Clarifying the Classification of Foreign Entities for Singapore Income Tax Purposes

The Inland Revenue Authority of Singapore (IRAS) has released a guidance on the classification of foreign entities for Singapore income tax purposes. This guidance is significant for businesses and asset managers using foreign entities, as the classification determines whether the foreign entities should be treated as either tax transparent or tax opaque from a Singapore income tax purposes.

 

The Resemblance Approach

IRAS applies a “resemblance approach” to classify foreign entities. This means IRAS examines the similarities and differences between a foreign entity and its corresponding Singapore entity before deciding whether the foreign entity should be treated as a company (i.e., tax opaque) or a partnership (i.e., tax transparent) for Singapore tax purposes.

• Company classification: The entity is expected to be substantially similar to a company incorporated under the Companies Act 1967.
• Partnership classification: The entity should resemble a Singapore partnership under local law.

 

Key Factors for Classification

IRAS has outlined specific factors for determining whether a foreign entity is treated as a company or a partnership:

1. Factors for a Company
   1. Incorporated or registered under the law of its home jurisdiction.
   2. Has a separate legal personality from its members and directors/managers.
   3. Maintains share capital or members’ guarantees.
   4. Has at least one member and is managed by a board of directors/managers.
   5. Has perpetual succession until wound up or struck off.
   6. Members share in profits only when declared by the entity (no unconditional right to dividends), except for an entity limited by guarantee.
2. Factors for a Partnership
   1. Formed or registered under the law of its home jurisdiction.
   2. Has at least two members.
   3. Members are entitled to share in the entity’s profits as the profits arise.
   4. The entity does not have share capital.
   5. No separate legal personality distinct from members, except for limited liability partnership.

If a foreign entity does not meet all factors for either category, IRAS will consider all relevant circumstances, including how the entity is classified for tax purposes in its home jurisdiction and the rationale behind that classification.

 

Consistency of Treatment

Once IRAS has assessed a particular foreign entity structure, it will generally apply the same classification consistently, provided the structure remains substantially unchanged.

 

IRAS Reference Table: Common Foreign Entity Classifications

IRAS has published a list of common foreign entity structures and their classification for Singapore tax purposes. Below is an excerpt:

Jurisdiction	Entity Structure	Classification
Cayman Islands	Segregated Portfolio Company (SPC)	Company
Germany	Kommandit Gesellschaft (KG)	Partnership
Guernsey	Incorporated Cell Company (ICC)	Company
Guernsey	Limited Company (LC)	Company
India	Limited Liability Partnership (LLP)	Partnership
Japan	Tokumei Kumiai (TK)	Partnership
Luxembourg	Société Anonyme (SA)	Company
Luxembourg	Société en Commandite par Actions (SCA)	Company
Luxembourg	Société en Commandite Simple (SCS)	Partnership
Luxembourg	Société en Commandite par Speciale (SCSp)	Partnership
Netherlands	Besloten Vennootschap met beperkte aansprakelijkheid (BV)	Company
Netherlands	Commanditaire Vennootschap (CV)	Partnership
USA	Limited Liability Company (LLC)	Company

*Unless the LLC can substantiate, based on its agreement, that it should be classified as a partnership.

Please note that the list may be updated depending on factors such as changes in the relevant foreign law or the agreement governing the entity’s creation.

 

Historical Context

There are no statutory provisions under the Income Tax Act 1947 (ITA) or Singapore case law that specifically address the tax transparency treatment of foreign entities in Singapore.

In Singapore, tax transparency has been granted to Singapore limited partnerships (LPs) and limited liability partnerships (LLPs). Accordingly, in practice, whether a foreign entity is treated as tax transparent depends on the extent to which its features resemble those of an LP or LLP, which are recognised as tax transparent entities in Singapore.

Before the issuance of formal guidance, the analysis of tax transparency was based on principles drawn from case law in Commonwealth jurisdictions, as well as advance rulings issued by the IRAS.

Under the common law approach, determining whether a foreign entity is tax transparent or opaque for income tax purposes involves comparing its characteristics with those of a locally recognized tax transparent LP and assessing the degree of similarity between the foreign entity and the limited partnership.

Additionally, IRAS applied similar principles in advanced rulings, comparing foreign vehicles to local equivalents. For example, a previous ruling dated 2020 the IRAS analysed whether a Foreign LP was regarded as tax transparent based on its characteristics and similarities with a Singapore LP. In this ruling, the characteristics and similarities analysed where the (i) definition of partnership, (ii) legal personality, (iii) business activities, (iv) partners, (v) liability of the partners, and (vi) the profits of the partnership.

 

Conclusion

The new guidance consolidates previous practices into a clear framework, providing greater certainty for taxpayers and reducing reliance on legal opinions or advanced rulings.

For Singapore structures holding foreign entities listed in the IRAS Reference Table, it is recommended to confirm that the current position aligns with the IRAS guidance. For other foreign entities not listed, the Resemblance Approach will apply.

Stay tuned for more updates on developments in the Singapore Asset and Wealth Management space. For more information, please contact Barbara Voskamp or Victor Sanlorien Cobo.