For Indian business owners considering incorporating a company in Singapore, it’s crucial to weigh the risks and benefits. One of the main attractions is the significant tax benefits. To encourage business growth, Singapore has entered into double tax treaties with a number of countries, including India. Double Taxation Agreements (DTAs) or Double Taxation Avoidance Agreements (DTAAs) promote reductions in tax rates for businesses and individuals. If you’d like to learn about the India-Singapore DTAA, read more. If you’re interested in learning about our company incorporation services, click “Explore Services” below.
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Countries around the world execute various tax treaties to provide benefits for both business entities and individuals. Double taxation avoidance agreements or double tax treaties offer tax exemptions, tax credits, and overall reductions in tax rates.
Singapore currently has several DTAAs with other countries. These agreements contribute to the efficiency of Singapore’s tax system. This article highlights important provisions of the India-Singapore DTAA, tax applicability, tax rates, the scope of the agreement, and the advantages of the DTAA between India and Singapore.
This article covers the following topics:
The DTAA between India and Singapore is a tax treaty that avoids the double taxation of income between Singapore and India and reduces the overall tax burden of the residents of both countries.
Without the India-Singapore DTAA , income is liable to be double taxed (i.e., each country may levy its own tax on the same income). This double taxation unfairly penalizes income flows between countries, thereby discouraging trade and commerce.
To address this problem and reduce the overall taxpayer burden, Singapore and India signed the treaty. Therefore any income that’s taxable in both the countries will be taxable only in one country as per the terms of the DTAA.
Since 2020, there have been a few significant revisions to the India-Singapore DTAA. These are as follows.
Withdrawal of Dividend Distribution TaxIn 2020, the Indian government launched several tax reforms aimed at reviving the country's economy and improving its investment climate. The most noteworthy of which was unveiled in its Union Budget for 2020–2021. On Feb. 1, 2020, India announced its bold move to withdraw the Dividend Distribution Tax (DDT) (i.e., the tax paid by the dividend payer).
Dividends are now taxed in the hands of the recipients (i.e. shareholders of the dividend distributing company). Given the preferential tax treatment of dividends in the India-Singapore tax treaty, the introduction of the new dividend tax regime creates an outstanding opportunity for substantial tax savings.
Implementation of OECD’s Multilateral InstrumentsOn April 1, 2020, the Multilateral Instruments of the Organisation for Economic Co-operation and Development (OECD) came into force for India and Singapore. This convention affects the application of the India-Singapore tax treaty.
One of the key changes is the introduction of the Principal Purpose Test (PPT). Tax authorities of a jurisdiction use PPT to determine if a person or entity has set up a transaction in a different jurisdiction solely for tax avoidance purposes.
Under the new rules, tax treaty benefits may be denied if tax treaty abuse is suspected. For more information on how your business in India and/or Singapore can prepare for the current DTAA regime, explore our article India ratifies OECD’s MLI: Its impact on Singapore-India DTA.
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1994 January 30
The Double Taxation Avoidance Agreement between Singapore and India comes into effect
Provisions are modified by a protocol to eliminate most taxes on capital gains
2011 September 1
A second protocol to incorporate OECD’s standard for the exchange of information for tax purposes comes into force
2016 December 30
A third protocol is signed to preserve the majority of tax exemptions on capital gains
2020 February 1
India announces its withdrawal of the Dividend Distribution Tax
The OECD’s Multilateral Instruments come into force for India and Singapore
We Have Helped Thousands Incorporate In Singapore
Contact Our Experts 88 Google reviewsThe India-Singapore double tax treaty is applicable to the residents (i.e., legal entities and individuals) of the signing states (i.e., India and Singapore). Its key aspects are explained below.
Types of Taxes CoveredThe following taxes are covered in the DTAA:
In India
In Singapore
The India-Singapore DTAA specifically defines where different types of income will be subject to tax. The country where income is taxable determines the applicable tax rate. See this table for more information.
Tax Rates ApplicableThe tax rate depends on a) the country where tax is to be paid b) the type of income and c) the maximum rate specified (if any) in the DTAA for that type of income. India-Singapore tax treaty distinguishes different kinds of income, which carry different tax rates. In some cases, the DTAA specifies a maximum rate for a type of income. In other cases, the country specific rate may be used. While planning a tax strategy, it is therefore important to consider the DTAA specified rates and corresponding prevailing tax rates in the country of taxation as they can differ.
What Taxes Will I Owe Under the India-Singapore Double Tax Agreement?
The tax you owe will depend on the country where you have to pay the tax which further depends on the type of income involved. Taxes on various types of income are described in the following sections.
Business ProfitsAccording to the Singapore-India double tax treaty, the profits of an enterprise are taxable only in the state where its business operations are carried out. If a Singapore-based business has a permanent establishment in India, profits attributable to the permanent establishment are taxed only in India.
If Singapore and India did not have a DTAA in force, business profits could be taxed in both Singapore and India. Profits generated by the permanent establishment would thereby bear the tax burden twice.
Interest, Royalties, and DividendsThe India-Singapore double tax agreement defines applicable tax rates for income derived from interest, royalties, dividends, and more. Generally, DTAA tax rates are lower than prevailing tax rates in the individual countries.
Interest
Without the treaty, the withholding tax rate in Singapore for any interest paid to non-residents is 15%. In India the rate ranges from 5–20% (depending on the type of interest) plus surcharge and cess. Under the India-Singapore DTAA, tax on interest is as follows:
Royalties
Without the treaty, the withholding tax rate in Singapore for any royalties paid to non-residents is 10%. In India the withholding tax rate for any royalty paid to non-residents is 10% plus surcharge and cess. Under the DTAA, the tax rate for royalties is 10–15% (depending on the kind of royalty paid to non-residents).
Dividends
Prior to April 1, 2020, India did not levy any withholding tax for dividends. However, the company paying dividends bears a dividend distribution tax (DDT) of 15% (plus surcharge and cess) when paying the dividend to its shareholders. The recipient shareholder is exempt from paying any tax on dividends. Thus, in India shareholders pay no tax on dividends, but the company pays a tax.
As of April 1, 2020, India abolished the DDT. Dividends are now taxed in the recipient's hands. India has since introduced a dividend withholding tax. The rate is 10% for dividends paid to shareholders who reside in India and 20% if paid to foreign investors. The India-Singapore double tax agreement reduces this rate to 10% or 15% as described below.
The India-Singapore double tax agreement states that dividend income is taxed in the recipient’s state of residence as follows:
In Singapore, dividend distributions by a company are tax free. Additionally, the recipient shareholder is exempt from taxes on dividend income. Thus, in most situations setting up a company in Singapore is the right strategy since its dividends will not be taxed either at the company level or at the recipient level.
The introduction of the new dividend tax regime by India creates an exciting opportunity for substantial tax savings for both foreign and Indian shareholders if they use the proper corporate structure. To learn more, see our article Singapore Benefits From India's New Dividend Tax Policy.
To compare which one of these two countries is more beneficial for launching a startup, check out our article Launching a Startup in India vs Singapore.
Capital GainsIn 2005, the India-Singapore DTAA was amended. The amendment provides that any capital gains from property sales or shares are taxable only in the country where the investor resides. Thus, capital gains on Indian assets realized by a Singapore resident will only be taxed in Singapore. But since Singapore does not levy any tax on capital gains, such a transaction will be tax free.
For example, if a Singapore resident sells shares of an Indian company, it will be exempt from capital gains tax both in India and Singapore. This significant tax benefit is designed to encourage investments in India from Singapore-based companies.
However, to avoid the misuse of this exemption (especially by third-country residents who establish holding companies in Singapore to avail the capital gains exemption) the treaty added a Limitation of Benefits (LOB) clause.
Under this clause, a Singapore-incorporated company is not entitled to the capital gains exemption if the sole purpose of the company’s establishment is to avail of the benefit. Additionally, companies that have negligible business operations in Singapore with no continuity in business activities are not entitled to this benefit. As a result of the LOB clause, the agreement is not applicable to shell companies.
What Is a Shell company?
A shell company is a legal enterprise which is “resident” of either Singapore or India but has negligible business operations in the state or no continuous business activities. A “resident” company of either country is considered a shell company if (in the 24 months before gains accrue to the company) the total annual expenditure of its operation is:
According to the third protocol DTAA amendment that was signed Dec. 30, 2016:
Capital Gains on Sale of Shares: Third Protocol
Prior to the Dec. 30, 2016 amendment, the India-Singapore DTAA stated that the capital gains on the sale of shares were to be taxable only in the country where the investor resides. However, the third protocol to the Singapore-India double tax treaty outlines the following changes:
This amendment is beneficial to Indian investors or entrepreneurs who wish to invest in Singapore companies or incorporate their businesses in Singapore. Since Singapore does not levy any capital gains tax, the capital gains that arise from the sale of shares of a Singapore company by an Indian resident are not subject to taxation.
It’s also important to note that this treatment of capital gains taxation is limited only to gains arising from the sale of shares. Capital gains on any other type of property are still taxable in the country where the investor resides.
Summary of Amended Capital Gains Tax Treatment
Shares acquired
Capital Gains Tax on Sale of Shares
Rate of Tax
Before April 1, 2017
Taxed in the country where the investor resides
100% of the capital gains tax rate
April 1, 2017–March 31, 2019
Taxed in the country where the company is a tax resident
50% of the capital gains tax rate
After March 31, 2019
Taxed in the country where the company is a tax resident
100% of the capital gains tax rate
Treatment of Associated EnterprisesThe DTAA also regulates the activities of companies called associated enterprises. Under its provisions, two enterprises are considered to be associated when:
Legislation within India and Singapore requires that transactions between associated enterprises be conducted at arm’s length. That means the prices of goods and services exchanged between companies under common control should be similar to those between independent enterprises.
The treaty also regulates situations where an arm’s length principle is breached. In such a case, any profits that have not accrued to one of the enterprises (by reason of the above conditions) may be included in the profits of that enterprise and taxed accordingly.
Any pricing disputes between the associated enterprises and their countries may be resolved through a mutual agreement procedure (as explained in Article 27 of the treaty). In order to prevent such disputes and ensure transactions between associated enterprises are at arm’s length, companies may seek to conclude an advance pricing arrangement (APA). An APA is an ahead-of-time agreement (between the taxpayer and tax authority) on an appropriate transfer pricing methodology to be used for a set of transactions over a fixed period of time, which are called covered transactions.
