Smart Strategies: A Look at Taxable and Non-Taxable Income in Singapore

As a business owner in Singapore, it’s essential to understand what qualifies as taxable and non-taxable income to ensure compliance with tax regulations. Below is a detailed breakdown of key income types that business owners must be aware of.

Taxable Income:

1. Income Earned Locally: Any income derived from business operations within Singapore is taxable.
2. Income Earned Overseas: Income generated from foreign business operations, also known as foreign-sourced income, becomes taxable when it is remitted back to Singapore.
3. Interest from Company Fixed Deposits: Interest earned on fixed deposits held by a company in a local bank or other fixed-income investments is subject to taxation. However, if the fixed deposit is held under a personal name, it is not taxable.
4. Royalty Income: Corporations that own intellectual property (such as patents, trademarks, or copyrights) and license these assets to other businesses must pay taxes on any royalty income earned. This is particularly relevant for companies in sectors like technology, pharmaceuticals, and entertainment.
5. Gains of a Revenue Nature: Any income or gains that are considered revenue in nature are taxable.
6. Interest from Director or Subsidiary Loans: Interest earned from loans to directors or subsidiaries is taxable. If the loan amount exceeds S$10 million, the company must prepare a Transfer Pricing document.

Non-Taxable Income:

1. Non-Remitted Foreign Fixed Deposit Interest: Interest earned from fixed deposits held in a foreign country is not taxable unless it is remitted back to Singapore.
2. Capital Gains: Capital gains are not taxable.

Example: Mr. Kent, the owner of a noodle manufacturing business, plans to sell his factory to purchase a larger one. To determine whether the sale qualifies as capital gains, Mr. Kent must consider the following factors (or “badges of trade”):

• Nature of the transaction: Since Mr. Kent’s primary business is noodle manufacturing and not property trading, the sale of his factory would likely be considered capital in nature.
• Duration of ownership: A long-term holding of the property supports the argument that it was not purchased for trading purposes.
• Frequency of transactions: This is Mr. Kent’s first property sale, which indicates a non-trading purpose.
• Renovations or improvements: Mr. Kent has not undertaken any improvements to make the property more marketable, further suggesting the sale is not for profit-making purposes.
• Sale circumstances: The sale is part of an expansion plan for the business, which supports the claim that the sale is not for profit.
• Motive for purchase and sale: The property was originally purchased to support the noodle business, not for trading or income-seeking purposes.
• Financing: Mr. Kent used long-term financing to acquire the property, which is typical for investments, not for trading.

After considering these factors, Mr. Kent can conclude that the profit from the sale of his factory qualifies as capital gains, which are non-taxable. However, it’s important to consider all factors collectively rather than relying on just one.

3. Dividend Income:

Whether dividend income is taxable depends on the nature of the investment and the country’s tax regulations.

• Dividends from Singapore-listed stocks (excluding REITs) are not taxable.
• For Singapore REITs, taxation depends on specific SGX reports.
• Dividends under the one-tier tax-exempt system are non-taxable; otherwise, they are subject to tax.

Summary

1. Foreign source income is taxable when remitted back into Singapore.
2. Income that is revenue in nature is taxable.
3. Capital gains are non-taxable.
4. Dividend income may or may not be taxable, depending on the nature of  the stock and applicable regulations.