New double tax treaty will help French businesses operating in Singapore, says expert
A new double tax treaty between France and Singapore will be of particular help to French companies operating in Singapore, especially in the construction industry, an expert has said.
Franck Lagorce, an expert in French tax at Pinsent Masons, the law firm behind Out-law.com was commenting following an announcement from the Singapore tax authority that the treaty came into force on 1 June.
“Changes in the new treaty to the definition of permanent establishment will benefit French construction and infrastructure businesses operating in Singapore. French businesses in all sectors operating in Singapore will also potentially be able to benefit from an enterprise to enterprise exemption from withholding tax on interest” he said.
Under the new treaty, construction sites and infrastructure projects operated by French companies in Singapore lasting for up to 12 months will no longer constitute a permanent establishment and so may not give rise to a Singaporean tax liability. In addition an exemption from withholding tax on interest will be available where interest is paid by a Singaporean business to a French one.
If a French company is operating in Singapore, it will only be subject to tax in Singapore to the extent that its profits derive from a permanent establishment (PE) in Singapore. The same principle will apply in the case of a Singaporean company operating in France. The new treaty changes the definition of PE so that a building site, construction or assembly or installation project will be treated as a PE if the activities, site or project last for more than 12 months. The previous treaty had a six month limit.
The new treaty also provides that the provision of services, including consultancy services will constitute a PE when the activity is conducted for more than 365 days in any 15-month period. Singapore based tax expert Valerie Wu,also from Pinsent Masons, said: “This is a useful improvement to the definition of PE as any construction and infrastructural activity requires extensive planning and consultancy”.
On interest payments, the general rule under the current treaty, which continues in the new treaty, is that the tax that either state can withhold on interest paid to a resident of the other state cannot exceed 10%. However, the new treaty provides a new complete exemption from withholding tax where the interest is paid by an ‘enterprise’ of one of the contracting states to an enterprise of the other contracting state. There is normally no withholding tax in France on interest but Singapore currently levies a withholding of 15%.
“Singapore is an important trade partner for France, providing access to the Association of Southeast Asian Nations (ASEAN) trade zone, a market of more than 650 million consumers. Over 600 French companies operate in Singapore, whereas only around 40 Singaporean businesses operate in France. Therefore, although the revised treaty will benefit Singaporean businesses looking to do business in France, it will have a much greater impact on French companies with operations in Singapore,” Franck Lagorce said.
The ASEAN zone comprises the countries of Brunei Darussalam, Myanmar/Burma, Cambodia, Indonesia, Laos, Malaysia, Philippines, Singapore, Thailand and Vietnam.
Under the new treaty dividends continue to be generally taxable in the country of the beneficiary, with a possible withholding in the country of source. The rate of withholding is capped at 15% for individuals, and also for companies which own less than 10% of the company paying the dividends.
In the new treaty, the cap on the amount of tax that can be withheld in the country where the country paying the dividend is located will be 5% for beneficial owners who are companies which own directly or indirectly at least 10% of the share capital of the company paying the dividends. There is currently no dividend withholding tax in Singapore but there is a withholding of 30% in France.
The treaty replaces a treaty dating back to 1974. The new treaty was signed in 2015 but had to be ratified by both states before it could come into effect. This has now happened and it came into force on 1 June 2016 and will begin to apply to residents of France and Singapore from 1 January 2017, although the start dates vary depending on the type of tax.
The renegotiation of the treaty coincided with the OECD’s base erosion and profits shifting (BEPS) project, to come up with recommendations to prevent the international avoidance of tax by multinational companies. Franck Lagorce said that the influence of the OECD BEPS project can be seen in provisions in the treaty which introduce anti-abuse measures to reduce the risks of tax fraud and evasion, limit some tax advantages and insert an exchange of information clause in line with the most recent OECD model.
A new ‘main purpose’ anti-abuse clause denies the benefits of the treaty where the main purpose for entering into certain transactions or arrangements was to secure a more favourable tax position.
“Although there are benefits for those genuinely conducting business in the other state, the tightening up of the anti abuse provisions means that it will be more difficult to artificially structure arrangements to take advantage of the new treaty,” Lagorce said.
There are specific provisions in the new treaty aimed at real estate investment vehicles. The distribution of income from some real estate investment vehicles will be treated as a dividend, unless the beneficial owner holds 10% or more of the capital of the investment vehicle. This will allow the country where the vehicle is located to withhold tax from the dividend.
Franck Lagorce said: “This clause is typical of the more modern clauses inserted by France, since the introduction in France of specific taxation regimes related to some real estate vehicles. This clause is viewed as targeting listed real estate companies which have elected for the ‘SIIC’ regime and the non-listed regulated vehicles known as ‘OPCI – SPPICAV. It will affect Singapore resident investors in these vehicles.'”
“The definition of capital gains on immovable properties has also been changed in the new treaty, at the request of France. This means that ‘immovable properties’ will comprise not only the immovable property itself (eg French real estate), but also shares or rights in a company or trust where more than 50% of whose assets or property comprise real estate or which derive more than 50% of their value, directly or indirectly from real estate. This will allow France to levy its capital gains tax, at a rate of currently around 34%, wherever shares are sold in a Singapore company or other vehicle holding mainly French real estate,” he said.