Singapore introduces new Section 10L to tax gains from the sale or disposal of foreign assets

Historically, Singapore does not tax capital gains. Only gains which are “income” in nature are taxed.

However, from January 1, 2024 onwards, Singapore has introduced into law the new Section 10L of the Income Tax Act 1947 (“ITA”). Under this new Section 10L, Singapore will now tax gains received in Singapore from the sale or disposal of foreign assets in certain specified scenarios. The introduction of this new Section 10L has created quite a stir among the tax practitioners in Singapore because this new Section 10L, on the face of it, may potentially cover the taxation of capital gains in certain specified scenarios.

It will thus be crucial for multinational corporations (MNCs) and businesses to understand the tax implications arising from this new Section 10L, especially for Indian companies which are planning to repatriate corporate gains to Singapore. In this Singapore tax update, we will discuss the following:

a. the impetus behind the introduction of this new Section 10L;

b. a brief overview of the key features of this new Section 10L; and

c. our brief thoughts on this new Section 10L.

Based on the official reports of the Parliamentary Debates, the new Section 10L was introduced to address international tax avoidance risks relating to the non-taxation of disposal gains in the absence of real economic activities. This move is intended to be part of Singapore’s long-standing policy to align key areas of her tax regime with international norms. This new tax treatment will be consistent with international standards, such as the rules against harmful tax practices agreed by the Inclusive Framework on Base Erosion and Profit Shifting (“BEPS”) of which Singapore is a member, as well as the EU Code of Conduct Group Guidance.

Under the new Section 10L, gains received in Singapore from the sale or disposal by an entity of a multinational group of any immovable or movable property situated outside Singapore (hereinafter referred to as a “foreign asset”) would be “treated as income chargeable to tax." This new Section 10L applies if the gains would not otherwise be treated as income or if the gains would otherwise be exempt from tax under the ITA.

This new Section 10L will however not cover the sale or disposal of a foreign asset by an entity that is part of a group, whereby all the group entities are either incorporated only in one jurisdiction or have places of business only in one jurisdiction.

In addition, Section 10L will not apply to a sale or disposal of foreign assets (not being intellectual property rights) in certain circumstances such as:

a. a sale or disposal by a pure equity-holding entity that meets certain specified conditions;

b. a sale or disposal by an entity (which is not a pure equity-holding entity) that has “adequate economic substance” in Singapore and which operations are managed and performed in Singapore;

c. a sale or disposal by either:

• prescribed financial institutions where the sale or disposal is carried out as part of, or incidental to, their business activities; or

• entities under certain tax incentive schemes where the sale or disposal is carried out as part of, or incidental to, activities that qualify for exemption or concessionary tax rates under those schemes.

Foreign-sourced gains from the sale or disposal of a foreign asset (not being an Intellectual Property Right (“IPR”)) will not be subject to Singapore income tax, if the entity concerned can meet the “adequate economic substance” requirement (“Economic Substance Requirement”) in the basis period in which the sale or disposal occurs.

However, for foreign-sourced gains received in Singapore from the sale or disposal of foreign IPRs, different rules apply. For gains received in Singapore from the sale or disposal of foreign qualifying IPRs, a modified nexus approach is used to determine the extent of such gains which would not be taxable in Singapore. On the other hand, for gains from the sale or disposal of foreign non-qualifying IPRs, the full amount of gains will be subject to tax when received in Singapore. This is regardless of whether the entity has adequate economic substance in Singapore.

Only the net amount of gains (after deducting relevant expenditure), that is received in Singapore or deemed to be received in Singapore, is taxable. Where the sale of the foreign asset is at a price less than the open‑market price of the foreign asset, the Comptroller of Income Tax may treat as the amount of gains received in Singapore, as the amount derived by adding the open‑market price of the foreign asset to the actual amount of gains received in Singapore and deducting from that total amount the actual sale price.

The final point to note is that Section 10L applies only to the gains from the sale or disposal of a foreign asset that occurs on or after January 1, 2024.

• This legislative amendment is a step in the right direction in tackling international tax avoidance risks and harmful tax practices and is in any event aligned with international norms and standards. As a country which is heavily reliant on international trade and investments, it is in Singapore’s interest for her tax rules to withstand international scrutiny so that she can continue to attract the flow of trade and investments.

• That said, MNCs and businesses can expect a fair degree of uncertainty over the implementation of the new Section 10L in practice. In particular, it may be unclear how the Economic Substance Requirement would be applied in practice. In determining whether a non-pure equity-holding entity has met the Economic Substance Requirement, much will still depend on the facts and circumstances unique to each entity and its industry.

• In this regard, it may be useful for MNCs and businesses to seek Advance Rulings to clarify the application of this Economic Substance Requirement, especially for those transactions of substantial economic value.

Moving forward, MNCs and businesses (e.g., Indian companies which are planning to repatriate corporate gains to Singapore) can expect a fair degree of uncertainty over the interpretation and application of this new Section 10L in practice.

When in doubt, it may be prudent to seek the counsel of legal advisors.

About the authors: Ma HanFeng is a Partner and heads the Tax department; Prakaash Silvam is an Equity Partner in the Litigation & Dispute Resolution department and co-heads the India Practice; Vedanta Vishwakarma is a Foreign Lawyer in the Litigation & Dispute Resolution department at Oon & Bazul LLP.