The Inland Revenue Authority of Singapore has published Advance Ruling Summary No. 17/2022, concerning the tax treatment of liquidation proceeds.
Advance Ruling Summary No. 17/2022
Whether the Liquidation Proceeds (defined below) to be derived by Company A upon liquidation of Company B are capital in nature and not assessable to tax under section 10(1) of the Income Tax Act 1947 (2020 Revised Edition) ("ITA").
Relevant background and facts:
Company A is a company incorporated and tax resident in Singapore. In year X, it was designated to act as the main holding company for investments of the ultimate beneficial owner ("UBO") of Group A, Mr Z.
Prior to year X, the UBO held its investments mainly through an investment holding company, i.e. Company C. Company C had provided inter-company loans (the "Intercompany Loans") to fund various operating affiliates in Group A, which were ultimately owned by UBO.
In year Y, Company C incorporated a wholly owned subsidiary in Singapore, i.e. Company B. Company B was set up to facilitate the holding of and novation of the Intercompany Loans from Company C to Group A. Company B took over the Intercompany Loans from Company C. In return, Company B issued new ordinary shares to Company C.
In year Y, Company A acquired 100% shareholding in Company B from Company C.
Over the years, the Intercompany Loans were fully repaid to Company B. Company B used its excess cash (from the repayment of the Intercompany Loans) to extend loans to Company A.
Having achieved the purpose stated at paragraph (c) above, the UBO plans to streamline the investment holding structure through the liquidation of Company B.
Upon liquidation, Company B anticipates distributing any excess of assets over liabilities to its shareholder, Company A. The net assets would be distributed to Company A ("Liquidation Proceeds"). The Liquidation Proceeds would be in the form of a distribution in specie, i.e. by way of offsetting the balances in loans and advances due from Company A.
Relevant legislative provision:
Income Tax Act 1947 (2020 Revised Edition) – Section 10(1)
The Liquidation Proceeds to be derived by Company A upon liquidation of Company B are capital in nature and not subject to tax under section 10(1) of the ITA.
Reasons for the decision:
The Liquidation Proceeds represent a return of capital to Company A upon liquidation of Company B. Thus, it is not taxable under section 10(1) of the ITA.