Taxation of gains from sale of foreign assets

      

Under the new Section 10L, gains from the sale or disposal of foreign assets on or after 1 January 2024 that are received in Singapore by an entity of a relevant groups will be treated as income chargeable to tax under Section 10(1)(g) of the Income Tax Act 1947, unless exceptions apply. Section 10L also applies when the gains are capital in nature or tax exempt. 

    

Section 10L applies to an entity that is a member of a relevant group, i.e., not all incorporated or established in Singapore, or if any entity in the group has a place of business such as a branch or a permanent establishment in more than one jurisdiction. 

    

Section 10L will not apply to gains from the sale or disposal of a foreign asset (not being a foreign IPR) when it is:

There a different economic substance requirements for Pure Investment Holding Entities (“PEHE”) and non-PEHE which are set out in detail in the IRAS e-Tax Guide. 

    

The IRAS e-Tax Guide also explains that the economic substance requirement will be determined based on an analysis of the entity’s core income generating activities in Singapore and be commensurate with the business model and scale of operations. The economic substance requirement has to be met in the year of disposal of the foreign asset rather than in the year the gains are received in Singapore, for the gains to be excluded from the scope of Section 10L. The economic substance requirement will typically be assessed at the entity level (with certain exceptions). 

    

Under Section 10L(6), Section 10L will not apply to a prescribed percentage of disposal gains relating to qualifying IPRs as defined in Section 43X of the Income Tax Act 1947. The prescribed percentage is arrived at based on the modified nexus approach, which seeks to establish a direct nexus between the income benefitting from the IP regime and the extent to which the taxpayer has undertaken the underlying research and development that generated the IP asset. 

     

For non-qualifying foreign IPRs, the full amount of the gains from the sale or disposal of the IPRs will be subject to tax when such gains are received in Singapore, regardless of whether the entity has adequate economic substance in Singapore. 

     

Given that the exclusion from Section 10L for disposal gains from foreign IPRs is available only for businesses benefitting from the IP Development Incentive, the application of the above exclusion appears to be fairly limited. This means that disposal gains of non-qualifying foreign IPRs received by businesses will likely be subject to tax under Section 10L when received in Singapore, even if the business is currently incentivized under a non-IP incentive (such as the Development and Expansion Incentive), or if it has economic substance in Singapore. 

    

The IRAS e-Tax Guide on Tax Treatment of Gains or Losses from the Sale of Foreign Assets provides further guidance on the application of Section 10L. Businesses can also consider an advance ruling to obtain certainty on the economic substance requirements when a proposed sale or disposal of a foreign asset is anticipated.