As a strategic gateway to Asia, Singapore provides access to growing regional markets, world-class infrastructure, and a robust financial sector. Its favourable tax regime, skilled workforce, and stable political system make it attractive for businesses and investors. To optimise the benefits of establishing a hub in Singapore, it is crucial for investors to consider both entry and exit strategies carefully.
Section 13W of the Income Tax Act 1947, effective from 1 June 2012 to 31 December 2027, serves as a safe harbour for companies investing and disposing of ordinary shares, where tax is exempt on gains from the disposal of ordinary shares of investee companies that meet the following conditions:
- The divesting company must have held at least 20% of the ordinary shares in the investee company.
- This shareholding must have been continuous for a minimum period of 24 months prior to the disposal between 1 June 2012 and 31 December 2027 (both dates inclusive).
This safe harbour rule is important as determining whether gains from the disposal of shares are taxable has traditionally been a complex process in Singapore. This complexity arises because the Income Tax Act 1947 (ITA), being a tax on income and not capital gains, does not explicitly define the concepts of "income" and "capital." Consequently, companies have to rely on a set of case law principles known as the “badges of trade” to assess whether the gain from share disposals iscapital (non-taxable) or income in nature (taxable).
The badges of trade are guidelines derived from court decisions, which examine factors such as the intention behind acquiring the shares, the frequency of transactions, and the manner of disposal. This assessment often created uncertainty, as the classification depended on subjective interpretations of the facts and circumstances.
The safe harbour rule does not apply to:
- A company whose gains or profits from the disposal of shares are included as part of its income of a company referred to in Section 26 of the ITA (e.g. life insurers, insurers other than life insurers and composite insurers); and
- The disposal of non-listed shares of an investee company that is in the business of holding immovable properties, trading immovable properties or undertaking property development activities (for sale) in Singapore or abroad.
In the Budget 2025, the following enhancements to Section 13W of the ITA were announced:
- The sunset date of 31 December 2027 will be removed.
- The scope of eligible gains will be expanded to include those from the disposal of preference shares accounted for as equity.
- The 20% shareholding threshold conditions can be assessed on a group basis.
The above enhancements will apply to disposal gains derived on or after 1 January 2026. Further details will be provided by the Inland Revenue Authority of Singapore (IRAS) by the third quarter of 2025.
The enhancements to Section 13W will provide greater certainty and flexibility to businesses investing in Singapore. By removing the sunset date, companies can plan long-term investments with certainty, knowing the exemption scheme will remain permanently in place. The inclusion of preference shares broadens the scope of qualifying gains. Additionally, allowing the shareholding threshold to be assessed on a groupbasis increases the flexibility for group structures.
However, questions remain on the practical implementation of these changes, particularly in recognition that preference shares could function as hybrid instruments (e.g. debt vs equity) and how the shareholding threshold should be applied in such context.
Whilst we await further details, let’s not lose sight that gains on disposal of foreign assets by a Singapore company under certain circumstances is a taxable event, regardless of Section 13W.
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If you require advisory support on the tax implications arising from the enhancements to Section 13W of the ITA on your company, please contact our team.