The latest e-Tax Guide by IRAS was published on 9 Sep 2024.
The following are the broad considerations that the Comptroller of Income Tax (CIT) would regard as having the effect of tax avoidance within the meaning of section 33(1) of the Income Tax Act (ITA):
(i) Shifting of income derived mainly from one’s personal efforts or skills to a company;
(ii) Artificial splitting of income through the incorporation of multiple companies;
(iii) Artificial re-incorporation of the same business; and
(iv) Attribution of income or profit not aligned with economic reality. E.g. Is the Medical professional receiving an arm’s length remuneration?
Many Medical professionals in private practice earn income which is largely derived from the provision of their personal services. IRAS has, through its audits, observed medical professionals incorporating one or more companies to manage their practice and receive this income.
In some cases, there were very few or no commercial reasons for the set-up of companies and the arrangement allowed the taxpayer to reap the following tax advantages:
(i) Lower corporate income tax rates
An overall lower effective tax rate due to a lower corporate income tax rate versus the higher marginal personal income tax rate; The highest marginal personal income tax rate has increased from 22% (since YA 2017) to 24% (with effect from YA 2024) while the corporate income tax rate is 17% (since YA 2010). Corporatising one’s personal business may allow one to benefit from the lower corporate tax rate.
(ii) Corporate tax exemptions and rebates
Companies are eligible to enjoy lower tax rates under the Start-up Tax Exemption Scheme and Partial Tax Exemption Scheme, which are schemes introduced to encourage entrepreneurship.
Companies may also receive tax rebates in some years. Artificially splitting income earned from one source or a set of operation and attributing it to several companies may allow one to unduly benefit from multiple sets of tax exemptions and rebates. In some cases, businesses re-incorporate themselves every three years so that they can continuously take advantage of the start-up tax exemption, which only applies to companies in their first three YAs.
There were also cases where the set-up of a company was supported by commercial reasons, but the remuneration paid to the Medical professional performing the bulk of the services was not aligned with market value of similar services.
While it is taxpayers’ prerogative to determine the structure of their businesses, obtaining a tax advantage cannot be one of the main purposes of the chosen arrangement.
