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03 March 2021

Singapore updates guidance on tax residence status and determination of a permanent establishment due to COVID-19

Executive summary

The Inland Revenue Authority of Singapore (IRAS) updated its COVID-19 Support Measures and Tax Guidance on 29 January 2021. In this update, the application period for tax residence status and permanent establishment (PE) is extended. In addition, guidance is provided on the interpretation of the provisions of Singapore’s Avoidance of Double Taxation Agreements (DTAs), and determining whether the PE threshold for building sites, construction, installation and assembly projects has been satisfied.

This Alert summarizes the guidance issued by the IRAS to date for companies.

Detailed discussion

Tax residence of a company

The IRAS is prepared to consider a company as a Singapore tax resident for the Year of Assessment (YA) 2021 and/or YA 20221 where the company is not able to hold its board of directors meeting2 in Singapore due to the travel restrictions relating to COVID-19, provided it meets all the following conditions:

  • The company is a Singapore tax resident for the immediately preceding YA.
  • There are no other changes to the economic circumstances3 of the company.
  • The directors of the company have to attend the board of directors meeting held outside Singapore or if the meeting is held via electronic means (e.g., video-conferencing, teleconferencing) due to the directors being temporarily restricted in their travel as a consequence of COVID-19.

Conversely, IRAS will consider a company as a nonresident for YA 2021 and/or YA 2022, provided it meets all the following conditions:

  • The company is not a Singapore tax resident for the immediately preceding YA.
  • There are no other changes to the economic circumstances of the company.
  • The company has to hold its board of directors meeting in Singapore due to the travel restrictions related to COVID-19.

Permanent establishment of a foreign company

The IRAS will consider that the presence of a foreign company’s employees remaining in Singapore due to travel restrictions relating to COVID-19 does not result in the creation of a PE in Singapore for the foreign company for YA 2021 and/or YA 2022 (see endnote 1), provided it meets all the following conditions:

  • The foreign company does not have a PE in Singapore for the immediately preceding YA.
  • There are no other changes to the economic circumstances (see endnote 3) of the company.
  • The presence of the employees in Singapore is due to travel restrictions related to COVID-19 and their physical presence in Singapore up to 30 June 20214 is temporary.
  • The activities performed by the employees during their presence in Singapore would not have been performed in Singapore but for the travel restrictions related to COVID-19.
  • These employees will leave Singapore as soon as they are able to do so, following the relaxation of travel restrictions related to COVID-19.

To support the tax residence status and the position that there is no PE in Singapore, companies should keep relevant documentation and records and provide such information to the IRAS upon request.

Interpretation of the provisions of Singapore’s Avoidance of Double Taxation Agreements (DTAs)

For the interpretation of the provisions of Singapore’s DTAs, the IRAS has indicated that references may be made to the Organisation for Economic Co-operation and Development (OECD) Secretariat analysis and guidance of tax treaties and the impact of the COVID-19 crisis published on 3 April 20205 and on 21 January 2021.6

Determining whether the PE threshold for building sites, construction, installation and assembly projects has been satisfied

The IRAS has decided to “stop the clock” for determining whether the construction PE threshold has been exceeded during certain periods where operations are suspended as a public health measure to prevent the spread of COVID-19. Specifically, the IRAS will not count the 122 days during the lock-down period from 7 April 2020 to 6 August 2020, provided that the nonresident enterprise meets all the following conditions:

  • The nonresident enterprise must have carried out “construction works” (as defined7) in relation to a construction contract, in Singapore.
  • The building site, construction, assembly or installation project must be in connection with a qualifying construction contract(s), which refers to a construction contract (including one to which the Government is a party) that meets the following specified criteria:
    • Entered into before 25 March 2020, but not if the construction contract was renewed (other than automatically) on or after that date
    • Remains in force on 2 November 2020
    • Where, as at 7 April 2020, any “construction works” (as defined, see endnote 7) to be performed under the construction contract have not been certified in accordance with the construction contract as completed."
  • No construction work was performed at any time between 20 April 2020 and 30 June 2020.
  • The nonresident enterprise must be subject to tax in the jurisdiction of residence on the total profits derived from the activities carried out in Singapore if the nonresident enterprise does not have a PE in Singapore as a result of the application of the universal extension of time.8
  • The nonresident enterprise should keep all relevant documentations and records to substantiate that all the above conditions are met and provide such information to the IRAS upon request.

Implications

The updated tax guidance is a positive development and will provide certainty and clarity for businesses on tax residency and PE matters, especially since the previous guidance was only applicable for the relevant period up to 31 December 2020.

Foreign enterprises that created a PE in 2020 arising from construction contracts in Singapore should review whether they are entitled to exclude the period from 7 April 2020 to 6 August 2020 in computing their PE threshold. To the extent that this results in a no PE assessment, they should seek a refund of the withholding tax paid.

It is crucial that companies maintain relevant documentation and records to support their claims relating to their tax residence or PE matters, and to provide them to the IRAS upon request.

As the COVID-19 situation is constantly evolving, companies should continue to monitor this topic for any updated guidance issued by the IRAS.

_________________________________________

For additional information with respect to this Alert, please contact the following:

Ernst & Young Solutions LLP, International Tax and Transaction Services – International Corporate Tax Advisory, Singapore

Ernst & Young LLP (United States), Singapore Tax Desk, Chicago

Ernst & Young LLP (United States), Asia Pacific Business Group, New York

_________________________________________

Endnotes

  1. Companies that have applied the conditions to determine its tax residency or permanent establishment status for YA 2021 are also allowed to apply the conditions to determine its status for YA 2022.
  2. During which the strategic decisions of the company are made.
  3. These include: (a) the principal activities and business model of the company; (b) the nature of the business operations and the conduct of the business in Singapore and elsewhere; and (c) The usual locations in which the company operates.
  4. This date is subject to review as the COVID-19 situation evolves.
  5. OECD’s weblink: OECD Secretariat analysis of tax treaties and the impact of the COVID-19 crisis.
  6. OECD’s weblink: Updated guidance on tax treaties and the impact of the COVID-19 crisis - OECD.
  7. Section 3(1) of the Building and Construction Industry Security of Payment Act.
  8. As a Covid-19 statutory relief for construction sector, the COVID-19 (Temporary Measures) Act 2020 which Singapore enacted also provides a universal extension of time of 122 days in relation to construction contract completion date, to address delays that arose during the lock-down period between 7 April 2020 and 6 August 2020 (both dates inclusive) for eligible construction contracts.

Document ID: 2021-5254

 
 

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