A Quick Look at Singapore-India Double Tax Treaty
This post is an analysis of the key provisions that are of interest to Indian businesses operating from Singapore and investments routed to India through Singapore.
India and China are the economic super engines in the fast growing Asia. As the center of gravity of investments and economic activities shifts towards Asia India is gaining a lot of attention because of the economic opportunities and investment potential. Singapore being the preferred platform for international expansion of companies, many investors and entrepreneurs targeting Indian businesses and Indian opportunities incorporate a Singapore company. Singapore is the best jurisdiction for Indian businesses expanding internationally and India bound investments to gain maximum tax savings, provided the entity is properly structured and meets certain prerequisites.
Singapore and India signed an Avoidance of Double Taxation Agreement (DTA) in 1994, which was revised further with the signing of the Comprehensive Economic Cooperation Agreement in 2005. The Singapore – India DTA brings several benefits to Singapore based companies with Indian business and Investments and vice versa. The article below is an analysis of the key provisions that are of interest to Indian businesses operating from Singapore and investments routed to India through Singapore.
The objective of a DTA is to avoid of double taxation of income and makes clear the taxing rights between the two contracting countries, on all forms of income from cross-border economic activities between the two contracting countries. By elimination of double taxation, the DTAs between countries aim to enhance the flow of capital in the form of investments, goods in the form of trade and technical know-how in the form of services across their borders.
The key benefit of the India- Singapore DTA is with regards to taxes on capital gains. According to the improved DTA from 2005, capital gains from the alienation of shares in a company are no longer taxable in the country where the company is located instead subjected to the taxes of the country where the seller of the shares is resident. This expressly implies that a Singapore resident company is not subjected to Indian taxes on capital gains derived from the sale of shares in an Indian company but is liable to the tax regime of Singapore, where it is resident. Apparently Singapore does not levy taxes on capital gains, therefore Singapore based companies investing and generating income from disposing of shares in Indian companies can immensely benefit from the DTA. However this provision will not benefit any investment funds established in Singapore, because capital gains generated from sale of shares, will be treated as business profits and subjected to Indian tax rates.
It must be noted that in order to claim exemption from capital gains it must prove its commercial substance or in other words it will not be entitled to the capital gains exemption if its affairs are arranged primarily to take advantage of the benefits of the DTA. In addition, a shell/conduit company with negligible or nil business operations or with no real and continuous business activities in Singapore, is disallowed from enjoying the capital gains exemption. For the purpose of this DTA a company must prove its commercial substance – It must be listed on recognized stock exchanges of the contracting country – Its total annual expenditure on operations in the residence State is equal to or more than S$ 200,000 or Indian Rs. 50, 00,000 in the respective contracting country, as the case may be, in the immediately preceding period of 24 months from the date the gains arise.
The DTA also reduces the withholding tax on certain royalty payments and fees for technical services (FTS) from 15% to 10%, so that, now all royalties paid to a Singapore resident company will be taxed at 10%. As there is a flat rate applicable there is no longer a need to identify the category into which the royalty or FTS belongs. The provisions regarding incomes from interest and dividends are similar but with extensive sub-clauses. The DTA provides for incomes from interest and dividends to be subjected to taxes in the other contracting jurisdiction as well, apart from the recipient’s resident jurisdiction, however such taxes cannot exceed 10-15% depending on certain conditions.
The India-Singapore DTAA is broadly modeled along the lines of the existing Indian -Mauritius DTA however the India –Singapore DTA has included a ‘Limitation of Benefits’ in order to prevent treaty shopping practices. Recently the Indian government has mooted discussions to institute similar limitations in India – Mauritius DTA as well. A key point of interest is the express statement regarding the validity of the India – Singapore DTA, it has been stated that the DTA will terminate if the DTA between India and Mauritius terminates.
There has been a surge in investment flows between both the countries after the implementation of DTA and more Indian origin companies have been incorporated in Singapore. Many Indian IT companies have registered Singapore companies and are benefiting from the subsidized taxes on royalties of software and fees for services rendered. Indian investment in Singapore has skyrocketed from US$353.5 million in 2003 to US$12,803.6 million in 2007, in a range of sectors like IT, consultancy and education to steel, FMCG and chemicals. There are 4,000 Indian companies operating out of Singapore, and business analysts expect these numbers to increase to 5,500 over the next couple of years. Similarly many Singapore companies have also ventured into India. This growing bilateral relationship is a testament to the efficacy of the DTA between India and Singapore and underscores the prominence of Singapore as an internationalization platform to Indian companies which are actively expanding through Singapore incorporations.
If you are interested in starting a Singapore company, refer to our Singapore company registration guide.
Singapore and India signed an Avoidance of Double Taxation Agreement (DTA) in 1994, which was revised further with the signing of the Comprehensive Economic Cooperation Agreement in 2005. The Singapore – India DTA brings several benefits to Singapore based companies with Indian business and Investments and vice versa. The article below is an analysis of the key provisions that are of interest to Indian businesses operating from Singapore and investments routed to India through Singapore.
The objective of a DTA is to avoid of double taxation of income and makes clear the taxing rights between the two contracting countries, on all forms of income from cross-border economic activities between the two contracting countries. By elimination of double taxation, the DTAs between countries aim to enhance the flow of capital in the form of investments, goods in the form of trade and technical know-how in the form of services across their borders.
The key benefit of the India- Singapore DTA is with regards to taxes on capital gains. According to the improved DTA from 2005, capital gains from the alienation of shares in a company are no longer taxable in the country where the company is located instead subjected to the taxes of the country where the seller of the shares is resident. This expressly implies that a Singapore resident company is not subjected to Indian taxes on capital gains derived from the sale of shares in an Indian company but is liable to the tax regime of Singapore, where it is resident. Apparently Singapore does not levy taxes on capital gains, therefore Singapore based companies investing and generating income from disposing of shares in Indian companies can immensely benefit from the DTA. However this provision will not benefit any investment funds established in Singapore, because capital gains generated from sale of shares, will be treated as business profits and subjected to Indian tax rates.
It must be noted that in order to claim exemption from capital gains it must prove its commercial substance or in other words it will not be entitled to the capital gains exemption if its affairs are arranged primarily to take advantage of the benefits of the DTA. In addition, a shell/conduit company with negligible or nil business operations or with no real and continuous business activities in Singapore, is disallowed from enjoying the capital gains exemption. For the purpose of this DTA a company must prove its commercial substance – It must be listed on recognized stock exchanges of the contracting country – Its total annual expenditure on operations in the residence State is equal to or more than S$ 200,000 or Indian Rs. 50, 00,000 in the respective contracting country, as the case may be, in the immediately preceding period of 24 months from the date the gains arise.
The DTA also reduces the withholding tax on certain royalty payments and fees for technical services (FTS) from 15% to 10%, so that, now all royalties paid to a Singapore resident company will be taxed at 10%. As there is a flat rate applicable there is no longer a need to identify the category into which the royalty or FTS belongs. The provisions regarding incomes from interest and dividends are similar but with extensive sub-clauses. The DTA provides for incomes from interest and dividends to be subjected to taxes in the other contracting jurisdiction as well, apart from the recipient’s resident jurisdiction, however such taxes cannot exceed 10-15% depending on certain conditions.
The India-Singapore DTAA is broadly modeled along the lines of the existing Indian -Mauritius DTA however the India –Singapore DTA has included a ‘Limitation of Benefits’ in order to prevent treaty shopping practices. Recently the Indian government has mooted discussions to institute similar limitations in India – Mauritius DTA as well. A key point of interest is the express statement regarding the validity of the India – Singapore DTA, it has been stated that the DTA will terminate if the DTA between India and Mauritius terminates.
There has been a surge in investment flows between both the countries after the implementation of DTA and more Indian origin companies have been incorporated in Singapore. Many Indian IT companies have registered Singapore companies and are benefiting from the subsidized taxes on royalties of software and fees for services rendered. Indian investment in Singapore has skyrocketed from US$353.5 million in 2003 to US$12,803.6 million in 2007, in a range of sectors like IT, consultancy and education to steel, FMCG and chemicals. There are 4,000 Indian companies operating out of Singapore, and business analysts expect these numbers to increase to 5,500 over the next couple of years. Similarly many Singapore companies have also ventured into India. This growing bilateral relationship is a testament to the efficacy of the DTA between India and Singapore and underscores the prominence of Singapore as an internationalization platform to Indian companies which are actively expanding through Singapore incorporations.
If you are interested in starting a Singapore company, refer to our Singapore company registration guide.