Cambodia Investment Review

Singapore’s New Taxation Policy Could Profoundly Impact How Cambodian Investments Are Structured & Managed: DFDL Cambodia

Singapore’s New Taxation Policy Could Profoundly Impact How Cambodian Investments Are Structured & Managed: DFDL Cambodia

Cambodia Investment Review

Recent developments in Singapore’s tax policies are prompting investors to reassess their Singaporean requirements. Singapore, long favored for its transparent and efficient tax regime, is seeing changes that could profoundly impact how Cambodian investments are structured and managed.

“Singapore has always been a go-to for Southeast Asian investments, especially for Cambodia,” explains Clint O’Connell Partner at DFDL Cambodia and a leading tax expert. “It’s clean image and tax effectiveness make it an ideal jurisdiction. But the latest modifications are a game-changer for those who do not prepare adequately.”

Singapore’s tax regime offers substantial benefits, including a quasi-territorial system, favorable tax rates, and incentives, particularly appealing for foreign direct investments (FDI) in Cambodia. This appeal was further enhanced by the Cambodia-Singapore Double Taxation Agreement (DTA), operational since 2018, offering tax reliefs and reduced withholding tax rates.

Singapore’s Second Protocol Amending the DTA

Once ratified the recent Second Protocol Amending the DTA, signed in November 2023, will align with the OECD’s initiatives against tax base erosion and profit shifting (BEPS). A crucial element of this alignment is the introduction of the Principal Purpose Test (PPT) as part of BEPS Action 6. This test scrutinizes the primary intent behind structuring investments through Singapore, aiming to prevent treaty abuse.

“The PPT is essentially a litmus test for investment structures,” O’Connell notes. “It challenges investors to prove that their use of the DTA is not primarily for tax benefits. This is a significant shift from previous practices and puts the onus on investors to demonstrate substantive economic ties in Singapore.”

Read more: GDT Engages with Cambodia’s Leading Business Chambers on Pressing Taxation Concerns

General Department of Taxation address concerns from AmCham and EuroCham representatives on October 5, 2023.

For investors, this means ensuring that their Singaporean entities are not merely conduits for tax benefits. Criteria such as having key management personnel in Singapore and demonstrating control and decision-making processes within the country become critical.

Additionally, beginning January 1, 2024, Singapore’s new tax on foreign-sourced disposable gains marks a departure from its earlier stance. Previously exempt, these gains will now be taxed if the relevant entities lack ‘economic substance’ in Singapore.

“This new tax on foreign-sourced gains is another layer of complexity,” adds O’Connell. “It’s not just about having a presence in Singapore anymore. Investors must demonstrate that their entities are operationally and economically rooted in Singapore.”

More Stringent Compliance and Substance Requirements

These changes signify a move towards more stringent compliance and substance requirements. Investors can no longer rely on basic/shelf company structures in Singapore for tax benefits. This shift necessitates a strategic assessment for those using Singapore as a base for Cambodian investments.

“The era of the shelf company in Singapore for tax planning has been over for some time,” O’Connell cautions. “Investors need to embed real substance into their Singaporean operations. It’s about aligning with the evolving tax landscape while ensuring that investments remain viable and compliant.”

The recent tax policy shifts in Singapore are not just regulatory changes but a fundamental realignment of investment strategies between Cambodia and Singapore. Investors must now prioritize economic substance and compliance to harness the benefits of the Cambodia-Singapore investment corridor effectively.

To learn more about the full tax review click here.

Related Articles