Until recently, Singapore had remained one of the most attractive jurisdictions for companies handling international investments, particularly because of its position on capital gains. Gains, even if remitted to Singapore, weren’t taxed if they were capital in nature. However, this changed significantly with effect from 1 January 2024. The revised approach now affects Singapore-based companies that receive foreign-sourced gains from asset disposals.
This blog dives into the implications of this policy shift, the nature of income affected, deductions allowed, and the importance of economic substance in determining taxability. If your company operates across borders, these changes are not just worth noting — they are worth preparing for.
What Has Changed?
Before 2024, capital gains — whether arising from Singapore or elsewhere — were generally not taxed in Singapore. That included income from selling foreign properties, foreign shares, or foreign intellectual property (IP).
However, under the new Section 10L of the Singapore Income Tax Act 1947 (ITA), the situation has shifted for companies that fall under the classification of “covered entities.” Starting from 1 January 2024, gains from the sale or disposal of foreign assets that are received in Singapore will be taxable if:
- The gains are not taxed under other provisions of the ITA (e.g., Section 10(1)), or
- The gains are exempt under the ITA.
These are now treated as foreign-sourced disposal gains and are taxable under specified conditions.
What Are Foreign-Sourced Disposal Gains?
Foreign-sourced disposal gains include profits earned from selling or disposing of movable or immovable property situated outside Singapore. These include:
- Overseas real estate
- Foreign equity or debt securities
- Unlisted foreign company shares
- Loans issued by entities in foreign jurisdictions
- Foreign intellectual property rights (IPRs)
In essence, any income arising from the disposal of assets located outside Singapore is potentially within scope.
When Do These Gains Become Taxable?
Taxation is triggered only when these gains are received in Singapore by a covered entity. This means that if a Singapore-incorporated business or branch receives funds from the sale of a foreign asset after 1 January 2024, and it doesn’t meet the necessary exemption criteria, those gains are taxed.
There is one crucial detail to remember:
If the disposal took place before 1 January 2024, even if the proceeds are received after that date, those gains will not be taxed.
Economic Substance Requirements
To determine whether tax applies, the law looks at whether the entity has adequate economic substance in Singapore. This test varies based on the nature of the business.
1. Pure Equity-Holding Entities
These entities:
- Derive income primarily from dividends or gains on shares
- Must file required regulatory returns
- Must be managed and operated in Singapore
- Should maintain an office and adequate staff locally
2. Other Business Entities
They must:
- Have business activities managed and executed in Singapore (either directly or outsourced)
- Maintain meaningful operations, including:
- Qualified employees based in Singapore
- Business spending that aligns with the income levels
- Decision-making functions situated locally
Failure to meet these economic substance tests can result in loss of exemption, thereby making gains taxable.
Deductions Allowed
Where a gain is taxed, businesses are allowed to claim deductions, but there are rules:
- You can deduct expenses incurred in acquiring, improving, or creating the asset
- You can claim losses from the disposal of other foreign assets
- However, no double deduction is allowed. If an expense was already claimed against another income, it can’t be claimed again
- If gains are received over multiple years, the deduction is split across years proportionally
Additionally, companies can claim foreign tax credits (FTC) to offset taxes already paid abroad. These can take the form of:
- Double taxation relief
- Unilateral tax credit
- Foreign tax credit pooling system
These credits must be claimed within four years from the year of remittance.
Special Treatment for Intellectual Property Rights (IPRs)
Not all assets are treated equally. The tax treatment of foreign IPRs is notably different:
- For qualifying IPRs (as defined in Section 43X of the ITA), a modified nexus approach applies
- This means only the portion of gain linked to actual R&D or IP development done by the taxpayer will be tax-exempt
- For non-qualifying IPRs, the entire gain will be taxed upon receipt in Singapore, regardless of economic substance
The rationale is to ensure tax benefits are provided only when there is a genuine connection between the IP income and real economic activity by the taxpayer.
Who Are the Covered Entities?
A “covered entity” is any member of a “relevant group” with an international presence. Even if one member of the group operates a branch or has business activities abroad, the entire group is considered relevant under Section 10L.
Importantly, Singapore-only groups with no foreign connection are excluded from these rules.
What Are the Exemptions?
There are carve-outs from Section 10L, including:
- Licensed banks, merchant banks, finance companies, and insurers
- Companies under tax incentive schemes like:
- Aircraft Leasing Scheme
- Financial Sector Incentive
- Global Trader Programme
- Maritime Sector Incentive, and more
- Entities that meet economic substance criteria in Singapore for the relevant basis period
These exceptions are designed to protect industries with already strong oversight or strategic value to Singapore’s economy.
ESR for Special Purpose Vehicles (SPVs)
SPVs often lack physical operations or staff. For these, ESR is tested at the holding entity level. If the holding company:
- Controls the SPV
- Benefits economically from it
- Determines the investment strategy
Then the holding entity is required to meet economic substance conditions.
Final Thoughts
The amendments to the ITA under Section 10L bring Singapore in line with global tax principles but also significantly increase compliance obligations for international businesses.
With income from foreign disposals now falling under the lens, businesses must carefully evaluate their asset holding structures, plan remittances wisely, and maintain solid documentation to defend economic substance.
As always, when in doubt, speak with a tax advisor who can help you navigate the specifics.
Need help evaluating your company’s exposure under the new Section 10L? Reach out to our tax team at knowledge@m2k.co.in.
