Withholding Tax On Certain Payments To Non-Residents

Need to know:

• What is withholding tax?
• What is Singapore-sourced or deemed Singapore-sourced Income?
• What are non-resident and permanent establishments?
• Types of specific payments to non-resident (type of income)
• Does the payee need to know the payer’s residency before payment is made?
• Finalisation of non-resident’s tax liability
• General exemption or withholding tax reductions or waivers
• Certificate of Residence

In this article we focus on corporations.

What is Withholding tax? 

In a nutshell, deductions on CERTAIN gross payments (detailed below) made by Singapore residents or permanent establishments (payer) to non-resident companies or individuals (payee) must be withheld and paid to the Inland Revenue Authority of Singapore (IRAS). 

This deduction  is known as withholding tax, a tax collection mechanism to facilitate the collection of taxable from non-resident on specified categories Singapore sourced or deemed Singapore sourced Income.

Payment between Singapore tax resident companies

No withholding tax applicable for payments made between Singapore tax resident companies.

Payment by non-resident companies to Singapore tax resident companies

In a case where a non-resident company (A) pays a Singapore resident company (B) for B’s business in Singapore, the income is a  Singapore sourced income and is liable for tax in Singapore. Withholding tax is not applicable in this situation..

Payment by Singapore tax resident companies to non-resident companies 

Example, a Singapore resident company (B) obtains a loan from a non-resident company (A) and B pays A interest on the loan, the interest payment is deemed Singapore sourced and falls under the specific categories of payments liable to withholding tax. 

B is required to withhold a prescribed percentage of A’s interest payment and pay  to IRAS within the stipulated deadline.

What is Singapore-sources or deemed Singapore-sourced Income?

In Singapore, certain income is deemed sourced in Singapore and thus subject to withholding tax under Section 12 of the Singapore Income Tax Act (‘Act’). The purpose of this section is to enable a tax liability to be attached for a payment to a non-resident company.

Singapore withholding tax is only applicable to non-resident companies or individuals for: 

• Income derived from a Singapore source;
• Services provided or work done in Singapore; and
• Specific types of payments 

What are non-resident and permanent establishments (PE)?

Non-resident company

In Singapore, the tax residence of a corporation is determined by the place where the  management and control of its business is exercised  in making of decisions on strategic matters such as those relating to company policies and strategies.  This is taken generally to mean the place where the directors meet  or where de facto control is exercised, e.g. where the CEO and CFO resides. 

A company is considered a non-resident of Singapore when the control and management of the company is not exercised is Singapore.  

Does place of incorporation determine its tax residency? 

No, place of incorporation is not necessarily indicative of the tax residence status of a company 

Permanent establishments (PE)

Singapore’s double taxation agreement (DTA) defines PE largely based on the OECD Model Tax Convention.

The term “permanent establishment” includes, but is not limited to, a place of management, a branch or office, a factory, a workshop, a work shop, a building or work site, a construction, installation, or assembly project, a place of extraction of natural resources, etc.

Generally, a PE is not relevant, except for treaty purposes, as Singapore taxes based on source of income rather than the presence of a PE.

PE is defined broader in Singapore tax law than in most DTAs; however, as discussed above, this is largely irrelevant where treaties  take precedence.

Types of specific payments to non-residents 

Section 12 of the Income Tax Act includes the following specific categories of payments (sourced or deemed to be sourced in Singapore) that are subject to withholding tax when paid to non-resident companies. Example:

Interest, commissions or fees in connection with any loan or indebtedness	Royalties or other payments for the use of or the right to use any movable property
Rent or other payments for the use of any movable property	Payment of management / Directors fees
Distributions from a real estate investment trust (REIT)	Payments for the purchase of real property from a non-resident property trader
Payments for the use of or the right to use scientific, technical, industrial or commercial knowledge or information or for the rendering of assistance or service in connection with the application or use of such knowledge or information	Payments made from structured products (other than payments which qualify for tax exemption under Section 13(1)(zj) of the Income Tax Act 1947)

For comprehensive categories of payments and withholding tax rates refer to IRAS websites 

Does the payee need to know the payer’s residency before payment is made?

Singapore residents must determine whether recipients reside in Singapore prior to making payments. If the payee believes a payment is payable to a non-resident of Singapore, the payee must withhold and account for the withholding tax within the IRAS stipulated time. 

It is the payee’s responsibility to determine if payments are made to residents or non-residents.

Finalisation of non-resident’s tax liability

The law has divided withholding taxes in to two major categories namely: 

• Final withholding taxes
• Non final withholding taxes

Final tax rate is the reduced rate of say 10 to 15 percent and it applies on the gross payment. The following conditions need to be met  for a reduced rate to apply;

1. Payment is not derived from any trade, business, profession or vocation carried on in Singapore by the non-resident company; and
2. The payment is not effectively connected with any PE of the non-resident company in Singapore.

Under the final tax regime, the non-resident company does not file corporate tax return to IRAS and thus the non-resident company cannot claim tax deductions on business expenses on the Income derived. 

The prevailing corporate tax rate (17%) will apply if the above mentioned are NOT satisfied

Under the non-final tax rate regime, the non-resident recipient can submit certified accounts and tax computation with IRAS to claim deduction for expenses wholly and exclusively incurred in the production of the relevant income and to claim a refund of any tax overpaid. In this case the non-resident company will be subject to a withholding tax rate of 17% (prevailing corporate tax rate) which is the non-final tax rate.  Lower withholding tax may apply as specified in the DTA

General exemption or withholding tax reductions or waivers

Certain income and payments may be exempted from tax or be subjected to a reduced rate of withholding tax as provided for under the Income tax act, under Singapore’s tax treaties and economic Expansion Incentives Act. 

Lower rates may apply if the non-resident person is a tax resident of a country or territory which has a tax treaty with Singapore. Singapore has signed Avoidance of Double Taxation Agreements (DTAs) with many major jurisdictions including Australia, China, France, Germany, Japan and UK  that reduce or waive withholding taxes.

Certificate of Residence

It is necessary for the payer to obtain a Certificate of Residence (COR) from the payee certifying that the payee is a resident of the DTA country  for the applicable year and submit it to IRAS in order to be eligible for the reduced / waived withholding tax.

If you any queries with regards to withholding tax and related payments we will be happy to assist.

It is not intended to exhaustively address all the possible tax issues that may arise. Instead, this information is intended to provide a better general understanding of taxpayers’ tax obligations. Despite our best efforts, this information is not legal or practice-specific and you should seek professional advice.