Question

TAX Main Assignment:

Your client is planning to set up an investment company (private limited) in Singapore in mid 2018. Their funds will be invested in shares of public listed companies and also on real properties. But they are in a dilemma on whether to set up an investment holding or investment dealing company. Some of your client’s friends have prompted that the tax treatment between the two are different.

However your client’s intention is to minimise their tax obligations in Singapore from their business venture.

Prepare a short write up (not exceeding 1,500 words) by identifying the key differences between investment holding and investment dealing based on tax treatment and also on advising them appropriately on which will be the optimum set up that will meet your client’s intention. In your discussion include the following:

1) The deductibility of expenses;

2) The application of capital allowances;

3) The restrictions of Section 10E of SITA;

4) The application of business loss if any;

5) The operations of Section 10(1)(a),10(1)(d) and 10(1)(f) 6) Your final advice on the decision to set up an investment company.

Answer 1

Investment Holding Company

An investment holding company refers to a company that owns investments such as properties and shares for long-term investment and derives investment income ("non-trade income") such as dividend, interest or rental income. The company's principal activity is that of investment holding.

An investment holding company is different from an investment dealing company. An investment dealing company refers to a company that owns investments such as properties and shares as a form of trading stock to derive trade income from the purchase and sale of these investments, e.g. gain on sale of real properties and shares. Unlike an investment holding company, the company's principal activity is that of investment dealing.

Deductible expenses are expenses that are attributed to the investment income. These may be incurred directly, indirectly, or in accordance with statutory and regulatory provisions.

These are expenses directly incurred to earn investment income and are deductible against the respective source of investment income. Examples are: Cost of collecting rent (for rental properties), Interest expenses (on loan taken to acquire investments such as shares and property), Insurance (for rental properties), MCST management fees (for rental properties), Property tax (for rental properties), Repair and maintenance (for rental properties)

Generally, indirect expenses incurred are not deductible. However, as a concession, indirect expenses not exceeding 5% of the company's gross chargeable investment income is deductible. Examples are: Administrative and management fees, Directors' fees, General expenses, Office rental, Office telephone charges, Office water and light charges, Staff salaries, allowances, bonus and approved provident fund contributions, Transport expenses (exclude motor vehicle expenses on S-plated cars which are not deductible)

These are expenses incurred in accordance with statutory and regulatory provisions, such as the Companies Act. Some examples are Accounting fees, Annual listing fees, Audit fees, Bank charges, Income tax service fees, Printing and stationery, Secretarial fees.

Non-Deductible Expenses for Investment Holding Companies

Expenses that are capital in nature and expenses attributable to investments that do not produce any income are not deductible. Some examples are: Cost of new assets for the investment property such as refrigerator, air-conditioner, washing machine, furniture and fittings.

• Stamp duty and legal fees incurred for the purchase of investments.
• Interest expense incurred to acquire shares that have not yielded dividends.
• Commission, advertising, legal costs incurred to secure the first tenancy.

Tax Deductions/Claims

An investment holding company is not entitled to claim capital allowance as it is not carrying on a trade or business. Only fixed assets purchased to replace existing fixed assets can be claimed as deductible expenses.

Investment holding companies cannot carry forward any unutilized losses to offset the income of future years of assessment.

Investment holding companies cannot transfer (to other companies in the same group) current year unutilized losses arising from excess of expenses over investment income under the Group Relief system.

Investment holding companies may transfer current year unutilized Industrial Building Allowance, Land Intensification Allowance and donations to other companies in the same group under Group Relief system.

>> Investment holding companies incorporated after 25 Feb 2013 are not eligible to claim Tax Exemption for New Start-up Companies.

Investment Dealing Company

A company that is carrying out the business of deriving investment income as a trade is taxed as though its business activities constitute a trade. The company’s income is determined under section 10E of the Income Tax Act and is taxed as a trading income. Whether a company is an investment dealing company or an investment holding company is a question of fact and the IRAS will look at the facts and business activities to determine this.

Deduction of expenses is less restrictive for an investment dealing company than for an investment holding company. The following rules apply to determine the deduction of its expenses:

(a) Any outgoings or expenses incurred in respect of investments which produce income are deductible.

(b) Any outgoings or expenses incurred in respect of investments which produce income are only deductible against the income derived from such investments. The balance of any outgoings and expenses which cannot be set-off in that year shall be disregarded; and

(c) It is allowed to claim capital allowances under the Income Tax Act for plant and machinery used to derive its income. The balance of any allowances which cannot be set off in that year shall be disregarded.

As the investment dealing company is carrying out a trade, it would be able to enjoy the benefits of the Productivity and Innovation Credit Scheme. It is also able to claim the full tax exemption for the first 3 Years of Assessment after incorporation.

Group Relief is however not available as any losses and capital allowances which are not utilized are disregarded.

Now, Application of Section 10E.

Section 10E is effective from the YA 1996. It applies to the following entities: A company w.e.f. 13 Oct 1995; the trustee of a property trust w.e.f. 10 Dec 2002; a partner of an LLP2 w.e.f. 11 Apr 2005; a partner of an LP2 w.e.f. 4 May 2009.

Whether an entity is carrying on the business of the making of investments is a question of fact. An entity claiming to be carrying on such a business must satisfy the Comptroller of this fact based on its activities. Once an entity has satisfied this fact, it may then apply the provisions of section 10E to determine its income derived from its business of making investments from that YA onwards. The income so determined is chargeable to tax under section 10(1) (a) of the ITA.

Investments include securities and immovable properties. The business of making investment includes a business of letting immovable properties and a business of letting service apartments.

Under section 10E, the following rules shall apply when determining the income of the entity derived from its business of making investments:

(a) Any outgoings or expenses incurred in respect of investments which do not produce any income are not deductible;

(b) Any outgoings or expenses incurred in respect of investments which produce income are only deductible against the income derived from such investments. The balance of any outgoings and expenses which cannot be set off in that year shall be disregarded;

(c) The capital allowances under sections 19, 19A, 20 and 21 are only deductible against the income derived from investments which produce income. The balance of any allowances which cannot be set off in that year shall be disregarded;

(d) The IBA under sections 16, 17 and 18 of the ITA are only deductible against the income derived from investments which produce income. But any IBA which cannot be fully utilized by the entity in a YA is not disregarded. If there is other income (e.g. passive interest income) within the same YA, it can be offset against that income and any balance can be carried forward to the next YA subject to the relevant same business test 3 and shareholding test 4 (if the entity is a company). Instead of being carried forward, the current year balance of IBA can also be eligible for group relief with effect from YA 2007.

Final Decision

As per Section 10E states that it applies to only Investment Dealing Company, Client should go with Investment Holding Company, as he wants to minimize tax obligations.