Capital Gains Tax (CGT) is the money you are to pay to the state when selling something valuable with profit. In a country other than Singapore it would look like this: your company headquarters was in a mansion, its value increased threefold, you sold the mansion, it’s time to share your profits with the state.
Singapore does not tax capital gains — in most cases. But if you suspect that your situation might be an exception, read on. While it is always best to consult a Singapore accounting company (or your bookkeeping services provider), some of this information might be handy.
In Singapore, capital gains tax is only imposed if it is one of your business activities to make profits on selling the classes of assets listed below. In all other cases, the CGT rate is zero. So if you just need to get rid of that old house infested with ghosts, no capital gains tax is applied.
You don’t pay CGT when casually doing any of the following:
- Selling fixed assets: houses, cars, mansions, diamonds, racehorses, etc.
- Selling intangible assets: the rights for the song your studio owns or that TV series idea that Channel 5 wants to buy from you.
- Getting gains on foreign exchange on capital transactions: it's when you sell a piece of land for $150,000, convert the sum to Singapore dollars, and get S$212,000, but your accounting books show the historical value of the land at $150,000, and when converted, it is S$210,000 — well, this S$2,000 difference is not taxable.
Selling Shares & the “Safe Harbour” Rules
When do I still need to pay capital gains tax?
As we mentioned, the gains may be taxable if you sell assets with a profit-seeking motive. IRAS will decide if they consider you a trader by looking at your circumstances. They pay attention to the following aspects called Badges of Trade:
Holding period. If your company owned a Bugatti for one month and then sold it with a profit, it may look like your business entity had only bought the car to make money. If you sell properties at least once a year, IRAS will consider any gains as revenue gain.
Frequency of transactions. Has your company been selling a couple of houses every month with a profit? You might be trading.
Motive. If you planned to sell the asset from the moment of purchasing it, you are a trader. If you originally needed it for something else, you are not. Let’s say you are a legendary yachtsman. Your yacht club had bought a yacht, and you had signed its side to personalize it. 4 years later, the club sold the yacht with a profit because it had been signed by you (yep, you are that legendary). Had your company intend to make money on the future sale of the yacht from the beginning? There is a good chance to prove it did not.
Supplementary work done on the asset to increase its value. If your company buys a warehouse, turns it into a fancy loft and sells it to a coworking chain two months later, there is certainly some supplementary work in place.
Nature of the asset/property in question. IRAS considers some property types (e.g. commodities, manufactured items) more indicative of trade than others (e.g. antiques, artwork).
Circumstances of the realisation. Some circumstances behind the company’s idea to sell something can clear the business of all suspicion. For example, when a company is forced to sell the property due to compulsory acquisition, a sudden urgent need for cash, or a threat of foreclosure by creditors.
Be sure to collect and store evidence indicating you bought the asset with some goal other than selling it. Keep the records showing that you owned the asset/the property for a long time. Be ready to present all that to IRAS.
Other questions that IRAS may ask:
- What financing did you use to buy the property?
If you purchase a land with a 25-year loan and sell it later, it will be a capital gain and won’t be taxed. A trading company would not pay the loan for 25 years, it needs to buy and sell faster. Thus, short-term financing is a wake-up call for IRAS. If you buy the asset with a 5-year loan or less, IRAS is likely to discern a profit motive.
- Did the company do its research (feasibility studies)? In other words, did you try to figure out if the sale of the asset would be considered capital gain or revenue gain? IRAS expects you to.
- How did you account for the transaction in the books? What were the reasons for capitalizing it or treating it as a non-taxable gain? Was it based on the Financial Reporting Standards or on your feasibility studies?
- Do you have "evidence indicating intention"? When the authorities want to retake a piece of land, they send you a letter and oblige you to sell everything you own on that land. When you do this, it is not seen as revenue but as a capital gain. Hence, there will be no tax, so keep the letter.
Selling Shares & the “Safe Harbour” Rules
Under the “safe harbour” rules, also known as Section 13Z, you can enjoy zero capital gains tax when selling common stocks and profiting from it. The “safe harbour rule” is applicable to deals made before 31 May 2022.
If Company A sells ordinary shares of Company B on the stock exchange, the gains may be exempt from tax. It does not matter if Company B is Singapore-incorporated or not. It also does not matter if it is listed or not.
To qualify for zero Capital Gains Tax, Company A needs to meet the following conditions:
- It must hold at least 20% of the ordinary shares in company B.
- It must hold the shares for at least 24 months before selling them.
If these conditions are not met, IRAS will inspect the deal and use the Badges of Trade criteria that we listed above.
Singapore has zero Capital Gains Tax because it encourages investment in the country. High CGT rate makes entrepreneurs and investors steer clear of the jurisdiction, while low rates attract them. Singapore has the advantage of zero capital gains tax, and the only thing needed to profit from it is to back your transactions with papers that prove your motives.