Withholding tax on dividends paid in Singapore
There are no withholding taxes on dividends in Singapore. Instead, dividends are taxed at the standard rate, and a tax credit is granted on the income tax on which the dividends are paid. If there is a difference between the amounts of the tax credit and the standard rate, the deficit must be paid in addition by the company paying the dividends, and not by the shareholder receiving them.
In the event of the payment of dividends by a Singapore company by a foreign parent company, no taxes will be levied in Singapore anymore under the following circumstances:
No underpayment: no Singapore taxes are levied on dividends when they are transferred to another jurisdiction, if income tax has already been paid on the income from which the dividend is paid. Underpayment refers to the imbalance of taxes paid in two jurisdictions (in Singapore and another country).
Double Taxation Avoidance Treaty: If dividends are paid in a jurisdiction with which Singapore has entered into a double taxation treaty, then the Singapore company is exempted from the obligation to recover tax differences.
Preferential tax treatment: If dividends are paid by a Singapore company that enjoys preferential tax treatment, the resident company is exempted from the obligation to recover tax differences under that regime.
Profit from a foreign source: if the dividend is received from profits earned and taxed abroad prior to earning in Singapore (for example, profits from a foreign subsidiary of a Singapore resident company). Even if there is a tax difference, no tax is payable under that difference in the event that a Singapore company transfers dividends to a foreign parent company.
Foreign Tax Credit: If dividends are received from a foreign subsidiary and are directed to a Singapore holding company and the foreign tax credits exceed the Singapore income tax liability, no tax liability on dividends transferred to the foreign parent company no longer arises in Singapore.
It should be noted that most of Singapore’s tax treaties contain clauses meaning that the foreign parent company of a Singapore subsidiary considers income received from the Singapore subsidiary (the full amount of income tax was paid in Singapore), the subsidiary can enjoy favorable fiscal concessions (10% tax) or the absence of income tax.
In the Asian region, Singapore can be considered a favorable jurisdiction for the establishment of holding structures. This is not surprising, because the country fought and maintains the status of a business-friendly jurisdiction based on the criteria of simplicity and ease of its establishment, the existence of a system of tax incentives and business support at the state level, guided by the principle “If business is good, the state is also good”.
A country needs to have four main criteria in order to be an attractive jurisdiction for creating holdings:
1. Withholding taxes on dividends received: Incoming dividends transferred by a subsidiary to a holding company must either be exempt from tax or be taxed at reduced rates in the jurisdiction of the subsidiary. This effect is achieved through the use of double taxation treaties signed by the countries of which the counter-parties are residents.
2. Income tax on dividend income received: dividend income received by a holding company from a subsidiary must either be exempt or taxed at low income tax rates in the jurisdiction of the holding company.
3. Capital gains from the sale of shares: the holding company’s gains from the sale of subsidiary shares should be tax-exempt or subject to low capital gains tax in the jurisdiction of the holding.
4. Withholding tax on dividends paid: Dividends paid by the holding company to the ultimate owner – the parent company must either be fully exempt from taxation or be taxed at the lowest withholding tax rate in the jurisdiction of the holding.
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