Treatment of Business Losses in Singapore

This article is prepared by our staff at Hawksford and provides a high-level overview of the treatment of business losses in Singapore. Hawksford is a leading professional services firm offering a comprehensive range of reliable and cost-effective accounting & tax services to Singapore businesses.

It is imperative to understand the provisions relating to accounting and tax treatment of business losses in the jurisdiction where a business operates. It must be noted that many jurisdictions provides for loss carry-forward system, whereby the utilization of tax losses currently depends on the subsequent profitability of a company. Singapore being one of those jurisdictions with advance tax regime, allows for loss carry-back. Loss carry back allows companies to offset current period losses against previously paid taxes. In other words it is a provision to claim back tax paid previously on the grounds of current losses suffered. This is a huge relief to small companies and the scheme is open to all forms of entities including partnerships and sole proprietorships.

Treatment of Business Losses

Singapore permits corporate taxpayers to offset trading losses against all incomes in the same accounting period. Trading losses can be offset against any income, be it income from dividends, interest income or rental incomes.

Any unutilised tax losses can be carried forward indefinitely and offset against future trading profits.

Qualifying Conditions

The business claiming a loss carry forward is subjected to a shareholding test. Accordingly, there must be no substantial change in the shareholders and their shareholdings as at the relevant dates.

Relevant dates are the last day of the year (31 Dec) in which the loss was incurred and the first day of the tax year of assessment (1 Jan) in which the losses are to be deducted.

The shareholding test compares the percentage of the shareholdings of a company that is held by the same persons as at the relevant dates. There is no substantial change in shareholders and their shareholdings, if the percentage of shares held by the common shareholders (shareholders, who held shares during two relevant dates), as at the two relevant dates are 50% or more.

Group Relief

A company may transfer the unutilised trading losses that it incurred in the current year to another company within the same group to which it belongs. Such transferred losses are deducted against the assessable income of the claimant company (transferee) for the same year of assessment, provided certain conditions are met. A transferor company may transfer 100% of its loss items to a claimant company as long as the claimant company can absorb the losses.

Qualifying Conditions

The transferor and the claimant must

• Be companies incorporated in Singapore
• Belong to the same group of companies
• Satisfy the 75% shareholding threshold, whereby
  • at least 75% of the ordinary share capital in one company is beneficially held, directly or indirectly, by the other or,
  • at least 75% of the ordinary share capital in each of the two companies is beneficially held, directly or indirectly, by a third Singapore incorporated company
• Have the same accounting year end

Note: The ordinary shareholding must be maintained at or above 75% during the continuous period that ends on the last day of the basis period and the shareholders must demonstrate beneficial right to the residual assets or residual profit.

Disqualified Loss Items

The following loss items do not qualify for transfer

• Loss items of foreign branches
• Loss items in respect of income wholly exempt from tax
• Loss items in respect of specific categories of activities or trade where there are rules to quarantine the unutilised losses and capital allowances (e.g. income from Finance leases under Section 10D, income from hiring motor vehicle under Section10H of the Income Tax Act etc)
• Loss items of companies who have been given any of the incentives under the Economic Expansion Incentives Act (e.g. investments in new technology company, technopreneur investment incentive scheme and overseas investment & venture capital incentive)
• Expenses of dormant companies that remains unutilised as at the end of the year.
• Unutilised Section 14Q deduction arising in the year of assessment and before
• Current year unutilised losses arising from excess of expenses over investment income of investment holding companies.
  • Current year unutilised losses of Section 10E companies. Section 10E companies are investment companies or in other words entities that derives income from its business of making investments

Loss Carry-Back Relief

In order to support small corporate taxpayers and sole proprietors and partnership firms to tide over economic downturns a loss carry-back scheme was introduced in the year 2006.

According to the scheme with effect from Year of Assessment (YA) 2006, current year losses were allowed to be carried back however an aggregate trade loss of S$100,000 only was allowed to be carried back to the year of assessment preceding the current year.

Temporary Enhancements

Following the global economic crisis in the year 2008 the temporary enhancements were announce to the scheme. Accordingly for the YA 2009 and YA 2010 the current year unabsorbed trade losses can be carried back for up to three years of assessment immediately preceding the year of assessment in which the trade losses were incurred. The order of setoff is as follows

(a)Firstly, to the third YA immediately preceding the YA of loss;

(b) Secondly, where there are qualifying deductions remaining after (a), the balance will be carried back to the second YA immediately preceding the YA of loss; and

(c) Finally, where there are qualifying deductions remaining after (b), the balance will be carried back to the YA immediately preceding the YA of loss.

The aggregate amount of trade loss that can be carried back is now capped at S$200,000.

The carry back scheme is a way to recoup some of the losses incurred by claiming a refund on the tax paid in the previous years. The qualifying conditions are similar to the requirements for the carry forward of unutilized trade losses. The relevant dates for shareholding test is the first day of the year in which the trade losses were incurred and last day of the immediate preceding YA in which the trade losses are to be deducted.

Companies that elect to carry-back the loss should indicate the election when filling up the income tax form ‘Form C’ and the tax computation for the relevant YA and submit the revised tax computation for the previous YA. Refund of taxes paid can be claimed by a company prior to the time of filing its Form C by submitting the ‘Election Form’.

Investment Holding Companies

Losses of pure investment companies may not be carried forward. Pure investment companies are companies whose activities are confined to holding investments and deriving income from investments in the form of dividend, interest or rental.

Note for New startup companies

New startup companies must take note that there is a tax exemption scheme for the startups. Under this scheme, since 2005, a newly incorporated company that meets the qualifying conditions can claim for full tax exemption on the first $100,000 of normal chargeable income for each of its first three consecutive YAs. Since 2008, a further 50% exemption is given on the next $200,000 of the normal chargeable income for each of its first three consecutive YAs.

If a startup company elects to carry back its losses the qualifying deductions will be used to set-off against its assessable income for preceding YA. After the deduction if there is no remaining chargeable income, the company will not be able to enjoy the benefit of the above stated exemption scheme. Instead if the company elects to carry forward its unabsorbed trade losses and use the tax exemption scheme it will be able to enjoy a distinct savings in the form of reduced tax liability. Therefore new startups must carefully consider the implications of trade loss treatment.  Once an election for the Enhanced Carry-Back Relief System has been made, this election is irrevocable.

An Example

Consider a company ABC Pte Ltd incorporated in 2008. It has made a trade loss of S$100,000 in the year 2011, refer to the illustration below for the implications on its chargeable income and income tax.

If the company chooses to carry back the loss:

Year of Assessment	2010 (in S$)		2011 (in S$)		2012 (in S$)
Chargeable profit/loss	150,000	Chargeable profit /loss	(100,000)	Chargeable profit /loss	300,000
Less: Losses carried back from YA 2011	100,000	Less: Losses carried back to YA 2010	(100,000)	Losses brought forward	Nil
Chargeable income	50,000	Chargeable income	Nil	Chargeable income	300,000
Less: tax exemption for new startup	(50,000)			Less: PartialTax exemption-((10,000*75%)+290,000*50%))	(152,500)
Chargeable income after exemption	Nil	Chargeable income after exemption	Nil	Chargeable income after exemption	147,500
Tax Payable @20%	Nil	Tax Payable @17%	Nil	Tax Payable @17%	25,075

Total tax liability for YA 2010,2011 and 2012 is S$ 25,075.

If the company chooses to carry forward the loss made in YA 2011 then the tax implications will be as below.

Year of Assessment	2010 (in S$)		2011 (in S$)		2012 (in S$)
Chargeable profit/loss	150,000	Chargeable profit /loss	(100,000)	Chargeable profit /loss	300,000
Less: Losses carried back from YA 2011	Nil	Less: Losses carried forward to YA 2010	(100,000)	Losses brought forward	(100,000)
Chargeable income	150,000	Chargeable income	Nil	Chargeable income	200,000
Less: tax exemption for new startup-((100,000*100%) + (50,000*50%))	(125000)			Less: PartialTax exemption-((10,000*75%)+190,000*50%))	(102,500)
Chargeable income after exemption	25,000	Chargeable income after exemption	Nil	Chargeable income after exemption	97,500
Tax Payable  @20%	5,000	Tax Payable @17%	Nil	Tax Payable @17%	16,575

Total tax liability for YA 2010, 2011 and 2012 is S$21,575.

The tax liability of the company is much lesser if it elects to carry-forward the loss instead of carry-back the loss. Therefore a new startup company must exercise due diligence in treating its business loss.