Singapore has long been one of the more favored jurisdictions through which investors structure their ownership of Cambodian investments. Having a clean image and keeping itself off the notorious black and grey lists has enabled Singapore to remain at the top of the pile when it comes to safe, transparent and tax effective places from which to headquarter or hold an investment in South-East-Asia.
From a Cambodian perspective, Singapore was the country that broke the drought with respect to the Kingdom’s double taxation agreement (DTA) portfolio signing Cambodia’s first DTA in 2016, which came into effect on 1st January 2018.
This was important in more ways then one as it encouraged additional investments into Cambodia via Singapore through the use of tax benefits for Cambodian entities with Singaporean tax resident shareholders including the reduction of the standard withholding tax rates on interest, royalties, dividends and management services as well as the elimination of double taxation and protection from capital gains tax to name a few.
When combined with Singapore’s attractive tax regime, this has led to Singapore being front of mind for a large percentage of FDI looking to invest in Cambodia. Some of the salient features of the Singaporean tax regime include:
- Singapore operates on a “quasi” territorial-based regime meaning that profits are only taxed on locally sourced income and foreign income that is remitted or deemed remitted back to Singapore.
- Singapore’s Government offers generous tax incentives for specific industries and SMEs
- Companies can benefit from 0% tax on Capital Gains and Dividend Withholding
- Singapore has a low corporate tax rate capped at 17%
Sound too good to be true? Well, the devil is always in the detail and recent developments in Singapore should put investors on notice as to the obligations/thresholds involved in using Singapore as a jurisdiction under which a Cambodian investment is held.
It should be noted that the Protocol is not currently in force and needs to be ratified by both countries. From a Cambodian perspective once ratified the Protocol will be in place from 1 January of the following year.
(1) Principal Purpose Test
With little fanfare, government officials from Cambodia and Singapore signed the Second Protocol Amending the DTA between the respective countries on the 2nd of November 2023. The purpose of the Second Protocol ensures that the Cambodia-Singapore DTA is consistent with the latest international tax protocol, especially those outlined by the OECD, in addressing tax base erosion and profit shifting (BEPS).
The OECD’s Multilateral Instrument (MLI) is expected to affect the interpretation and application of more than 1600 tax treaties globally without the need for any bilateral negotiations between countries. Cambodia isn’t a signatory of the MLI, however, Singapore is and it is interesting to see that even jurisdictions like Cambodia, who are not part of the OECD/G20 Inclusive Framework on BEPS, are implementing aspects of BEPS.
The OECD’s BEPS Action 6 for the Prevention of Treaty Abuse introduced a Principal Purpose Test (PPT) that opens the door for the disallowance of treaty benefits in the event of deemed treaty shopping and abuse.
The PPT will have the effect of denying treaty benefits, such as the reduction of withholding tax on interest royalties and dividends, where it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that treaty benefit is one of the principal purposes of the party seeking to rely on the relevant double tax treaty.
The new Article 28 of the Cambodia – Singapore DTA reads as follows:
“Article 28 – Entitlement to Benefits Notwithstanding the other provisions of this Agreement, a benefit under this Agreement shall not be granted in respect of an item of income if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of this Agreement.”
The PPT is designed to protect jurisdictions from the erosion of their tax base by actions taken by enterprises such as treaty shopping. “Treaty Shopping” refers to the use of tax-driven structures under which a taxpayer creates a corporation in a jurisdiction to take advantage of a favourable DTA and so receives tax benefits.
So, when deciding to set up a Singapore holdco with the principal purpose of obtaining relief under the Singapore-Cambodia DTA, a taxpayer may now be at risk of having those DTA benefits denied under the PPT. This has a significant risk for the reduction of withholding taxes, double taxation and capital gains (from a Cambodian taxation perspective) in an exit scenario.
One of the areas where a taxpayer may protect themselves against a PPT claim made by the Cambodia tax authority would be to evidence economic substance in Singapore. This goes to the heart of the issue concerning whether the Singaporean entity is merely a by-product of tax treaty benefits who can evidence substantive economic ties in Singapore. It should be noted that Singapore already requires that in order to obtain tax residency, a foreign owned investment holding company must evidence:
- that control and management of the company’s business is exercised in Singapore;
- have at least one director based in Singapore who holds an executive position;
- have at least one key employee such as a CFO/CEO, COO based in Singapore; and
- receive support services from a related company in Singapore.
Evidencing commercial reasons as to why Singapore is chosen as the jurisdiction to hold a Cambodian investment will now become much more important given the introduction of the PPT in the Cambodia-Singapore DTA. Proof of economic substance will go some way to evidencing that tax relief was not one of the primary reasons for setting up a holdco in Singapore, along with supporting documentation such as board resolutions, business plans and corporate structures outlining where strategic decisions and control for the investment are made and held.
(2) Taxation of foreign-sourced income
Singapore is set to introduce a new tax on foreign-sourced disposable gains starting from January 1, 2024. The amendments to the country’s Income Tax Act were recently approved by Parliament, marking a significant change in Singapore’s tax regime.
Under the new amendments, capital gains from the sale of foreign assets will be subject to tax if they are received in Singapore and if the relevant entity does not have ‘economic substance’ in Singapore. Whether an entity has ‘economic substance’ will be assessed on a case-by-case basis.
Previously, foreign-sourced income was only taxed if received/remitted in Singapore. Singapore also did not apply a capital gains tax. However, with the new amendments, relevant entities will now be subject to a capital gains tax in Singapore.
The amendments specifically apply to entities that are part of consolidated multinational entities (MNE) groups, where at least one member of the group has a place of business outside of Singapore. Domestic groups are excluded from these provisions. Additionally, financial institutions and entities that are exempt from income tax under specific incentives are also excluded from the scope of the amendments.
Entities that primarily serve the purpose of holding shares in other entities and do not generate income from any source other than dividends received from these shares are considered ‘excluded entities’. To qualify as an ‘excluded entity’, a pure equity holding entity must:
- submit regular accounts or statements;
- conduct operations in Singapore; and
- have adequate human resources in Singapore.
Other entities must manage and perform operations in Singapore, have adequate economic substance in Singapore, and meet certain criteria such as the number of employees, qualifications, business expenditure, and key decision-making in Singapore.
The amendments also clarify how the location of foreign assets is determined. Shares in a company or securities issued by a company are considered situated where the company is incorporated. Immovable property and intangible movable property are situated where the property is physically located. Secured or unsecured debt is situated where the creditor is a resident, and intangible movable property is located where the rights of ownership for the property can be most effectively upheld.
These amendments mark a significant change in Singapore’s tax regime, introducing a capital gains tax for relevant entities and expanding the scope of taxation on foreign-sourced income.
Final Comments
The introduction of a PPT to the Cambodia-Singapore DTA should give taxpayers who currently invest in Cambodia via a Singapore holding company or intend to invest in Cambodia via Singapore pause for thought. The need for careful and well-thought-out planning when using a Singapore holding company to invest in Cambodia is now more important than ever.
Gone are the days where a shelf company in Singapore would suffice for tax planning purposes and care needs to be taken when deciding what personnel should be based in Singapore and how control and management can be evidenced.
The introduction of taxation on foreign-sourced disposable gains is also a key update for Singapore and again follows the trend as per the PPT whereby proving economic substance has become more critical.
In all cases, it is strongly advised to seek advice and support from a reputable and experienced tax advisor who is aware of developments both in Singapore and Cambodia.
Tax services required to be undertaken by a licensed tax agent in Cambodia are provided by Mekong Tax Services Co., Ltd, a member of DFDL and licensed as a Cambodian tax agent under license number – TA201701018.
