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A simple guide to corporate tax for Singapore startups

Dr Biz • Sep 07, 2020

Singapore has one of the most hospitable corporate tax regimes in the world. Its many attractions include a highly competitive flat rate of 17%, no capital gains tax at all, and a comprehensive double taxation treaty that means companies do not have to pay tax in more than one jurisdiction. On top of that, Singapore offers some highly attractive tax incentives to startups which, combined with Singapore’s position as a gateway to Asian markets, makes the city state truly one of the best places in the world to launch a new business.

Startup-specific tax breaks

To help new businesses channel more of their income toward growth and development, the Singapore government offers startups big tax breaks in their first three years of operation. During this period, new companies incorporated in Singapore pay corporate tax on just a quarter of the first S$100,000 of income they earn and then they pay tax on just half of the next S$100,000.

This means that a startup in Singapore would pay corporate tax on just $75,000 of the first $200,000 they earn, which works out to $12,750 at the current flat rate of 17%. This applies to each of the first three years of operation as long as the startup is incorporated in Singapore, a tax resident in Singapore and has no more than 20 shareholders with one individual owning 10% of the total share capital alone.

For a startup with an income of S$1 million per year, the above tax breaks work out to the following effective tax rates:

If, for some reason, you missed the startup tax breaks the first time around, businesses incorporated in Singapore that have not previously claimed the three year exemptions listed above are able to claim a Partial Tax Exemption for Companies. This allows businesses to apply for exemption of up to $102,500 on the first $200,000 of their taxable income.

Fully deductible expenses, including dividends

Another big benefit of the corporate tax system in Singapore for startups and established businesses alike is that tax is taken from income after all expenses that have been incurred generating that income have been deducted. This includes any business costs that contribute directly to the income of the company (see IRAS for more), such as the salaries paid to staff as well as other operational costs. Moreover, the dividends that Singapore companies pay to shareholders are completely tax free. This is potentially a big bonus for small business owners who could choose to be paid in dividends to make their personal income as tax efficient as possible.

Tax breaks on international income

To make sure Singaporean companies are not penalised for doing business abroad, Singapore also employs a comprehensive double taxation system. Under the Avoidance of Double Taxation Agreement (DTA), the city state has tax treaties with more than 80 countries that mean that, if a company pays tax in that country, it does not have to pay tax in Singapore and vice-versa.

In 2009, the government boosted this support further by awarding Unilateral Tax Credits to companies doing business in countries not covered by the tax treaty, which they can apply to the foreign-sourced income they paid tax on in another country. In addition to this, a company that is resident for tax in Singapore is also exempt from paying taxes on certain foreign income altogether, such as foreign dividends, foreign branch profits and service income, (with certain conditions).

No capital gains tax

Finally, one of the biggest boons for startups incorporated in Singapore is that they do not have to pay tax on the profit they make from selling part or all of their businesses. This compares to jurisdictions like the UK, where business owners have to pay up to 20% tax on a portion of the profits they make on the sale of any part of their business. This is a big, big bonus for startups with their eye on a fairly quick sale of the company, or asset rich businesses that might look to dispose of property in the future.

Of course, that tax tail should never wag the business dog, however; Singapore’s highly attractive corporate tax system is certainly a big bonus for any company that does decide to set-up shop in Singapore. Regular readers of the Dr Biz blog will also know tax is just one of many, many factors that makes Singapore one of the world’s leading startup hubs.

At Dr Biz, we provide tailored and comprehensive solutions for our client's business needs. From incorporation to accountancy, tax and payroll, to professional advisory services, we help businesses in Singapore assess potential risks and become more cost effective and efficient.

To find out more, please feel free to contact us.

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