The Coronavirus Disease 2019 ("COVID-19") has been a hot topic in the news since the start of 2020. Governments around the world continue to take precautionary steps to control the spread of the virus. Such measures include travel bans and restrictions, and the quarantining of individuals who have recently travelled to affected areas.
These preventative steps are likely to have a number of flow on consequences. Many of these are not immediately apparent. In this article, we consider how travel restrictions or a company's decision not to convene management meetings in Singapore may impact the ability of a Singapore incorporated company to obtain a Certificate of Residence ("COR").
What is a COR and why does it matter to companies?
A COR is a letter certifying that a company is a tax resident in Singapore. It is essentially confirmation from the Inland Revenue Authority of Singapore ("IRAS") that the control and management of a company's business is exercised in Singapore. This is the test for corporate residency which is established by Section 2 of Income Tax Act ("ITA").
The concept of control and management has been adopted from English revenue law, and the Courts in a number of jurisdictions have opined on what exactly this means. It is now settled law that the key factor in determining the place of control and management is where the Board of Directors ("BOD") come together to make decisions. The fundamental enquiry is therefore where the BOD (excluding nominee directors) meet, and where decisions on policy and strategic matters are made if this does not coincide with the place of board meetings.
Singapore tax resident and non-resident companies are generally taxed in the same manner, except that Singapore tax resident companies are able to enjoy the following benefits:
- Tax benefits provided under Double Tax Agreements ("DTA") between Singapore and other jurisdictions. These can take the form of lower rates of withholding tax or the preclusion of source country taxation in certain circumstances;
- Tax exemption on foreign-sourced dividends, foreign branch profits and foreign-sourced service income under Section 13(8) of ITA;
- Foreign tax credits; and/or
- Tax exemption scheme for new start-up companies.
It is important to note that some of the above benefits are available on due claim by a company in its domestic tax return filed with IRAS. In contrast, the availability of tax benefits under a DTA often requires evidence of tax residency to be provided to the tax authority of the treaty jurisdiction in which the company is seeking a tax benefit from.
To illustrate by way of example in a DTA context, suppose that a Singapore company is to receive a dividend from Japan. The domestic rate of withholding tax in Japan is slightly over 20% on dividends which are paid to non-residents. Under the Singapore / Japan DTA, this rate can be reduced to as low as 5%. As a practical matter, the Japanese company paying the dividend will need some level of assurance that this lower rate is to be applied. It is generally the case that the payer of income is liable for any underpayment of withholding tax. This assurance is provided in the form of a COR produced by the Singapore recipient. In some jurisdictions, providing a COR is an administrative requirement which must be satisfied before a payer can withhold at a DTA rate.
As the tax benefits can be relatively generous, IRAS takes a strict approach in granting a COR application, especially in the case of foreign-owned investment holding companies and non-Singapore incorporated companies.
Where a company is not intending to claim tax benefits under a DTA but nonetheless wishes to obtain a letter certifying that it is a Singapore tax resident, it can apply for a letter of residence from the IRAS. This should be distinguished from a COR, and should not be used as a basis for the claiming of DTA benefits.
Factors impacting the application of COR
Before deciding to obtain a COR in Singapore, companies should take note of the following:
a) Being incorporated in Singapore does not automatically make a company a Singapore tax resident – the residency status may change from year to year, depending on the key factors mentioned above.
b) Proper documentations, such as minutes of the BOD meetings held in the year, noting the location, name of attendees and detailed description of the substantive matters that were discussed, are required.
c) Where BOD meetings are conducted via conference call/ videoconferencing, the tax residency of a company will be considered based on the location of the majority of directors.
d) The place where an Annual General Meeting is held is not relevant.
e) The concept of control and management is mutually exclusive. It is not possible for a company to claim tax residency in Singapore and another country for a given year where the same test of control and management is applied. Administratively, the IRAS will require a Singapore company to confirm as part of the COR application process that it is not also asserting residency in another jurisdiction.
f) The IRAS describes additional requirements which apply to foreign-owned investment holding companies. The company must demonstrate a business reason for establishing in Singapore, and have an additional indicia of economic substance. This can include the existence of related companies carrying on business in Singapore; receiving administrative services from a group company in Singapore; or having at least one executive director or key employee based in Singapore (e.g. CEO, CFO, COO).
g) It is theoretically possible, but not common in practice, for a foreign incorporated company to be granted a COR. Outside of exceptional circumstances, the general position is that a company must be Singapore-incorporated as well as resident under the test of control and management to obtain a COR.
Practical steps for obtaining a COR
Due to the uncertainty of when the current crisis might end, the two likely scenarios that companies might face, and what they can do are:
1. Adopt a "wait-and-see" approach, as we are only in the first quarter of 2020. Should the outbreak be contained, travel bans and restrictions will likely be lifted. BOD meetings can then be held in Singapore from the second half of 2020.
2. Should the COVID-19 epidemic stretch into the second half of 2020, the BOD should start planning if a COR is required for the calendar year of 2020. If required, the company may hold the BOD meeting physically in Singapore, with all executive directors in Singapore, as well as related parties and service providers. If the directors are unable to travel to Singapore, companies may consider limiting the meetings to teleconferences, with the intention to ratify decisions made during the teleconferences by physical meeting in Singapore once the travel restrictions are lifted. Non-resident directors could consider appointing alternative directors who are based in Singapore and who are therefore able to physically attend BOD meetings.
The unfolding of the COVID-19 crisis highlights the importance of having carefully considered business continuity plans in place. While Singapore tax residency may not rank particularly high on the check list of things to consider, the downsides of failing to obtain a COR may be significant. This is particularly so for Singapore companies intending to claim benefits under Singapore's network of DTAs. Now is the time to consider what can be done to ensure that any revised governance procedures are consistent with the management and control of these companies continuing to be exercised in Singapore.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.