Singaporean Holding Companies:

For a country to be an attractive location in which to set up a holding company

4 Criteria must be satisfied:

Withholding Taxes on Incoming Dividends: Incoming dividends remitted by the subsidiary to the holding company must either be exempted from or subject to low withholding tax rates in the subsidiary jurisdiction. This is usually achieved by having in place a double taxation treaty to which the subsidiary and holding company jurisdictions are parties.

Corporate Income Tax on Dividend Income Received: Dividend income received by the holding company from the subsidiary must either be exempted from or subject to low corporate income tax rates in the holding company jurisdiction.

Capital Gains on the Sale of Shares: Profits realized by the holding company on the sale of shares in the subsidiary must either be exempt from or subject to a low rate of capital gains tax in the holding company jurisdiction.

Withholding Taxes on Outgoing Dividends: Outgoing dividends paid by the holding company to the ultimate parent corporation must either be exempt from or subject to low withholding tax rates in the holding company jurisdiction.

By these criteria Singapore is a relatively attractive jurisdiction in which to set up a holding company although not the most attractive.

Withholding Taxes on Incoming Dividends:

An extensive network of double taxation treaties reduces the rate of withholding taxes levied on dividends remitted by the foreign subsidiary to the Singaporean holding company from a standard rate of 20% to a rate which stands at between 10%-15%. Singapore has approximately 44 double taxation treaties in place. (Denmark has 78 and the UK has 110). The greater a country's network of double taxation treaties the greater its leverage to reduce withholding taxes on incoming dividends. An elaborate network of double taxation treaties is thus a key factor in the ability of a territory to develop as an attractive holding company jurisdiction.

Singapore has signed double taxation treaties with Australia, Bahrain, Bangladesh, Belgium, Bulgaria, Canada, Czech Republic, Chile, Denmark, France, Finland, Germany, Hungary, India, Indonesia, Israel, Italy, Japan, Latvia, Luxembourg, Malaysia, Mauritius, Mexico, the Netherlands, New Zealand, Norway, Oman, Pakistan, Papua New Guinea, the Philippines, Poland, Republic of China, Saudi Arabia, South Africa, South Korea, Sri Lanka, Sweden, Switzerland, Thailand, United Arab Emirates, United kingdom, Vietnam & United States. (The USA will not agree to grant tax-sparing credits to income remitted from a Singaporean subsidiary to a USA parent corporation and accordingly the treaty signed between both countries only covers air and shipping matters).

Corporate Income Tax on Dividend Income Received:

The amount of corporate income tax payable on dividend income received by a Singaporean holding company from a foreign subsidiary depends on whether or not the dividend remittances come from a subsidiary resident in a jurisdiction with which Singapore has signed a double taxation treaty:

Double Taxation Treaty: If the dividend remittances come from a jurisdiction with which Singapore has signed a double taxation treaty they receive the following fiscal treatment:

Exemption Method: Depending on the terms of the double taxation treaty the dividends may be completely exempted from an assessment to corporate income tax in Singapore. Exemption is only granted in respect of certain categories of income.

Credit Method: If the dividend income is not fully exempted from corporate income tax under the terms of the double taxation treaty then corporate income tax is payable in Singapore but the amount is reduced or eliminated altogether through tax credits. Singaporean corporate income tax is payable on the full value of the foreign profits out of which the dividends were paid. Against this Singaporean corporate income tax liability must be credited the full value of the tax paid in the foreign jurisdiction. If the foreign tax credit exceeds the Singapore tax liability then no further corporate income tax is payable in Singapore on the value of the dividends remitted.

Where a double taxation treaty has been signed the tax credit is composed of the full value of all the withholding taxes and corporate income taxes paid in the foreign jurisdiction on the dividends remitted. The result is that for all intents and purposes dividend income is often tax-free in the hands of the Singaporean holding company.

No Double Taxation Treaty: When the dividends are remitted from a jurisdiction with which Singapore has not signed a double taxation treaty tax credits are only available if the Singaporean holding company owns at least 25% of the shares of the foreign corporation. Furthermore the tax credits only include the corporate income tax paid in the foreign jurisdiction. Thus the amount of corporate income tax payable on dividends received by a Singaporean holding company from a foreign subsidiary depends largely on whether or not the subsidiary is resident in a jurisdiction with which Singapore has signed a double taxation treaty.

Capital Gains Tax on the Sale of Shares

In Singapore capital gains tax is only levied on:

Real estate purchased and sold within 3 years.

The profitable sale of assets whose purchase and re-sale is so short-term as to be deemed speculative.

Companies whose business activity consists in the repeated purchase and sale of capital assets for profit.

Where assets are owned by a company and their sale is effected by transferring ownership of the shares in the company a capital gains tax charge may also arise.

In practical terms this is likely to mean that no capital gains tax is levied on the profitable sale by a Singaporean holding company of its shares in a foreign subsidiary.

In Singapore's 2006 budget, tax exemption was granted on gains on disposal of shares in subsidiaries, subject to certain conditions.

Withholding Taxes on Outgoing Dividends:

In Singapore there are no withholding taxes levied on dividends. Instead dividends are taxed at 20% with a tax credit being given for any corporate tax levied on the profits out of which dividends are paid. Where there is a shortfall between the tax credit and the 20% charge the shortfall must be made up by the company paying the dividend and not by the shareholder receiving it.

Where a dividend is paid out by a Singaporean company to a foreign parent corporation no further taxes will be levied in the following circumstances: No Shortfall: Dividends will not suffer any further Singaporean taxes on remittance to a foreign jurisdiction if 20% corporate income tax has already been levied on the profits out of which the dividends are being paid.

Double Taxation Treaty: If the dividends are flowing to a jurisdiction with which Singapore has a double taxation treaty then the Singaporean company is exempted from the need to make up any shortfall arising.

Concessionary Tax Regime: If the dividends are flowing from a Singaporean company which is subject to a concessionary tax regime then the resident company is exempted from the need to make up any shortfall in so far as the shortfall relates to the concessionary tax regime.

Foreign Source Profits: If the dividends are from income earned and taxed abroad prior to being remitted to Singapore (e.g. the foreign branch profits of a Singaporean resident company) then even if there is a shortfall no tax is payable on the shortfall when the Singaporean company remits dividends to its foreign parent corporation.

Foreign Tax Credits: Where the dividends have flowed from a foreign subsidiary to a Singaporean holding company and the foreign tax credits exceed the Singaporean corporate income tax liability no further taxes are payable in Singapore on dividends remitted to the foreign parent corporation.

(N.B. Tax Sparing Provisions: Most of Singapore's tax treaties contain tax sparing provisions, meaning that the foreign parent corporation of the Singapore subsidiary treats income received from its Singapore subsidiary as if the full amount of corporate income tax had been paid in Singapore (i.e. 20%) even though the subsidiary was subject to a number of favorable fiscal concessions which meant it paid little (usually 10%) or no corporate income tax. The USA will not sign a full tax treaty with Singapore principally because of its refusal to accept tax-sparing credits).

Singaporean Holding Companies V Danish Holding Companies:

Since Denmark is currently the benchmark holding company jurisdiction which other holding company jurisdictions seek to emulate a comparative assessment of the 2 jurisdictions is a useful exercise:

Withholding Taxes on Incoming Dividends

A Danish holding company enjoys 2 key advantages over its Singaporean counterpart in terms of its ability to reduce the rate of withholding taxes levied on incoming dividends remitted from a foreign jurisdiction:

Double Taxation Treaties: Denmark has 78 double taxation treaties in place whereas Singapore has only signed 43. Double taxation treaties are the principal means by which a holding company can reduce the level of withholding taxes levied on dividends flowing out of the subsidiary jurisdiction.

EU Parent-Subsidiary Directive: This directive exempts from withholding taxes dividends remitted by a resident EU subsidiary to a resident EU holding company provided the EU resident holding company owns at least 25% of the shares of the EU resident subsidiary for a minimum period of 24 months prior to the dividend distribution. Since only EU states can benefit from this directive Denmark enjoys a key advantage over Singapore in terms of its ability to reduce withholding taxes on dividends remitted by an EU resident subsidiary.

Thus in terms of reducing withholding taxes levied on incoming dividends the Danish holding company is a considerably more attractive vehicle than its Singaporean counterpart.

Corporate Income Tax on Incoming Dividends

In Denmark dividend income received by a Danish holding company is exempted from corporate income tax irrespective of the existence of any double taxation treaties & domestic arrangements and irrespective of the jurisdiction in which the foreign subsidiary is located, provided that the Danish holding company meets the "participation exemption criteria" in that for a minimum period of 12 months prior to the dividend distribution it holds at least 25% of the shares of the foreign subsidiary (which subsidiary must not be deemed a "financial company").

In Singapore there are no "participation exemption criteria" but the level of corporate income tax levied on incoming dividends depends on the existence or non-existence of double taxation treaties with considerably more favorable treatment being given to remittances that flow from a subsidiary resident in one of the 43 jurisdictions with which Singapore has signed a double taxation treaty.

Thus from the point of view of corporate income tax levied on incoming dividends the Danish holding company is a much more flexible and attractive vehicle than its Singaporean counterpart.

Capital Gains on the Sale of Shares:

A Danish holding company is exempt from any capital gains on the profitable sale of shares in a foreign subsidiary provided that it has held at least 25% of the foreign subsidiary shares for a minimum period of 3 years prior to the disposal and provided the foreign subsidiary is not deemed a "financial company".

In Singapore the capital gains tax liability is not defined by any participation exemption criteria. Capital gains tax is only levied on: Real estate purchased and sold within 3 years.

The profitable sale of assets whose purchase and re-sale is so short-term as to be deemed speculative.

Companies whose business activity consists in the repeated purchase and sale of capital assets for profit.

Where assets are owned by a company and their sale is effected by transferring ownership of the shares in the company a capital gains tax charge may also arise.

In practical terms this is likely to mean that no capital gains tax is levied on the profitable sale by a Singaporean holding company of its shares in a foreign subsidiary with the consequence that in this respect a Singaporean holding company is a marginally more attractive vehicle than its Danish counterpart.

Withholding Taxes on Outgoing Dividends:

In Denmark no withholding taxes are deducted from outgoing dividends irrespective of the existence or non existence of a double taxation treaty and provided the ultimate foreign parent corporation holds at least 25% of the shares in the Danish holding company for a minimum period of 12 months.

However the company does not need to make up any shortfall where the shortfall results from a concessionary fiscal regime granted locally, where the parent corporation is resident in a jurisdiction with whom Singapore has signed a double taxation treaty and where the dividend income represents income earned outside Singapore by a Singapore resident company or its branch.

Which jurisdiction is preferable depends on individual circumstances. However in practical terms it seems that in terms of withholding taxes levied on outgoing dividends there is little to distinguish the jurisdictions.

Version date: 07.05.06