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Tax Exemption for Startup Companies in Singapore
Tax Exemption for Startup Companies in Singapore
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Singapore Tax Exemptions for Small Companies [New as well as Existing Companies]
Table of Contents
Introduction
Singapore is among the best countries to start and operate a business. The incorporation procedure is easy and fast. The city-state has been continuously introducing pro-business policies to maintain its reputation as a dominant start-up hub.
SUTE (Start-Up Tax Exemption) scheme was introduced by IRAS (Inland Revenue Authority of Singapore) in YA (Year of Assessment) 2005. IRAS is the Singapore government's statutory board that administers tax collection in Singapore. The SUTE scheme was launched to promote entrepreneurship and assist Singapore-registered businesses to establish and grow in Singapore.
What is the Start-Up Tax Exemption Scheme?
Singapore government keeps introducing new incentives and schemes to help Singapore-incorporated businesses focus on their expansion and growth. Start-Up Tax Exemption Scheme or SUTE scheme provides special tax exemption to qualifying start-ups for their first three Years of Assessments. It provides tax relief to the company by reducing their corporate tax rates.
When the scheme was introduced in 2005, it provided an exemption for the first S$300,000 of the company's net chargeable income. However, the scheme was revised in Budget 2018, and now the exemption applies to the first S$200,000 of the company's net chargeable income. However, the changes in the tax exemption scheme are applicable from the YA 2020. It gave rise to two different scenarios for tax exemption for qualifying companies.
Amount of tax exemption under SUTE
For companies with any of their YAs in 2019 or before:
For companies with any of their three Years of Assessment in 2020 or afterward:
Table 1.1 and 1.2 gives you a clear insight into the total amount exempted under the scheme.
Table 1.1
Chargeable Income |
Tax Exemption % |
Amount Exempted |
| S$100,000 | 100% | S$100,000 |
| Next S$200,000 | 50% | S$100,000 |
The following data states that the maximum exemption a company can enjoy in each YA is S$200,000.
Table 1.2
Chargeable Income |
Tax Exemption % |
Amount Exempted |
| S$100,000 | 75% | Next S$100,000 |
| Next S$200,000 | 50% | S$50,000 |
The following data states that the maximum tax exemption for each Year of Assessment is S$125,000.
Examples
The first three Years of Assessment of a qualifying company are YA 2018, YA 2019, and YA 2020. What maximum amount can the company claim under the Start-Up Tax Exemption Scheme?
Let's take a look at the maximum exemption for each YA in the table below.
Table 1.3
Year of Assessment |
Chargeable Income |
Tax Exemption % |
Amount Exempted |
Total Exemption |
| 2018 | S$100,000 | 100% | S$100,000 | S$200,000 |
|---|---|---|---|---|
| S$200,000 | 50% | S$100,000 | ||
| 2019 | S$100,000 | 100% | S$100,000 | S$200,000 |
| S$200,000 | 50% | S$100,000 | ||
| 2020 | S$100,000 | 75% | S$75,000 | S$125,000 |
| S$100,000 | 50% | S$50,000 |
The revision in the Start-Up Tax Exemption scheme takes effect from YA 2020. Therefore, companies could enjoy the tax exemption for YA 2018 and 2019 as per the old scheme.
Qualification Criteria for SUTE
All start-ups that comply with the following criteria become eligible for the tax exemption under the SUTE scheme.
Also, it is essential for a company to meet one of the following conditions to qualify for tax exemption for start-up companies:
Difference between tax-resident and non-tax resident in Singapore
A company is a tax-resident in Singapore if it has exercised its control and management in Singapore for the preceding YA. Control and management here refer to the taking decisions regarding the company's strategies and policies. In simpler terms, the company's board meeting's location determines whether a company is a tax-resident or non-tax resident in Singapore.
Do note that tax residency does not depend on the country of incorporation. Hence, the tax residency status is not permanent and may change from year to year.
For instance, company 'A' held its board meeting in Singapore for the YA 2019. In this case, the company is a Singapore tax resident.
However, company 'A' held its next board meeting overseas for the YA 2020. In the second case, the company will not be considered as a Singapore tax resident.
Companies not eligible for tax exemption for start-up companies
All newly registered companies in Singapore qualify for tax exemption for start-up companies except for the companies that fall in these two categories:
The reasons to exclude these two categories are:
SUTE scheme was introduced to promote entrepreneurship among Singapore locals. However, these two types of companies do not fit the criteria. They represent a model that does not comply with startup entrepreneurship. Hence, they are only eligible for Partial Tax Exemption that will be discussed further in this article.
Qualification criteria for companies limited by guarantee
Companies limited by guarantee are also eligible for the SUTE scheme if they fit the following criteria:
How to determine your company's first YA?
The SUTE scheme is applicable to the first three Years of Assessments of a start-up. Thus, it is crucial to determine your company's first YA to enjoy tax benefits better. Generally, a company's first YA is determined by the FYE (Financial Year End) chosen and its first set of accounts' closing date.
However, the first YA for tax exemption is also related to the basis period during which the company was registered. Hence, two companies incorporated on the same date may have different YAs.
Examples
Let's take a look at some of the examples to understand it better.
Example 1 – Company A was incorporated on 1st May 2019. The FYE is chosen on 30th April every year, and the first set of accounts was also closed on 30th April 2020. This shows that the period covered in the first set of accounts is 12 months, from 1st May 2019 to 30th April 2020.
The Year of Assessment is determined on the basis period, so:
YA |
Basis Period |
| 1st YA in 2021 | 1st May 2019 to 30th April 2020 (12 months) |
| 2nd YA in 2022 | 1st May 2020 to 30th April 2021 |
| 3rd YA in 2023 | 1st May 2021 to 30th April 2022 |
Example 2 – Company B was also incorporated on 1st May 2019. The FYE is chosen on 31st December every year, and the first set of accounts was closed on 31st December 2019. This indicates that the period covered in the first set of accounts is less than 12 months.
Hence:
YA |
Basis Period |
| 1st YA in 2020 | 1st May 2019 to 31st December 2019 (less than 12 months) |
| 2nd YA in 2021 | 1st January 2020 to 31st December 2020 |
| 3rd YA in 2022 | 1st January 2021 to 31st December 2021 |
Example 3 – Company C also has the same incorporation date, i.e., 1st May 2019. The FYE is chosen on 31st December every year, and the first set of accounts was closed on 31st December 2020. In this scenario, the period covered in the first set of accounts is more than 12 months.
Therefore,
YA |
Basis Period |
| 1st YA in 2020 | 1st May 2019 to 31st December 2019 (basis period cannot exceed 12 months) |
| 2nd YA in 2021 | 1st January 2020 to 31st December 2020 |
| 3rd YA in 2022 | 1st January 2021 to 31st December 2021 |
In example 3, the period covered in company C's first set of accounts is more than 12 months. However, each YA's basis period cannot exceed 12 months. Therefore, the company's profit/losses are required to be attributed and declared under YA 2020 & YA 2021, i.e., two Years of Assessments.
Claiming Tax Exemption for Startup Companies under SUTE scheme
The procedure for claiming the tax exemption for start-up companies under the SUTE scheme is automatic. You need to file your Estimated Chargeable Income and corporate tax return (Form C-S/C) after completing the relevant sections. IRAS (Inland Revenue Authority of Singapore) computes the tax exemption amount automatically after the filing.
Introduction to PTE (Partial Tax Exemption) Scheme
Partial Tax Exemption is given to all the existing Singapore-registered companies, except for those already qualified for the SUTE scheme (So technically all other companies not covered in above scheme are covered here). Budget 2018 had also revised the tax exemption under the PTE scheme.
Amount of tax exemption under PTE
The revised PTE scheme comes into effect in YA 2020. The revised provision allows the following tax exemption:
Therefore, the total maximum tax exemption a company can enjoy under this scheme for each YA is:
Chargeable income |
Exemption % |
Exempted amount |
| S$10,000 | 75% | S$7,500 |
| Next S$190,000 | 50% | S$95,000 |
The following data states the maximum exemption for every YA as S$102,500.
Deduction of expenses incurred before Business Commencement
Tax exemption is only applicable to the revenue expenses that are incurred after the commencement of your business activities. Expenses incurred prior to the production of income are not considered tax-deductible by the IRAS.
However, those revenue expenses are tax-deductible that were incurred a year prior to the first day of FY in which your business earns a dollar of business receipt.
Example
The incorporation date of company A is 1st May 2016, and the financial year-end chosen is 31st December every year. The company makes its first business transaction on 1st July 2018(relates to YA 2019). In this scenario, the revenue expenses incurred during the period 1st January 2017 to 31st December 2017, the year prior to 1st January 2018 (the fiscal year in which the company earned its first dollar), becomes eligible for a tax deduction in YA 2019.
Abuse of tax exemption
Companies that are set up for abusing the tax exemption provision and not with the intent of commercial reason or entrepreneurship can face penalization by the IRAS. Sometimes, flourishing businesses start multiple companies to avail these exemptions yearly. They can come under IRAS reviews.
Concept of 'shell companies'
Shell companies are the companies that are set up to evade tax by an existing profitable going concern. There are two methods in which a current profitable company can misuse shell companies:
Allocation Method
In this method, the profit of an existing profitable company is shared among a group of shell companies. This brings the total taxable income of all the companies involved within the tax exemption threshold.
Fee/Expenses Charging
In this method, shell companies charge fees/expenses to an existing profitable going concern. The current profitable company claims tax deduction on the charges paid to the shell companies. At the same time, shell companies enjoy tax exemption on the income received from the existing profitable company.
In Singapore, tax evasion or any fraudulent activity/behavior is a criminal offense. Any person or business who is involved in abusive tax arrangements must disclose such false action immediately. Otherwise, there are severe penalties and punishments one must face for setting up such shell companies and trying tax evasion.