foreign assets:
- immovable property is situated outside Singapore;
- equity securities and debt securities are registered in a foreign exchange;
- unlisted shares are issued by a company incorporated outside Singapore;
- loans where the creditor is a resident in a jurisdiction outside Singapore;
- IPRs where the owner is a resident in a jurisdiction outside Singapore.
Foreign gains are taxable if received in Singapore and either of the following applies:
A. Entity Lacks Adequate Economic Substance in Singapore
- For pure equity-holding entities (PEHEs):
- Must have operations managed in Singapore
- Adequate human resources and premises in Singapore
- For non-PEHEs:
- Must carry on a trade/business in Singapore
- Key decisions made in Singapore
- Reasonable business expenditure and staffing in Singapore
B. Gains Arise from Disposal of Foreign IPRs
- Gains from non-qualifying IPRs (e.g., trademarks, designs) are fully taxable
- Gains from qualifying IPRs (e.g., patents, software copyrights) may be partially exempt based on the OECD modified nexus approach
4. Exclusions from Section 10L
- Financial institutions
- Entities under specific tax incentive schemes (e.g. Development & Expansion Incentive, Finance & Treasury Centre, Global Trade Programme etc)
- Entities meeting economic substance requirements in the year of disposal
Note: Fund tax incentive schemes (e.g., Sections 13D, 13O, 13U) are not excluded, so fund managers and family offices must assess their substance compliance.
Practical consideration
For businesses that are “non-pure equity-holding entity”, whether they have fulfilled the required Economic Substance Requirement will depend on the facts and circumstances unique to each entity and its industry. Businesses and funds should review their structures, document substance, examine their operations and management to determine if they fulfil the economic substance requirements. Application for advance rulings can be considered for certainty.
