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.
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:
- 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
- it is in the public interest to approve the transfer.
In approving the application, the Minister may impose conditions as follows:
- 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.
- 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.
- For a DEI award, the Minister may;
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.
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:
- 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.
- 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.
- 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.
- 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.
- 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.