1StopConsultants
Your One Stop Solutions business partner in the SE Asia region!
| Home |  | SG-Types of Business entities |
Types of Business entities
General
Foreign investors have a wide range of business structures
to choose from when doing business in Singapore.
The most common business entities used by non-residents in
Singapore are:
- representative offices
- branches of parent companies
- Singapore subsidiaries
- partnerships
- joint ventures
- trusts.
Representative office
When a foreign corporation wishes to explore the Singaporean
market to analyses the suitability of the market for its goods and/or services,
it may elect to open a representative office. A representative office is permitted
and licensed to carry out limited activities including market research,
auxiliary or support services (such as the dissemination of market information)
and promotional and liaison work for the foreign corporation it represents. It
can also engage in customer service to the extent of answering queries on
behalf of the foreign corporation.
A representative office cannot conduct any business
activities of a profit-yielding nature, carry out any trading activities or
enter into any contracts in Singapore (other than for the purpose of carrying
out any permitted activities), nor is it allowed to open any letters of credit
directly or indirectly on behalf of its head office. As a representative office
is not revenue producing, it is a cost center to the foreign corporation.
The government authority responsible for registering
representative offices for most industries (including manufacturing, business
services and commerce) is International Enterprise Singapore (the IES).
Representative offices of banking, finance and insurance
businesses have to be registered with the Monetary Authority of Singapore
(MAS).
A representative office must be staffed by a representative
from the foreign corporation’s head office and it can engage Singaporean
support staff. Liabilities of a representative office are borne by the foreign
corporation.
A representative office would not normally be regarded as a
taxable entity in Singapore as it does not generate income. However, unless
protected under a tax treaty, in some circumstances, the Inland Revenue
Authority of Singapore (IRAS) may take the view that there is some profit
element which should be subject to tax (for example, where the representative
office regularly secures orders for acceptance by the overseas head office of the
foreign corporation). In such circumstances, the IRAS may impose taxes based on
a notional profit of 5 per cent of the operating overheads and expenses
incurred by the representative office in Singapore. In this case, tax would be
levied at the normal corporate rate on the notional profit amount. This is
because the IRAS may regard the activities rendered by the representative
office to the head office of the foreign corporation as sufficient to amount to
a taxable presence in Singapore.
Branch office
If a foreign company wishes to conduct business in Singapore
but does not wish to establish a separate legal entity, it may register a
branch. A branch is a registered legal entity although unlike a subsidiary, a
branch is treated as an extension of the foreign company. The name of the
foreign company’s Singapore branch must be the same as that of the head office.
A branch must have a registered office address in Singapore
and two local agents for acceptance of service of process and notices. Note
that the liabilities of the branch are the liabilities of the foreign company
which established it.
A branch will not be subject to limitations on the scope of
its activities. However, just as with any other business or company operating
in Singapore, certain types of business activities will require governmental
approvals and licenses. The registered foreign company will then be able to
carry on business in Singapore through its branch.
From a taxation point of view, a branch is considered a
non-resident entity (because control and management are exercised outside
Singapore) and, therefore, is not eligible for tax exemptions and incentives
available to local companies in Singapore. The IRAS will impose income tax on
the income of the branch accrued in or derived from Singapore. The current
applicable corporate tax rate (for the 2010 year of assessment onwards) is 17
per cent on all chargeable income accrued in or derived from Singapore.
Singapore subsidiary
Singapore allows 100 per cent foreign ownership in companies.
Therefore, a foreign company may incorporate a limited liability company in
Singapore and own 100 per cent of its shareholding. One advantage of a
subsidiary arrangement is that it “ring fences” the liability of the parent
company from operations carried on by the Singapore subsidiary.
A company must be incorporated with a minimum of one member
and have at least one director who is ordinarily resident in Singapore. A
Singapore citizen, permanent resident or an employment pass holder will
typically satisfy this requirement. Subject to compliance with these residency
requirements, the sole shareholder and director can be the same person. Every
Singapore-incorporated company must maintain a registered office in Singapore
and have at least one company secretary who is ordinarily resident in
Singapore.
A subsidiary may be either a private or a public company.
Professional assistance should be sought to ensure that the most suitable
corporate structure is chosen. The majority of companies in Singapore are
private companies. Private companies are limited to a maximum of 50
non-employee shareholders. Although it is possible to incorporate a company
with unlimited liability, there may be few commercial or other benefits in
doing so. In a limited liability company, the liability of the members to
contribute to the debts of the company is limited to the amount they each
agreed to contribute as capital. Private companies are also subject to
fund-raising restrictions and must not offer their shares to the public or
engage in any activity that would require the lodgment of a disclosure document
(for example, a prospectus). A private limited company’s name in Singapore
normally ends with “Private Limited” or “Pte Ltd”.
Public companies are usually listed on a stock exchange and
have well-established medium-to-large businesses with a large number of
shareholders. Public companies are subject to more stringent rules and
regulations as they have the ability to raise funds from the public. A public
company’s name in Singapore ends with “Limited” or “Ltd”.
A corporate tax rate of 17 per cent for the 2010 year of
assessment applies to Singapore incorporated and registered companies.
Partnership
General partnerships are comparatively inexpensive to
establish and can be formed quickly. The agreement creating the partnership
does not need to be registered. However, if the partnership trades under a
business name, that name must be registered.
Each partner is personally liable (on a joint and several
basis) with the other partners for the debts and obligations of the partnership
incurred while the relevant person is a partner. Each partner can be held
responsible for the actions of another partner. Subject to an exception for
certain types of professional partnerships, partnerships may not generally have
more than 20 members.
A partnership must lodge an income tax return (Form P) as if
it were an ordinary taxpayer but is not itself assessed for income tax on its
taxable income. Instead, the individual partners are assessed on their share of
the taxable income of the partnership together with any other personal income
they may have. The partners may claim a deduction for any losses that the
partnership incurs.
Limited liability
partnerships
A limited liability partnership (LLP) is a hybrid between a
company and a general partnership and was introduced in 2005 through the
enactment of the Limited Liability Partnership Act (Cap 163A).
An LLP partner can be
an individual or a business entity and retains the desired flexibility of a
partnership to the extent that it has less onerous reporting requirements than
companies. Further, an LLP partner’s liability is limited (that is, a partner
is not liable for liabilities of the other partner(s)).
An LLP must have at least two partners at all times and one
manager who is ordinarily resident in Singapore. The manager may be held
personally liable for the failure of the LLP to submit an annual declaration of
solvency statement.
For income tax purposes, an LLP is tax-transparent (that is,
each LLP partner will bear the liability of paying taxes according to its own
tax circumstances, which would include its share of profits from the LLP). For
treaty purposes, the Singapore tax authorities may not issue a tax residency
certificate for the LLP as it is a tax-transparent entity, but may consider
issuing the certificate to the LLP’s partners who are individuals or companies
resident in Singapore for tax purposes.
Limited partnerships
Limited partnerships were introduced in 2009 through the
enactment of the Limited Partnership Act (Cap 163B) (LP Act) and have become a
popular vehicle for private equity and investment funds in Singapore. A limited
partnership must consist of one or more general partners and one or more
limited partners. There is no prescribed upper limit on the total number of
partners. A limited partnership is essentially a general partnership with
passive investors participating as limited partners.
A limited partner’s liability is capped at his agreed
investment in the limited partnership provided that the limited partner does
not participate in management of the limited partnership. If the limited
partner does participate in management of the limited partnership, he risks
losing his limited liability status for the period of such participation in
management. The LP Act helpfully sets out a non-exhaustive list of “safe harbor”
activities which do not constitute participating in management of a limited
partnership.
General partners typically manage the limited partnership
and have unlimited personal liability for all debts and obligations of the
limited partnership incurred while they are general partners. In consequence,
it is common for the general partner to be set up as a special purpose limited
liability company.
Like a general partnership, a limited partnership has no
separate legal personality and, therefore, cannot own assets in its own name.
A limited partnership is tax-transparent; all partners are
taxed on their share of the limited partnership’s income and gains according to
their personal income tax rates.
Unincorporated joint
ventures and co-ventures
This type of business arrangement should be distinguished
from a partnership. A joint venture is an association of persons created when
two or more parties agree to work towards a common goal. This arrangement is
often structured so that it is not a partnership, as the parties to the joint
venture do not share the profit of the venture and do not wish to be legally
liable for each other’s acts and liabilities. However, notwithstanding the
intentions of the parties, Singapore law may, under certain circumstances,
regard that business arrangement as a partnership, and legal advice should be
sought if the arrangement is not intended to be regarded as such.
Careful legal planning is required to achieve the most favorable
tax treatment and to avoid any undesired classification as a partnership.
Joint venture company
This takes the form of a company incorporated to carry on
the joint venture on behalf of its shareholders. The company is a separate
legal entity distinct from its shareholders and is used where a number of
parties wish to carry on business together. The component parties’ liability is
limited to their share of capital investment in the joint venture company.
Trusts
While not commonly used in Singapore, a trust can be utilized
as a business vehicle or as an investment vehicle whereby a trustee conducts
the trust’s business on behalf of its “members” (legally known as
“beneficiaries” of the trust). The trustee may be a company (usually
proprietary) created for this purpose. The income generated will belong to the
beneficiaries of the trust and the rights and duties of the trustees are set
out in the trust deed.
A trust is not an independent legal entity. The trustee can
assume obligations on behalf of the trust and is allowed to use trust assets to
satisfy trust debts as provided for in the trust deed.
Business trusts
For trusts which are registered under the Business Trusts
Act (Cap 21A), the tax treatment applicable to normal trusts does not apply. A
registered business trust will instead be subject to tax like a company under
the one-tier system and income will continue to be taxable at the trustee
level. The unit holders will, however, not be taxed on their share of the
statutory income of the trust to which they are entitled and no credit will be
allowed to the unit holders for the tax paid by the trustee.
Shelf companies
Shelf companies are “ready-made” companies available for
immediate use. Shelf companies, therefore, offer a solution to an urgent
requirement for a company as it usually takes an average of a week to
incorporate a company in Singapore. Shelf companies have all the powers of a
company under the Companies Act (Cap 50) to carry out any nature of business.
Singapore Exchange
Investors may wish to consider raising local equity by
listing on the Singapore Exchange (SgX). This avenue is also available to
companies incorporated outside Singapore. The SgX serves a wide array of
international and domestic investors and end users, including many of the
world’s largest financial institutions.
Potential investors should ask their legal advisers for a
thorough outline of the current listing rules.