Introduction：
As discussed in Part I, with the new income tax agreement between Taiwan and Singapore (the “New Agreement”) soon to take effect, it is important to incorporate the relevant provisions of the New Agreement into the overall planning of cross-border holding structures. As the establishment of a Singapore holding or investment company is often integrated into family governance, wealth management and overseas investment planning, this article focuses specifically on the implications of the New Agreement for such holding structures and provides some directions for preliminary review.
I. Implications for Cross-Border Holding Structures
First, the implications of the New Agreement are considered separately from two perspectives: the structure where a Singapore company holds equity in a Taiwan company, and the structure where a Taiwan company holds equity in a Singapore company.
- Singapore Parent Company Holds Equity in a Taiwan Subsidiary
Where a Singapore parent company holds equity in a Taiwan subsidiary, dividends distributed by the Taiwan subsidiary to the Singapore parent company shall, in principle, constitute income of the Singapore parent company. Therefore, if the requirements for applying the New Agreement are satisfied, the withholding tax rate levied by Taiwan (as the source of the dividend income) on the dividend will be limited to a maximum of 10%.
Under the previous tax agreement between Taiwan and Singapore, the amount of tax payable by the company receiving the dividends, plus the corporate income tax payable by the company distributing the dividends, was subject to a cap of 40% of the profits out of which the dividends were paid. In other words, the tax payable by the Singapore parent company on the dividends, plus the income tax payable by the Taiwan subsidiary on the profits out of which such dividends arose, was capped at 40% of such profits. This differs from the basis of calculation under the New Agreement and may therefore result in different tax liabilities.
- Taiwan Parent Company Holds Equity in a Singapore Subsidiary
Conversely, where a Taiwan parent company holds equity in a Singapore subsidiary and the Singapore subsidiary distributes its earnings to the Taiwan parent company in the form of dividends, the New Agreement includes transitional provisions regarding the tax credit mechanism for the first three years from the commencement of its application, as further described below:
During the first three years from the commencement of the application of the New Agreement, the transitional provisions will apply. If the Singapore subsidiary is granted Singapore tax incentives, resulting in the actual tax paid on its relevant income or profits being lower than the amount of tax that would have otherwise been payable, the Taiwan parent company may, when calculating the creditable tax, deem the tax payable to have been actually paid within a certain scope. In other words, the amount of creditable tax available to the Taiwan parent company may exceed the amount of tax actually paid in Singapore.
In addition, where the Taiwan parent company holds equity of 25% or more in the Singapore subsidiary, other than the foregoing tax incentives, the Taiwan parent company may, when calculating the amount of creditable tax, also include the tax paid by its Singapore subsidiary on the profits generating the dividends prior to the distribution of such dividends. In other words, the scope of the creditable tax is not limited to the tax withheld or paid in Singapore on that specific dividend; the tax paid by the Singapore subsidiary on the profits generating such dividends may also be included within the scope of the creditable tax.
Except for the transitional provisions mentioned above, in principle, only the tax actually paid in Singapore may be used as the basis for the tax credit.
Therefore, from a long-term perspective, the application of the New Agreement may lead to a reduction in the amount of creditable tax, resulting in tax liabilities different from those prior to the application of the New Agreement. Businesses or families should therefore review their existing holding structures and assess the potential impact of the New Agreement before its application. Businesses or families planning to establish cross-border holding structures should also take the new agreement into consideration.
II. Preliminary Review for Cross-Border Holding Structures
Initially, cross-border holding structures may be reviewed from three perspectives. First, review the existing equity and cash flow structures, including the holding relationships among Taiwan, Singapore and other jurisdictions, as well as dividend distribution policy. Second, recalculate the effective tax liabilities after the application of the New Agreement, particularly how the income tax regulations, tax incentives, tax credits, and withholding tax rates in Singapore and Taiwan will affect the overall after-tax returns once the transitional provisions cease to apply after three years from the commencement of the New Agreement. Third, as discussed in Section IV of Part I of this article, “New Taiwan–Singapore Income Tax Agreement Takes Effect (Part I): An Overview of the Taxation of Cross-Border Income,” if one of the principal purposes of a holding structure arrangement is to obtain the treaty benefits under the New Agreement, such treaty benefits may be denied. Therefore, it is also necessary to review the holding structure between Singapore and Taiwan to determine whether it could be deemed to have one of the principal purposes of obtaining treaty benefits under the New Agreement, thereby mitigating future uncertainties regarding the application of the New Agreement.
III. Conclusion
For businesses and high-net-worth families, the key considerations arising from the New Agreement are not limited to changes in tax rates, but rather whether the existing structures possess sufficient commercial purposes and long-term sustainability. Businesses and families are advised to seek professional legal and tax advice based on their specific circumstances to mitigate uncertainties regarding the future application of the New Agreement and tax audits, and to make appropriate adjustments by comprehensively considering factors such as taxation, corporate law, investment review, foreign exchange, inheritance, and family governance.
(The article is originally in Chinese which can be found here.)