Start-Up Tax Exemption Guide for New Singapore Companies
What is the Start-Up Tax Exemption (SUTE) Scheme?
The SUTE scheme was introduced in Year of Assessment (YA) 2005 by the Inland Revenue Authority of Singapore (IRAS) to encourage entrepreneurship and support local enterprises.
Normal chargeable income refers to the company’s taxable income (e.g. income from investments) after deducting allowable business expenses (e.g medical expenses of employees).
Income is taxable when the income is earned in Singapore, or received in Singapore from outside of Singapore. However, income is non-taxable when it is a capital gain (e.g. gains on sale of fixed assets like machinery, and gains on foreign exchange of capital transactions).
On the other hand, the YA is the period of time for which the company’s income will be assessed for tax purposes. This period of time is known as the “basis period” and is generally 12 months long.
The SUTE will apply for the company’s first 3 consecutive YAs. The exemption will start running from the first YA, even if the company has not made any chargeable income yet.
Hence, if the company only starts making chargeable income in its third YA, it will only qualify for 1 year of tax exemption under the SUTE.
How is the first YA of a company determined?
The dates of the company’s first YA depends on the date chosen as the company’s financial year end when the company was first incorporated, and the closing date for its first set of accounts.
For example, Company A was incorporated on 1 November 2019. Company A chooses its financial year end date as 31 October. This means that Company A’s first set of accounts will close on 31 October 2020.
As a result, the basis period for Company A’s first YA will be 1 November 2019 to 31 October 2020.
On the other hand, Company B also incorporated on 1 November 2019. However, it chooses its financial year to end on 30 June. This means that Company B’s first set of accounts will close on 30 June 2020.
Therefore, the basis period for Company B’s first YA will be 1 November 2019 to 30 June 2020 – a shorter period than Company A’s first YA, even though both companies incorporated on the same date.
What is the Amount of Tax Exemption Under the SUTE?
Where at least one of the start-up’s first 3 YAs falls in YA 2020 onwards, the start-up can claim a tax exemption on its first $200,000 of normal chargeable income.
The start-up will receive a 75% tax exemption on the first $100,000 of normal chargeable income, with a further 50% exemption on the next $100,000 of normal chargeable income. The maximum exemption for each YA is $125,000 (75% x $100,000 + 50% x $100,000).
Where at least one of the start-up’s first 3 YAs falls in YA 2010 to YA 2019, the start-up will be able to claim a tax exemption on their first $300,000 of normal chargeable income.
The start-up will receive a 100% exemption on the first $100,000 of normal chargeable income and a further 50% exemption on the next $200,000 of normal chargeable income. The maximum exemption for each YA is $200,000 (100% x $100,000 + 50% x $200,000).
Which Companies Qualify for SUTE?
SUTE is open to all newly-incorporated companies that:
- Were incorporated in Singapore;
- Were a tax resident in Singapore for that YA; and
- Have no more than 20 shareholders beneficially holding the company’s total share capital. Furthermore, either all the shareholders must be individuals, or at least 1 shareholder must be an individual holding at least 10% of the company’s issued ordinary shares.
The newly-incorporated company also cannot be:
- A company whose principal activities are that of investment holdings; or
- A company which undertakes property development for sale, for investment, or for both investment and sale
This is because investment holding companies generally only earn passive income (e.g. dividend and investment income), while property developers typically incorporate a new company for each new property development.
With its aim of encouraging entrepreneurship, the SUTE is not intended for such companies. These companies will instead be given partial tax exemption (see below).
When is a company considered a Singapore tax resident?
A company is considered tax-resident in Singapore if its control and management had been exercised in Singapore for the preceding YA. Control and management refers to the making of strategic decisions by the company.
Generally, the location of the company’s board meetings will determine whether control and management had been exercised in Singapore or elsewhere, rather than the company’s place of incorporation.
Do companies limited by guarantee also qualify for SUTE?
Companies limited by guarantee also qualify for SUTE, provided that:
- They have members who are all individuals throughout the YA; or
- At least 1 of its members is an individual whose contributions to the assets of the company under the company’s constitution, in the event of the company being wound up, amounts to at least 10% of the total contributions of the members of the company throughout the basis period for that YA.
How to Claim Tax Exemption under SUTE
Filling in of forms
To claim the tax exemption under SUTE, you simply need to file your corporate tax return as per normal. IRAS will then compute the amount of tax exemption you’re entitled to automatically.
For more information, please refer to our guide to filing and paying corporate tax in Singapore.
You may also wish to check out our article on the common mistakes to avoid when filing corporate tax.
There are penalties for making incorrect tax returns, even if you had no intention to evade tax.
Is a company still eligible for tax exemption after its third YA?
After its first 3 YAs, the company will no longer be eligible for SUTE. However, it can still enjoy Partial Tax Exemption (PTE).
What is the tax exemption amount under the Partial-Tax Exemption (PTE)?
Under the PTE, from YA 2020 onwards, companies enjoy a 75% tax exemption on the first $10,000 of normal chargeable income, and a further 50% exemption on the next $190,000 of normal chargeable income.
The maximum exemption for the company for each YA is $102,500 (75% x $10,000 + 50% x $190,000).
For YA 2019 and before, companies enjoy a 75% tax exemption on the first $10,000 of normal chargeable income and a further 50% exemption on the next $290,000 of normal chargeable income.
The maximum exemption for the company for each YA is $152,500 (75% x $10,000 + 50% x $290,000).
Abuse of Tax Exemption Schemes
There have been instances where companies were set up without any genuine commercial reasons in order to abuse the SUTE scheme. Please note that tax evasion or fraud is a criminal offence that you may be held liable for.
Matters such as determining your eligibility for SUTE and filing your company’s corporate tax returns can be complicated and confusing.
If you need any help with these, you may wish to approach a corporate services firm to assist you with the process. You can also check out our competitive rates for tax and other corporate services.
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