On July 25, 2022 the Inland Revenue Authority of Singapore (IRAS) published a high-level overview of which cost are deductible and which costs are non-deductible for a Singaporean Investment Holding Companies. In this respect the term investment holding company refers to a company that owns investments such as properties and shares for long term investment and derives investment income ('non-trade income') such as dividend, interest or rental income. The company's principal activity is that of investment holding.
An investment holding company is different from an investment dealing company. An investment dealing company refers to a company that owns investments such as properties and shares as trading stock to derive trade income from the purchase and sale of these investments (e.g. gain on sale of real properties and shares). Unlike an investment holding company, the company's principal activity is that of investment dealing.
Allowed deductions
Expenses that are attributed to the investment income may be deductible. These may be incurred in the course of the company’s operations or in accordance with statutory and regulatory provisions.
Direct Expenses
Direct expenses are expenses directly incurred to earn investment income and are deductible against the respective source of investment income.
Some examples of direct expenses are:
- Cost of collecting rent (for rental properties);
- Interest expenses (on loan taken to acquire investments such as shares and property);
- Insurance (for rental properties);
- Management Corporation Strata Title (MCST) management fees (for rental properties);
- Property tax (for rental properties); and
- Repair and maintenance (for rental properties).
It should be noted that expenses incurred before the investment starts to produce income are not deductible. For example, interest incurred on a loan taken to acquire shares or properties that have not commenced to produce any dividend or rental income is not deductible.
Statutory and Regulatory Expenses
Statutory and regulatory expenses are expenses incurred in accordance with statutory and regulatory provisions, such as the Companies Act.
Some examples of Statutory and regulatory expenses are:
- Accounting fees;
- Annual listing fees;
- Audit fees;
- Bank charges;
- Income tax service fees;
- Printing and stationery; and
- Secretarial fees.
Other Allowable Expenses
Other than statutory and regulatory expenses and direct expenses, in some cases, an investment holding company may incur the following (deductible) expenses:
- Administrative and management fees;
- Directors' fees;
- General expenses;
- Office rental;
- Office telephone charges;
- Office utility charges;
- Staff salaries, allowances, bonus and approved provident fund contributions; and
- Transport expenses (excluding motor vehicle expenses on S-plated cars which are not deductible).
As an investment holding company is not carrying on a trade and derives only non-trade income, only a reasonable amount of such other expenses is allowable. According to IRAS as a guide, the total amount of such expenses allowable should not exceed 5% of the company’s gross investment income.
Deductions/ Claims Not Allowed
Non-deductible expenses, being capital in nature
Examples of non-deductible expenses, being capital in nature:
- Incorporation fees;
- Striking-off fees;
- Liquidation fees;
- Property valuation fees (where the property is held on capital account); and
- Initial Public Offering (IPO) fees.
Capital Expenses and Expenses on Non-Income Producing Investments
Expenses that are capital in nature and expenses attributable to investments that do not produce any income are not deductible.
Some examples are:
- Cost of new assets for the investment property such as refrigerator, air-conditioner, washing machine, furniture and fittings
The cost to acquire the initial new assets is capital in nature and not deductible. The subsequent cost of replacing the assets is deductible for properties already yielding investment income, as the expense is for an income-producing investment.
- Stamp duty and legal fees incurred for the purchase of investments
Stamp duty and legal fees incurred for the purchase of investments are capital in nature and therefore not deductible.
- Interest expense incurred to acquire shares that have not yielded dividends.
When shares have not yielded any dividends, they are non-income producing investments. Any expense incurred before the investment produces income is not deductible.
Excess Expenses from 1 Source of Investment
Expenses are deductible against their source of income. For instance, property tax expenses incurred on an investment property is deductible against the rental income generated by the same property.
When the expenses exceed the income generated by the investment, the excess expenses from this source of investment are not deductible against income from another source of investment. For example, any excess of expenses over rental income cannot be deducted against dividend or interest income.
As a concession, the deficit arising from a block of shares may be set-off against the net dividend income from other blocks of shares within the same group. Learn more about the concessionary ‘group’ tax treatment for dividend income.
Other remarks
Capital Allowance Claims
An investment holding company is not entitled to claim capital allowances as it is not carrying on a trade or business. Only fixed assets purchased to replace existing fixed assets can be claimed as deductible expenses.
Unutilised Losses
An investment holding company cannot carry forward any unutilised losses to set-off the income of future Years of Assessment (YAs).
Group Relief Claims
An investment holding company cannot transfer (to other companies in the same group) current year unutilised losses arising from the excess of expenses over investment income under the Group Relief system. However, a company may transfer current year unutilized Industrial Building Allowance, Land Intensification Allowance and donations to other companies in the same group under Group Relief system.
Tax Exemption for New Start-Up Companies
An investment holding company is not eligible to claim the tax exemption for new start-up companies.
However, an investment holding company is still eligible for the partial tax exemption.
the partial tax exemption
All companies, including companies limited by guarantee, are eligible for partial tax exemption (PTE), unless they are claiming the tax exemption for new start-up companies.
The tax exemptions for qualifying companies are as follows:
- 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.
(Normal chargeable income refers to income to be taxed at the prevailing Corporate Income Tax rate of 17%).
Table: Partial Tax Exemption on first 200,000 Singapore dollar of normal chargeable income
|
Chargeable Income |
% Exempted From Tax |
Amount Exempted From Tax |
|
First $ 10,000 |
75% |
$ 7,500 |
|
Next $ 190,000 |
50% |
$ 95,000 |
The maximum exemption for each year is $ 102,500 ($ 7,500 + $ 95,000)
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