On or about 30 Jun 2020, the Inland Revenue Authority of Singapore (IRAS) has published an Income Tax Advance Ruling Summary No. 4/2020 with regards to “Exchange fee paid pursuant to exchange of Notes”.

The Subject was whether the Exchange Fee can be regarded as:

  1. a gain (or loss) on disposal by Noteholders and does not fall under section 12(6) of the Income Tax Act, in which case the tax treatment to Noteholders would depend on their personal circumstances (i.e.capital or revenue in nature) and such Exchange Fee payable to non-resident Noteholders would not be subject to Singapore withholding tax; or
  2. “break cost” or “prepayment fee” (as defined in section 13(16) of the SITA) under the Qualifying Debt Securities (“QDS”) scheme, in which case the Exchange Fee would not be subject to withholding tax when paid or deemed paid by the Issuer to non-resident Noteholders. Noteholders would also be entitled to the QDS tax concessions and exemptions in respect of such amount under sections 13(1)(ba) and 43N of the SITA, and individuals deriving such income (other than through a partnership in Singapore or from the carrying on of a trade, business or profession in Singapore) would be exempt from tax on such income pursuant to section 13(1)(zk) of the SITA.

It was ruled that:

  1. As the Exchange Fee is a payment in connection with the underlying indebtedness of the principal sum of the Notes, it falls under section 12(6)(a) of the SITA.
  2. The Exchange Fee does not fall within the definition of “prepayment fee” under section 13(16) of the SITA as the Conditions do not provide for an amount for early redemption of the Notes.
  3. The Exchange Fee falls within the definition of “break cost” under section 13(16) of the SITA as it represents the amount payable to Noteholders to compensate Noteholders for the loss incurred by them in connection with such early redemption of the Notes. Therefore, subject to satisfying the governing conditions under the Income Tax (Qualifying Debt Securities) Regulations, sections 43N, 13(2F) of the SITA, where applicable:
    • Noteholders deriving the Exchange Fee will be entitled to tax exemptions and concessions available under sections 13(1)(ba) and 43N of the SITA, and individuals deriving such income (other than through a partnership in Singapore or from the carrying on of a trade, business or profession in Singapore) would be exempt from tax on such income under section 13(1)(zk) of the SITA; and
    • The Exchange Fee will not be subject to withholding tax when paid by the Issuer to non-resident Noteholders of the Notes under the QDS Scheme

For more information about the ruling, please go to the IRAS website.

Source, IRAS, 2 Jul 2020