Until 31 December 2023, Singapore maintained a longstanding position—capital gains from the sale or disposal of both domestic and foreign assets were not taxed. However, this approach shifted significantly starting 1 January 2024, with the introduction of a new framework targeting foreign-sourced disposal gains.
Under the revised rules, gains from the sale of foreign assets—defined as any movable or immovable property located outside Singapore—will now be taxed when received in Singapore by a covered entity. This taxability is determined under Section 10(1)(g) of the Income Tax Act 1947 (ITA), provided either of the following two situations apply:
- The gains are not already taxed under Section 10(1) of the ITA, or
- The gains were previously exempt under the ITA.
This change specifically targets instances where such foreign-sourced capital gains were remitted into Singapore, marking a pivotal evolution in the country’s tax treatment of offshore assets.
Taxation of Foreign-sourced Disposal Gain
From 1 January 2024, taxation applies when:
- The disposal or sale of a foreign asset occurs on or after this date; and
- The receiving entity does not engage in exempted business activities, nor benefits from specific tax incentives; and
- For foreign assets excluding Intellectual Property Rights (IPRs), the entity does not meet economic substance requirements within Singapore.
Notably, only entities established in Singapore—whether by incorporation, registration, or establishment—are within the scope of Section 10L of the ITA. Foreign entities with no operational base in Singapore remain unaffected.
A useful illustration of this applicability is provided in the original document for reference.
Applicability of Section 10L (Companies)
The rule’s applicability differs based on the type of asset and timing of disposal. Here’s how it breaks down:
- For Singapore assets – Section 10L does not apply.
- For foreign assets other than IPRs – Taxability hinges on whether the scenario is excluded or not.
- For foreign IPRs – Taxation depends on whether the IPR qualifies under the Modified Nexus Approach.
- Disposals before 1 January 2024 – These remain unaffected by the new regime.
The key takeaway: when a covered entity disposes of assets on or after 1 January 2024, and is not excluded, the gains may be taxed in full or in part.
Excluded Scenarios under Section 10L
Certain business activities are shielded from this new taxation if they fall under specific exclusions. These include:
- Licensed financial institutions: banks, finance companies, insurance providers, capital market services license holders, and merchant banks.
- Entities engaged in disposal as part of their regular business.
- Entities availing tax incentives such as:
- Finance and Treasury Centre Incentive
- Global Trader Programme
- Aircraft Leasing Scheme
- Pioneer Certificate Incentive
- Maritime Sector Incentive
- Insurance Business Development Incentive
- Development and Expansion Incentive
- Financial Sector Incentive
Further, entities demonstrating adequate economic substance—evaluated at the entity level—can also fall outside the taxation net.
Economic Substance Requirement (ESR)
Economic substance isn’t a group-wide evaluation; it is assessed individually per entity, except in special cases.
The benchmarks differ depending on the nature of the entity:
1. Pure Equity-Holding Entity
Such entities derive income primarily through dividends or gains from shareholdings. Their ESR requires:
- Full compliance with statutory reporting obligations.
- Centralized operations managed within Singapore.
- Presence of sufficient human resources and premises locally.
2. Non-Pure Equity Holding Entity
In addition to local management and operations, these entities must prove reasonable economic activity through:
- Adequate headcount in Singapore
- Qualified personnel with relevant experience
- Business expenditure in and outside Singapore relative to income
- Key decision-making occurring within Singapore
ESR for Special Purpose Vehicles (SPVs)
SPVs, by nature, are lean entities created to isolate investment risk and often lack significant physical presence. In such cases, ESR shifts to the immediate or ultimate holding entity, provided the following conditions are met:
- The holding entity controls and benefits economically from the SPV.
- It defines the SPV’s investment strategy.
Where both immediate and ultimate holding entities are SPVs, ESR can be tested at the ultimate holding level, as long as the intermediate one also qualifies as an SPV.
Outsourcing of Economic Activities
Outsourcing doesn’t exempt an entity from ESR. Instead, it’s recognized if:
- The outsourced activities occur within Singapore.
- The entity retains direct and effective control over the outsourced operations.
- The service provider allocates dedicated resources to the outsourcing entity.
Resources of the outsourced party are factored into ESR—provided they match the service complexity and scope.
Taxation of Foreign IPRs
Gains from the sale or disposal of foreign IPRs are treated differently. Two broad categories emerge:
1. Qualifying IPRs
These include patents, patent applications, and copyright in software as per Singapore or equivalent foreign laws. Gains are taxed based on a Modified Nexus Approach, aligning tax exemption with the portion of qualifying R&D activities conducted.
2. Non-Qualifying IPRs
Here, the entire gain is taxed upon receipt in Singapore, regardless of whether the entity meets ESR. This blanket treatment reflects the higher scrutiny around IPRs not supported by sufficient local development.
Cost Deduction for Computing the Capital Gains
While computing taxable gains, some deductions are allowed:
- Direct expenses linked to acquisition, enhancement, or financing of the foreign asset
- Losses from sale or disposal of other foreign assets
However, deductions are disallowed if:
- The expenditure was already claimed against other income, regardless of taxability
Where gains are received over multiple years, a reasonable portion of the deduction is allowed each year.
Entities may also claim foreign tax reliefs—including unilateral or pooled credits—within four years of remittance.
Exemption on Tax for Individuals
When an individual receives gains from foreign asset disposals, Section 13(1)(zu) of the ITA can offer exemption—but only when the gains are capital in nature.
If such gains are classified as business revenue, they remain taxable, regardless of origin.
In transparent entities like partnerships, the individual partner may enjoy the exemption on their capital gains share, subject to the same conditions.
Advance Ruling for ESRs
Entities seeking certainty on whether they meet ESR can apply for an advance ruling from IRAS. Key features include:
- Validity up to five assessment years, including the year of disposal
- Applications must relate to disposals expected within one year from submission
- The ruling is final and non-appealable
The initial application costs SGD 660, covering the first 4 hours of processing. Thereafter, IRAS charges SGD 165/hour.
Complex cases may take longer to resolve.
Key Definitions
- Covered Entities include those within relevant groups—that is, groups with foreign presence. A Singapore-only group does not qualify unless it has overseas branches or establishments.
- Covered Income includes gains from assets like:
- Immovable property abroad
- Equity or debt securities in foreign markets
- Unlisted foreign shares
- Foreign loans
- Foreign IPRs
Modified Nexus Approach for Qualifying IPRs
The Modified Nexus Ratio is calculated as:
(QE × 130%) / (QE + NE)
Capped at 100%
Where:
- QE = Qualifying R&D expenditure
- NE = Non-qualifying expenditure
Tax-exempt portion of gains =
Total disposal gains × Modified Nexus Ratio
The taxable portion is the remaining gain after this exemption.
Adjustment to Open-Market Price
If a foreign asset is sold below market value, the Comptroller of Income Tax may recalculate the gain using this formula:
A + B – C
Where:
- A = Gain actually received
- B = Open-market price
- C = Sale price
This adjustment applies only when gains are received in Singapore. If none is remitted, the shortfall is not taxed.
Conclusion
Singapore’s introduction of Section 10L marks a turning point in how the jurisdiction approaches foreign-sourced gains. What was once considered a tax-neutral transaction now comes under closer scrutiny, especially for entities lacking substantial presence or purpose in Singapore. This move signals a broader commitment to transparency, fairness, and alignment with global tax norms. For businesses operating across borders, the message is clear: economic substance is no longer optional. As the tax lens sharpens, the focus must shift from avoidance to genuine value creation. Strategic foresight, careful structuring, and timely advisory will be critical as organizations navigate this evolving landscape.
