Income Tax – Certainty of Non-Taxation of Companies’ Gains on Disposal of Equity Investmnts


 

Dear Friends and Business Associates,

The Inland Revenue Authority of Singapore issued a new E-tax Guide on “Certainty of Non-Taxation of Companies’ Gains on Disposal of Equity Investments” (“the new rule“) on 30 May 2012.

By way of background, this new rule was introduced in 2012 Budget to give upfront tax certainty on gains derived by companies from their disposal of equity investments with effect from 1 June 2012.

Prior to the new rule, gains derived by a company from the disposal of its equity investment would be subject to income tax in Singapore if it is determined that such gains are revenue in nature.   In practice, the determination, which is a question of facts, is not an easy exercise from taxpayers’ and tax practitioners’ perspective and it could result in a length tax dispute to be resolved with the IRAS.

Under the new rule, gains derived by a company (known as “divesting company“) from its disposal of ordinary shares in an investee company are not taxable if immediately before the disposal, the divesting company had held at least 20% of the ordinary shares in the invest company for a continuous period of at least 24 months.

In this context, the divesting company can be either a company incorporated in Singapore or elsewhere and it does not matter if it is a listed or an listed company.  On the other hand, the new rule does not apply if the investee company is an unlisted company and is in the business of trading or holding Singapore immovable properties (other than the business of property development).

As in other income tax concession, there is a sunset clause for this new rule, i.e. 31 May 2017.

If based on the facts of the case, the new rule is not applicable, the normal tax rule will continue to apply in determining the nature of gains or losses from disposal of equity investments.

To avail of the rule, the divesting company must complete the necessary information in its Form C for the relevant year of assessment.  While it is not required to furnish any supporting documents at the time when Form C is filed, it has to furnish supporting documents upon IRAS’ request.

What does this mean to you?

We welcome the new tax rule as an initiative to provide taxpayers with upfront tax certainty on the disposal of equity investments.  It allows taxpayers to carefully plan their divestment of equity investments ahead so as to benefit from the application of the new rule.  Having said that, it is important for taxpayers to prepare sufficient documentation to demonstrate that the conditions for the new rule have been satisfied.

As for accredited tax professionals, we will wait for the draft bill for the amendment to the Income Tax Act to see if there are any inconsistencies between the IRAS’ interpretation of the new rule and the actual words used in the proposed legislation.

If you have any questions or comments on this alert, please contact us at me jack.wong@whm-consulting.com.

Best regards
Jack HM Wong, FCPA Singapore
Accredited Tax Advisors (Income Tax and GST)
Founder and Lead Business & Tax Advisor
WHM Consulting Pte Ltd
E-mail: jack.wong@whm-consulting.com
LinkedIn: http://sg.linkedin.com/in/jackhmwong
Website: http://www.whm–consulting.com
Facebook Fan Page: http://www.facebook.com/WHMConsulting

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