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In brief

On 15 June 2020, the Economic Expansion Incentives (Relief from Income Tax) (Amendment) Act 2020 came into force. Among other legislative changes, the key amendments provide an avenue for the Pioneer Industry, Pioneer Service and Development and Expansion Incentive awards previously approved and granted to a company to be transferred to another company, subject to approval. In addition, investment allowances may now be granted to a corporate partnership.


Contents

Key takeaways

As part of the Singapore government’s regular review of tax incentives, the following key provisions were introduced in the Economic Expansion Incentives (Relief from Income Tax) (Amendment) Act 2020:

  • The Pioneer Industry award, the Pioneer Service award and the Development and Expansion Incentive award previously approved and granted to a company may be transferred to another company, subject to the approval of the Minister for Trade and Industry.
  • The investment allowance regime may now be granted to corporate partnerships and the allowance apportioned to its partners.
  • Investment allowance is available for capital expenditure incurred in constructing and operating a submarine cable system with one or more landing stations in Singapore.
  • A company that has already obtained a foreign loan to purchase productive equipment may still apply for that loan to be an approved foreign loan.

In more detail

Transfer of Pioneer Industry, Pioneer Service and Development and Expansion Incentive awards 

The Pioneer Industry, Pioneer Service and Development and Expansion Incentive (“DEI”) awards are intended to encourage companies to develop capabilities and conduct new or expanded business activities in Singapore. Qualifying income for companies granted the Pioneer awards is tax exempt while qualifying income of companies with the DEI award may benefit from concessionary tax rates of either 5% or 10%.

The Pioneer and DEI awards are granted specific to a company. Before these legislative changes, where there was a transfer of business from one company to another, the transferor company would have to approach the Singapore Economic Development Board (“EDB”), the economic agency administering these tax incentives, to discuss and apply for the “transfer” of the incentive. Where the “transfer” is approved, the transferee company will be issued a new incentive letter, which may not necessarily be a continuation of the incentive award previously granted to the transferor company.

Following the Economic Expansion Incentives (Relief from Income Tax) (Amendment) Act 2020 (“EEIA (Amendment) Act 2020”), it is now possible for a company (referred to as the “transferor company”) to transfer in whole or in part, its Pioneer or DEI awards to another company (referred to as the “transferee company”).

At the Second Reading of the Economic Expansion Incentives (Relief from Income Tax) (Amendment) Bill 2020, Senior Minister of State for Trade and Industry, Chee Hong Tat commented that “as companies amalgamate, merge or undergo corporate restructuring, there may be a need to transfer their existing awards to the new entity.” To make it clear that an amalgamated company is also eligible for the transfer of the incentive awards, it is provided that a transferee company “includes a company that results from an amalgamation or merger involving the transferor company.” There is no express requirement in the legislation that the transferor company and transferee company must be related entities. That said, transfer applications for related entities would presumably be the more common scenario.

The legislative changes make it clear that the transferee company effectively steps into the shoes of the transferor company, subject to the Minister for Trade and Industry’s (“Minister”) discretion in imposing or varying conditions, as appropriate.

A transferor company has to apply to the Minister in writing, in the prescribed form with specified particulars, to transfer the whole or part of its incentive award to the transferee company. The Minister may approve the application if he is satisfied that:

  1. because of the transfer of the transferor company’s business to which the incentive award relates, the transferee company is or will be producing the pioneer product under its Pioneer Industry award or, is or will be engaging in the qualifying activity under the Pioneer Service award or the DEI award; and
  2. it is in the public interest to approve the transfer.

In approving the application, the Minister may impose conditions as follows:

  1. The Minister may impose any conditions on the transferee company. They may be the same as those previously imposed on the transferor company or different from them.
  2. If the transferor company continues to produce any pioneer product under its Pioneer Industry award, or engage in any qualifying activity for purposes of its Pioneer Service award or DEI award, the Minister may add new conditions, vary or remove any conditions imposed on the transferor company.
  3. For a DEI award, the Minister may;
    1. in relation to the transferee company, specify its base income for the qualifying activity for the year of assessment for which the approval is given and subsequent years of assessment. This may be (i) the base income of the transferor company for the subject activity immediately before a specified date; or (ii) any other amount that the Minister thinks fit.
    2. in relation to the transferor company, substitute, effective from the year of assessment for which the approval is given and subsequent years of assessment, its base income with any amount that the Minister thinks fit, for any qualifying activity it continues to conduct.

Upon the Minister’s approval of an application, effectively, the transferee company steps into the shoes of the transferor company for the remainder of the tax relief period for the incentive award transferred to the transferee company. The EEIA (Amendment) Act 2020 sets out the following consequences arising from the approval:

  1. On the specified date, the transferor company ceases to be a Pioneer enterprise for the relevant pioneer product, or a Pioneer Service company or a DEI company for the relevant qualifying activity, as the case may be.
  2. Starting on the specified date, the transferee company is treated as having been approved as a Pioneer enterprise for the relevant pioneer product, or a Pioneer Service company or DEI company for the relevant qualifying activity, as the case may be.
  3. The transferee company’s production day for its Pioneer Industry award or commencement day for its Pioneer Service award or DEI award is the same as that of the transferor company for the purposes of determining its tax relief period.
  4. For a DEI award, the transferee company is treated as having the same concessionary tax rate for each part of the tax relief period as that of the transferor company, had the transferor company remained a DEI company for the relevant qualifying activity.
  5. The Minister will amend or cancel the certificate issued to the transferor company for the incentive award as necessary, and issue a certificate to the transferee company for the incentive award transferred.

Note that instead of approving an application to transfer the relevant incentive, the Minister may require the transferee company to apply for a new Pioneer Industry award, Pioneer Service award or DEI award, as appropriate.

Companies contemplating any transfer of incentive as a result of restructuring (including a business transfer or an amalgamation) should approach the EDB and apply for the transfer, where appropriate, before the proposed restructuring. This is to ensure that there is ample time to discuss and finalise the transfer of the incentive and any relevant modification of the conditions as required by the Minister.

Investment allowance extended to corporate partnerships

The investment allowance regime provides for an allowance in addition to the normal capital allowance (i.e., tax depreciation) on a percentage (up to 100%) of qualifying fixed capital expenditure incurred on approved projects within a period of up to five years, or eight years where the asset is acquired on hire-purchase. It is currently only available for companies.

At the Second Reading of the Economic Expansion Incentives (Relief from Income Tax) (Amendment) Bill 2020, Mr Chee noted that “companies increasingly co-own assets with other companies, including through corporate partnerships.” The extension of the investment allowance scheme to include corporate partnerships is therefore to “better cater to the evolving business environment.”

The amendments to the primary legislation enable regulations to be made to apply the relevant investment allowance provisions, to enable investment allowance to be given to a corporate partnership, and to apportion such allowance given to the corporate partnership to its partners. In this regard, corporate partnership is defined to mean “a partnership, limited liability partnership or limited partnership comprising solely of partners that are companies”. Details enabling implementation will be prescribed in subsidiary legislation.

Extension of investment allowance to include capital expenditure on submarine cable systems landing in Singapore

In a bid to encourage companies to invest in submarine cable systems landing in Singapore, the Minister for Finance had announced in Budget 2018 that the investment allowance for productive equipment would be extended to include capital expenditure incurred on newly constructed submarine cable systems landing in Singapore.

This Budget announcement has now been legislated. Subject to the Minister’s approval and meeting all prescribed conditions, investment allowance may be claimed for capital expenditure incurred to construct and operate any submarine cable systems with one or more landing stations in Singapore, and any such landing station.

Approved foreign loans for productive equipment to include loans already obtained

Following the EEIA (Amendment) Act 2020, a company that has already obtained a foreign loan of not less than SGD 20 million for the purchase of productive equipment for its trade or business may apply to the Minister for the loan to be an approved foreign loan. An approved foreign loan enjoys lower interest withholding tax rates. Previously, an application could only be made before the loan was obtained.

Author

Allen Tan is the head of the Tax, Trade and Wealth Management practice in Baker McKenzie Wong & Leow. He has extensive experience working on both international and local tax issues, with a special focus on the regional tax aspects of the transactions that he is involved in. Allen’s clients include Global Fortune 500 multinational corporations and major Singapore conglomerates. He is recognised as a leading lawyer for his tax controversy and corporate tax work in many leading legal and tax directories including International Tax Review, Chambers Asia Pacific and Legal 500 Asia Pacific. Allen was also named the Asia Tax Practice Leader of the Year 2018 by International Tax Review.

Author

Shih Hui Lee has advised on both regional and Singapore tax issues, with focus on advising MNCs on international tax aspects of cross-border transactions. Her practice includes advising clients on tax issues arising from mergers and acquisitions, indirect taxes, transfer taxes, foreign direct investment and cross-border tax planning issues. Prior to joining Baker McKenzie, Shih Hui worked in one of the Big Four accounting firms in Singapore. She has experienced being an in-house regional tax advisor in one of the multinational cable and satellite television channel.

Author

Dawn Quek is a leading tax and private client lawyer in Singapore with many years of experience in corporate tax and international tax planning. She is the Head of the Wealth Management practice in Singapore and is the Asia Pacific representative on the Firm's Global Wealth Management Steering Committee. Dawn is consistently ranked as a leading tax and private client/wealth lawyer by various legal publications including Chambers High Net Worth (HNW) Guide, International Tax Review Women in Tax Leaders Guide and the Legal 500 Asia Pacific. She was named "Private Client Lawyer of the Year" at the 2018 Asia Legal Awards by The Asian Lawyer, and named "Women in Wealth Management" at the 2018 WealthBriefingAsia Awards. Dawn is a key player in the local wealth management and financial services scene. She frequently participates in formal and informal consultations with government authorities on law reform on issues relating to the wealth management and financial services industry from a tax and legal perspective. She has also co-written articles on international tax planning issues in various tax and legal journals published by CCH and BNA. In addition, Dawn has been quoted extensively in publications such as the New York Times, the International Herald Tribune, Reuters, the Financial Times, the Straits Times, the Business Times and Asian Private Banker on issues and developments affecting the wealth management industry in Singapore.