Structuring an M&A deal via Singapore

published on 24 February 2021 | reading time approx. 3 minutes

Singapore has been recognised as an international hub and a prime gateway to investing in Southeast Asia. A Singapore company holding businesses in the region can be advantageous to the group of companies as a whole and can be used for M&A deals or a company re-organisation.

Singapore’s stable political framework, the reliable legal system with an established rule of law, the business friendly tax environment, its efficient administration and vast network of “investment protection” and “double taxation” treaties make it an outstanding location for investments into the region to be structured and channeled through.

Even during the current Covid-19 pandemic, deals can still be closed electronically. Singapore has a digital-friendly administration (electronic filing is possible for most applications and documents) and electronic signatures are generally recognised, effective and binding on the parties under the Electronic Transactions Act.

This article discusses the tax considerations, stages of investment when structuring a deal through a Singapore holding company, and methods of dispute resolution in the country.

• Tax Considerations »

• Stages of Investment »

• Dispute Resolution »

Tax Considerations

Singapore’s tax system operates on a territorial basis. Foreign sourced income that is not derived from or remitted into Singapore is not subject to tax in Singapore. Singapore has a comparatively low corporate tax rate of 17 per cent with partial tax exemptions on the first 200.000 Singapore Dollar taxable income. Further tax reductions may be granted for qualifying businesses. Tax deductions are available on interest expenses incurred on funds used to purchase business assets. There are also tax incentives through the Approved Global Trader Program (reduced tax rate of 5 per cent or 10 per cent), Foreign Treasury Centre (reduced tax rate of 8 per cent), International/Regional Headquarters (reduced tax rate of 5 per cent or 10 per cent), enhanced deductions for qualifying research & development (R&DD) and writing down allowances for acquisitions of intellectual property.

There is no tax on capital gains and dividends distributed by a Singapore company are not subject to withholding tax. Unutilised capital allowances and trade losses may be carried forward indefinitely (subject to qualifying conditions).   

Singapore has a large network of Agreements for the Avoidance of Double Taxation (DTAs) which may further reduce the tax burden. Subject to conditions, investors can avail themselves of tax exemptions on incoming dividends, foreign branch profits, and foreign service income, as well as the certainty of non-taxation on capital gains derived from the disposal of investments^[1].

Here is an example for a commonly relied-upon tax exemption: SingCo has a subsidiary in Indonesia which earns income from the sale of oilseeds. IndoCo reports its income in its Indonesia tax returns and declares its after-tax profits as dividends to SingCo. If SingCo is a Singapore tax resident, these dividends are not subject to Singapore tax.

Another common reliance on a DTA: SingCo lends to IndoCo an interest-bearing loan. Because SingCo is a tax resident of Singapore, Indonesian withholding tax on the interest income received by SingCo is limited to 10 per cent under the Indonesia-Singapore DTA. Non-treaty rate of withholding is 20 per cent.

In Singapore, the tax residency of a company is determined by the place in which the business is controlled and managed^[2].  The residency status of a company may change from year to year. A Singapore-incorporated company may not necessarily be a Singapore tax resident. This should be considered when setting-up the structure for the deal.

Stages of Investment

If your deal is structured through a Singapore holding company, the horizon of your investment can be broadly seen in the following stages:

1. incorporation,
2. acquisition of your investment (including funding it),
3. doing business (repatriating profits) and
4. exit (divestment).

1. Incorporation

In Singapore, a company can be incorporated as quickly as within a week. Typically, investors choose to incorporate a private company limited by shares as it is easy to establish, has no restrictions on foreign ownership, may enjoy tax privileges and is governed by a flexible corporate framework. This flexibility can be used to finance the company as there are no thin capitalisation rules, to create different share classes with different entitlements, to easily increase the share capital and to transfer shares fast and efficiently.  

In addition to other common types of companies, Singapore has created a new legal entity for investment funds in the country through the Variable Capital Companies Act 2018 (which came into force in 2020). Variable Capital Companies can be established as a standalone fund, or an umbrella fund with multiple sub-funds and different portfolios.

In general there are no foreign exchange or currency restrictions on the remittance or repatriation of capital or profits in or out of Singapore.

Singapore is also commonly used as place of incorporation for a Joint-Venture company if the operating business is not in Singapore. Any corporate matters (e.g. financing, corporate governance, shareholder’s rights) would be subject to Singapore’s company laws and a potential dispute between the Joint-Venture parties could be settled under Singapore’s efficient court or alternative dispute resolution system.

2. Acquisition of your investment and available tax deductions

Acquisitions are generally by way of purchase of shares or transfer of business assets and liabilities. In Singapore, a sale and purchase agreement should be drafted by the lawyers.

Whether the deal is structured as an asset or share purchase depends on the

• nature of the investment,
• the subject of the investment (e.g. real estate or customer contracts),
• purpose of the investment (strategic or portfolio investment),
• horizon of investment (the expected length of holding), or
• the method of funding.

Singapore also offers flexibility in financing the deal. Consideration can be in cash, shares, debt (loans or promissory notes, including convertible loans) or a combination.

Common tax considerations around the share versus assets deal relates to the availability of tax attributes (e.g. losses, already negotiated tax incentives) in the target company and tax deductions on interest expenses. Broadly speaking, tax deductions are not available to a Singapore company who incurred interest expenses while funding its share acquisitions. On the contrary, interest expenses incurred to buy business assets (e.g. machines, real property) may rank for deductions. However, where a share deal is a prerequisite for the deal (e.g. seller only wants to dispose of shares), an asset deal may be done after the share deal to achieve similar outcomes.

3. Conducting business through the holding company

There is no limit on the movement of investment capital into or out of Singapore. In other ASEAN countries, restrictions on foreign investor ownership are stricter, such as in Thailand, Indonesia, the Philippines and Myanmar.

Deals can generally be closed using electronic means in Singapore, reducing the need for directors to travel in and out of the country. Contracts signed electronically can be valid and binding on the parties provided that a method is used to identify the person and to indicate their intention in respect of the information contained in the electronic record, and it was reliable for such a purpose^[3].

The prevailing corporate income tax rate of 17 per cent is comparatively lower than that in Singapore’s neighbouring countries. If SingCo is a tax resident holding company the foreign dividends received are generally exempt from tax if they are distributed from after-tax profits arising from an active business.

For the after-tax profits all of the following three conditions should be met:

• The foreign income had been subject to tax in the foreign jurisdiction from which they were received (known as the “subject to tax” condition). The rate at which the foreign income was taxed can be different from the headline tax rate;
• The highest corporate tax rate (foreign headline tax rate condition) of the foreign jurisdiction from which the income is received is at least 15 per cent at the time the foreign income is received in Singapore; and;
• The Controller is satisfied that the tax exemption would be beneficial to the person resident in Singapore.

Singapore does not impose withholding tax on dividends. It is quite common for companies to set up central functions like HR, Finance, Controlling in Singapore as English speaking qualified manpower can be easily sourced here. It is possible to charge license and service fees to the subsidiaries and business ventures in the region .

4. Exit from the investment

Singapore does not impose tax on capital gains. The certainty of non-taxation is granted if the divesting company holds at least 20 per cent of the ordinary shares in the investee company whose shares are being disposed, and the divesting company maintains the minimum 20 per cent shareholding in the investee company for a continuous minimum period of 24 months prior to the disposal.

If the above conditions are not met, it does not mean the gain is automatically taxable. Instead, its taxability is determined based on a combination of factors known as the badges of trade – nature of subject matter, length of ownership, frequency of transaction, supplementary work, circumstances of the realisation (divestment), motive, mode of financing.

In practice, it may be preferable to sell shares in a Singapore holding as opposed to selling the business venture in the region, which may be subject to foreign ownership restrictions, approval of local licensing authorities or simply a much more time consuming process. A new shareholder can be registered in Singapore within a few days.

Dispute Resolution

Singapore allows the parties to an agreement to freely choose the applicable law and jurisdiction. However, with respect to competition law, employment law, and company law Singapore laws will still apply. Singapore and the EU adopted the Hague Convention on Choice of Court Agreements, which allows an easier enforcement of court decisions.

For matters which parties wish to keep private, or where enforcement action may have to be taken in another jurisdictions the agreement can include an arbitration clause referring the dispute to the Singapore International Arbitration Centre (SIAC). Such clauses are increasingly common in corporate transaction documents in Singapore. SIAC is internationally recognized and the most preferred arbitral institution in Asia. It has an excellent record of enforcement in different countries under the New York Convention and an experienced international panel of arbitrators from over 40 jurisdictions^[4]. Alternatively, mediation can be carried out at the Singapore International Mediation Centre (SIMC). The Singapore Convention on Mediation (adopted 20 December 2018) provides for recognition and enforcement of mediated settlement agreements across countries which are signatories to such a Convention.