Foreign investors have a wide range of business structures to choose from when doing business in Singapore.
- representative offices
- branches of parent companies
- Singapore subsidiaries
- joint ventures
When a foreign corporation wishes to explore the Singaporean market to analyses the suitability of the market for its goods and/or services, it may elect to open a representative office. A representative office is permitted and licensed to carry out limited activities including market research, auxiliary or support services (such as the dissemination of market information) and promotional and liaison work for the foreign corporation it represents. It can also engage in customer service to the extent of answering queries on behalf of the foreign corporation.
A representative office cannot conduct any business activities of a profit-yielding nature, carry out any trading activities or enter into any contracts in Singapore (other than for the purpose of carrying out any permitted activities), nor is it allowed to open any letters of credit directly or indirectly on behalf of its head office. As a representative office is not revenue producing, it is a cost center to the foreign corporation.
The government authority responsible for registering representative offices for most industries (including manufacturing, business services and commerce) is International Enterprise Singapore (the IES).
Representative offices of banking, finance and insurance businesses have to be registered with the Monetary Authority of Singapore (MAS).
A representative office must be staffed by a representative from the foreign corporation’s head office and it can engage Singaporean support staff. Liabilities of a representative office are borne by the foreign corporation.
A representative office would not normally be regarded as a taxable entity in Singapore as it does not generate income. However, unless protected under a tax treaty, in some circumstances, the Inland Revenue Authority of Singapore (IRAS) may take the view that there is some profit element which should be subject to tax (for example, where the representative office regularly secures orders for acceptance by the overseas head office of the foreign corporation). In such circumstances, the IRAS may impose taxes based on a notional profit of 5 per cent of the operating overheads and expenses incurred by the representative office in Singapore. In this case, tax would be levied at the normal corporate rate on the notional profit amount. This is because the IRAS may regard the activities rendered by the representative office to the head office of the foreign corporation as sufficient to amount to a taxable presence in Singapore.
If a foreign company wishes to conduct business in Singapore but does not wish to establish a separate legal entity, it may register a branch. A branch is a registered legal entity although unlike a subsidiary, a branch is treated as an extension of the foreign company. The name of the foreign company’s Singapore branch must be the same as that of the head office.
A branch must have a registered office address in Singapore and two local agents for acceptance of service of process and notices. Note that the liabilities of the branch are the liabilities of the foreign company which established it.
A branch will not be subject to limitations on the scope of its activities. However, just as with any other business or company operating in Singapore, certain types of business activities will require governmental approvals and licenses. The registered foreign company will then be able to carry on business in Singapore through its branch.
From a taxation point of view, a branch is considered a non-resident entity (because control and management are exercised outside Singapore) and, therefore, is not eligible for tax exemptions and incentives available to local companies in Singapore. The IRAS will impose income tax on the income of the branch accrued in or derived from Singapore. The current applicable corporate tax rate (for the 2010 year of assessment onwards) is 17 per cent on all chargeable income accrued in or derived from Singapore.
Singapore allows 100 per cent foreign ownership in companies. Therefore, a foreign company may incorporate a limited liability company in Singapore and own 100 per cent of its shareholding. One advantage of a subsidiary arrangement is that it “ring fences” the liability of the parent company from operations carried on by the Singapore subsidiary.
A company must be incorporated with a minimum of one member and have at least one director who is ordinarily resident in Singapore. A Singapore citizen, permanent resident or an employment pass holder will typically satisfy this requirement. Subject to compliance with these residency requirements, the sole shareholder and director can be the same person. Every Singapore-incorporated company must maintain a registered office in Singapore and have at least one company secretary who is ordinarily resident in Singapore.
A subsidiary may be either a private or a public company. Professional assistance should be sought to ensure that the most suitable corporate structure is chosen. The majority of companies in Singapore are private companies. Private companies are limited to a maximum of 50 non-employee shareholders. Although it is possible to incorporate a company with unlimited liability, there may be few commercial or other benefits in doing so. In a limited liability company, the liability of the members to contribute to the debts of the company is limited to the amount they each agreed to contribute as capital. Private companies are also subject to fund-raising restrictions and must not offer their shares to the public or engage in any activity that would require the lodgment of a disclosure document (for example, a prospectus). A private limited company’s name in Singapore normally ends with “Private Limited” or “Pte Ltd”.
Public companies are usually listed on a stock exchange and have well-established medium-to-large businesses with a large number of shareholders. Public companies are subject to more stringent rules and regulations as they have the ability to raise funds from the public. A public company’s name in Singapore ends with “Limited” or “Ltd”.
A corporate tax rate of 17 per cent for the 2010 year of assessment applies to Singapore incorporated and registered companies.
General partnerships are comparatively inexpensive to establish and can be formed quickly. The agreement creating the partnership does not need to be registered. However, if the partnership trades under a business name, that name must be registered.
Each partner is personally liable (on a joint and several basis) with the other partners for the debts and obligations of the partnership incurred while the relevant person is a partner. Each partner can be held responsible for the actions of another partner. Subject to an exception for certain types of professional partnerships, partnerships may not generally have more than 20 members.
A partnership must lodge an income tax return (Form P) as if it were an ordinary taxpayer but is not itself assessed for income tax on its taxable income. Instead, the individual partners are assessed on their share of the taxable income of the partnership together with any other personal income they may have. The partners may claim a deduction for any losses that the partnership incurs.
Limited liability partnerships
A limited liability partnership (LLP) is a hybrid between a company and a general partnership and was introduced in 2005 through the enactment of the Limited Liability Partnership Act (Cap 163A).
An LLP partner can be an individual or a business entity and retains the desired flexibility of a partnership to the extent that it has less onerous reporting requirements than companies. Further, an LLP partner’s liability is limited (that is, a partner is not liable for liabilities of the other partner(s)).
An LLP must have at least two partners at all times and one manager who is ordinarily resident in Singapore. The manager may be held personally liable for the failure of the LLP to submit an annual declaration of solvency statement.
For income tax purposes, an LLP is tax-transparent (that is, each LLP partner will bear the liability of paying taxes according to its own tax circumstances, which would include its share of profits from the LLP). For treaty purposes, the Singapore tax authorities may not issue a tax residency certificate for the LLP as it is a tax-transparent entity, but may consider issuing the certificate to the LLP’s partners who are individuals or companies resident in Singapore for tax purposes.
Limited partnerships were introduced in 2009 through the enactment of the Limited Partnership Act (Cap 163B) (LP Act) and have become a popular vehicle for private equity and investment funds in Singapore. A limited partnership must consist of one or more general partners and one or more limited partners. There is no prescribed upper limit on the total number of partners. A limited partnership is essentially a general partnership with passive investors participating as limited partners.
A limited partner’s liability is capped at his agreed investment in the limited partnership provided that the limited partner does not participate in management of the limited partnership. If the limited partner does participate in management of the limited partnership, he risks losing his limited liability status for the period of such participation in management. The LP Act helpfully sets out a non-exhaustive list of “safe harbor” activities which do not constitute participating in management of a limited partnership.
General partners typically manage the limited partnership and have unlimited personal liability for all debts and obligations of the limited partnership incurred while they are general partners. In consequence, it is common for the general partner to be set up as a special purpose limited liability company.
Like a general partnership, a limited partnership has no separate legal personality and, therefore, cannot own assets in its own name.
A limited partnership is tax-transparent; all partners are taxed on their share of the limited partnership’s income and gains according to their personal income tax rates.
Unincorporated joint ventures and co-ventures
This type of business arrangement should be distinguished from a partnership. A joint venture is an association of persons created when two or more parties agree to work towards a common goal. This arrangement is often structured so that it is not a partnership, as the parties to the joint venture do not share the profit of the venture and do not wish to be legally liable for each other’s acts and liabilities. However, notwithstanding the intentions of the parties, Singapore law may, under certain circumstances, regard that business arrangement as a partnership, and legal advice should be sought if the arrangement is not intended to be regarded as such.
Careful legal planning is required to achieve the most favorable tax treatment and to avoid any undesired classification as a partnership.
Joint venture company
This takes the form of a company incorporated to carry on the joint venture on behalf of its shareholders. The company is a separate legal entity distinct from its shareholders and is used where a number of parties wish to carry on business together. The component parties’ liability is limited to their share of capital investment in the joint venture company.
While not commonly used in Singapore, a trust can be utilized as a business vehicle or as an investment vehicle whereby a trustee conducts the trust’s business on behalf of its “members” (legally known as “beneficiaries” of the trust). The trustee may be a company (usually proprietary) created for this purpose. The income generated will belong to the beneficiaries of the trust and the rights and duties of the trustees are set out in the trust deed.
A trust is not an independent legal entity. The trustee can assume obligations on behalf of the trust and is allowed to use trust assets to satisfy trust debts as provided for in the trust deed.
For trusts which are registered under the Business Trusts Act (Cap 21A), the tax treatment applicable to normal trusts does not apply. A registered business trust will instead be subject to tax like a company under the one-tier system and income will continue to be taxable at the trustee level. The unit holders will, however, not be taxed on their share of the statutory income of the trust to which they are entitled and no credit will be allowed to the unit holders for the tax paid by the trustee.
Shelf companies are “ready-made” companies available for immediate use. Shelf companies, therefore, offer a solution to an urgent requirement for a company as it usually takes an average of a week to incorporate a company in Singapore. Shelf companies have all the powers of a company under the Companies Act (Cap 50) to carry out any nature of business.
Investors may wish to consider raising local equity by listing on the Singapore Exchange (SgX). This avenue is also available to companies incorporated outside Singapore. The SgX serves a wide array of international and domestic investors and end users, including many of the world’s largest financial institutions.
Potential investors should ask their legal advisers for a thorough outline of the current listing rules.