Are you a small business owner in Singapore looking for some tax relief? Well, you're in luck! Singapore offers generous tax incentives specifically designed to support and encourage start-ups in the country. In this article, we will explore the various tax relief measures available for start-ups in Singapore and how they can help lighten your financial burden.
Tax Reliefs for New Start-Ups
When starting a business, every penny counts, and that's where tax exemptions for new start-ups come into play. Singapore offers some fantastic schemes that can lighten your tax load considerably.
Tax Exemption Scheme for New Start-Up Companies
Under Section 43 of the Income Tax Act 1947, the government introduced a tax exemption scheme for new start-up companies in the Year of Assessment (YA) 2005 to support entrepreneurship and grow local companies.
In Budget 2018, the government announced a revision to the tax relief scheme, effective from YA 2020, in light of strengthened support for companies to build their capabilities.
The revised tax exemptions for qualifying companies in their first three consecutive YAs, starting from YA 2020, are as follows:
- A 75% exemption on the first $100,000 of normal chargeable income; and
- An additional 50% exemption on the next $100,000 of normal chargeable income.
For YA 2019 and before
- Full exemption on the first $100,000 of normal chargeable income; and
- A further 50% exemption on the next $200,000 of normal chargeable income.
This tax relief scheme is only applicable to qualifying companies for their first three consecutive Years of Assessment (YAs). From the fourth YA onwards, companies are eligible for partial tax exemption, which we’ll get into later.
If your company does not use the tax exemption for new start-ups in the first 3 Years of Assessment (YAs), it cannot claim this exemption in later YAs.
The exemption is only for the first 3 consecutive YAs. If your company incurs losses or has no income in any of these YAs, it does not qualify for that year. However, that year still counts towards the first 3 consecutive YAs.
Consider your company's first 3 YAs are YA 2021, YA 2022, and YA 2023. Suppose it has no income in YA 2021 and YA 2022. It starts operations in 2022 and earns taxable income in YA 2023.
Your company can claim the tax exemption for new start-ups in YA 2023 if it meets all conditions. However, YA 2023 is your company's third YA, even if it's the first year you claim the exemption.
Your company cannot claim this exemption in YA 2024, as it is the fourth YA. From YA 2024, your company qualifies for the partial tax exemption.
Wondering how much tax relief you can claim for your start-up? Check out these examples:
Example 1: Tax Exemption on First $200,000 of Chargeable Income (where any of the first 3 YAs falls in or after YA 2020)
The maximum exemption for each YA is $125,000 ($75,000 + $50,000).
Example 2: My company qualifies for the tax exemption scheme for new start-up companies and its first 3 YAs are YA 2021, YA 2022 and YA 2023. What is the maximum exemption I can claim under the scheme?
Total Maximum Exemption Across All 3 YAs: $375,000
Here's How You Can Qualify for This Tax Relief:
To be eligible for the tax exemption scheme, your company must:
- Incorporation in Singapore: The company must be incorporated in Singapore.
- Tax Residency: The company must be a tax resident in Singapore for the relevant Year of Assessment (YA).
- Shareholding Requirements: The company's total share capital must be beneficially held directly by no more than 20 shareholders throughout the basis period for that YA. Additionally, all shareholders must be individuals, or at least one shareholder must be an individual holding at least 10% of the issued ordinary shares of the company.
Here's what makes you ineligible:
- If your company whose principal activity is that of investment holding
- If your company undertake property development for sale, investment, or both
Also, a foreign company or its Singapore branch cannot claim the tax exemption for new start-up companies as they are not incorporated in Singapore. However, a foreign company or its Singapore branch is eligible for the partial tax exemption on its normal chargeable income.
Partial Tax Exemption Scheme for Established Start-Up Companies
Companies, including those limited by guarantee, can qualify for partial tax exemption (PTE). This exemption is available under Section 43 of the Income Tax Act 1947. However, it does not apply to companies claiming tax exemption for new start-ups.
The Budget 2018 announcement stated changes to the partial tax exemption scheme. Therefore, these changes took effect from the Year of Assessment (YA) 2020. They reflect the enhanced support for companies to build capabilities.
Qualifying companies receive tax exemptions as follows for YA 2020 onwards:
- 75% exemption on the first $10,000 of normal chargeable income; and
- A further 50% exemption on the next $190,000 of normal chargeable income.
If you are a sole proprietor or a partner in any trade, business, profession, or vocation and you're reading this blog, you may qualify for tax reliefs and deductions. These apply to your individual income tax, which differs from corporate income tax. To learn more about your eligibility for business tax reliefs and deductions under personal income tax, read our blog.
Additionally, we offer a comprehensive guide on Singapore corporate income tax.
Precautionary Warning: Avoid Tax Relief Abuse
The Inland Revenue Authority of Singapore (IRAS) takes a firm stance against businesses that attempt to abuse the tax relief schemes to evade taxes. Abusive tax arrangements, such as setting up shell companies or charging fees without bona fide commercial reasons, are strictly prohibited.
IRAS conducts audits to identify possible abuse of the tax exemption schemes. As of 31 Jan 2021, more than 300 companies have been audited for possible abuse of the tax exemption scheme for new start-up companies. This has resulted in total tax recovery and penalties of more than $25 million. Tax evasion and fraud are criminal offences punishable by law, and severe penalties can be imposed.
Businesses should always ensure compliance with tax regulations and disclose any abuse immediately. Moreover, IRAS considers disclosure of abuse as a mitigating factor when determining penalties.
Navigating Singapore's tax landscape can be daunting especially when you’re a start-up business. Fortunately, with the availability of various tax exemption schemes, you can enjoy substantial tax relief during your businesses' critical early stages.
Considering these benefits but haven't set up your business yet? Grof can assist. It's essential to understand eligibility, pinpoint the first three Years of Assessment, and file tax returns timely for successful exemption claims. Grof's tax compliance services can ensure a smooth start.
Remember, adhering to tax laws is important. Misusing these schemes can result in hefty penalties, so staying within legal guidelines is key to enjoying these benefits. Starting a business is thrilling, and with proper guidance, you can confidently tackle tax matters.
Get in touch with us today for expert advice on compliance and maximising tax advantages. Knowledge of these schemes is a powerful tool for enhancing your start-up's financial well-being.