Singapore Advance Ruling clarifies treatment of Tax Deferred Distributions from foreign trusts

The Inland Revenue Authority of Singapore (IRAS) published a summary of Advance Ruling No. 13/2026 on 3 August, which clarified whether tax deferred distributions derived from a foreign trust would be subject to Singapore income tax.

The taxpayer, a Singaporean investment holding company (Company A), held a foreign property trust (X Property Trust), which held 100% of a second foreign property trust (Y Property Trust), which in turn held 100% of a third foreign property trust (Z Property Trust).

All the property trusts were constituted in a third country where they are tax transparent for income tax purposes. Z Property Trust owned a property from which it will derive rental income and will make a distribution up the structure to the taxpayer.

As such, the tax (if any) on the distribution income from X Property Trust will be borne by Company A, while the distribution income from X Property Trust to Company A will be subject to withholding tax in Country X.

When X Property Trust makes cash distributions in excess of its net taxable income to Company A, these are tax deferred distributions, which are generally attributable to building allowances, tax depreciation and other tax timing differences. The tax deferred distributions are not taxable when received but reduce the cost base of the units in the trust in the hands of Company A in the third country. The tax deferred distributions should be recorded as return of capital in the books of Company A.

The taxpayer would be liable for withholding in the foreign country and inquired concerning taxation in Singapore. Upon review, IRAS determined that:

• Under Section 10(1) of Singapore’s Income Tax Act, tax deferred distributions derived by Company A from X Property Trust, to the extent of the amount of capital invested in X Property Trust, would not be subject to tax in Singapore and would be treated as a reduction of the cost of the investment in X Property Trust by Company A.
• Should it be determined subsequently that any gains from the disposal of the investment in X Property Trust is taxable, such gains would be computed based on the original cost incurred less the tax deferred distributions.

The ruling is specific to the applicant and the relevant arrangement and should not be interpreted as a general exemption for all foreign trust distributions. It should be noted that the non-taxable treatment applies to distributions characterised as returns of capital, limited to the amount of capital invested in the foreign trust.

“The distinction between capital repayments and taxable income is particularly important for Singapore investment holding companies with overseas trust structures,” said Wiliam Kim, Client Accounting Manager at Sovereign Management Services in Singapore.
“Proper classification, documentation and monitoring of investment cost bases are therefore essential to managing both current and future tax exposure.”