On or about 1 Dec 2020, the Inland Revenue Authority of Singapore (IRAS) has published an Income Tax Advance Ruling Summary No. 14/2020 with regards to “Qualifying Debt Securities”.
The Subject was whether:
- the perpetual capital securities (“Securities”) will be regarded as “debt securities” for the purpose of section 43N(4) of the Income Tax Act and Regulation 2 of the Income Tax (Qualifying Debt Securities) Regulations;
- the Distributions (including Arrears of Distributions and any Additional Distribution Amounts) payable on the Securities will be regarded as interest payable on indebtedness and will enjoy the tax concessions and exemptions available for “qualifying debt securities” (“QDS”) assuming that the other requisite conditions for the Securities to be QDS are satisfied.
The key features of the Qualifying Debt Securities (ODS)
The key features of the Qualifying Debt Securities (ODS) under section 43N(4) of the SITA and Regulation 2 of the Income Tax (Qualifying Debt Securities) Regulations, include:
- The Securities confer the right to the Security holders to receive fixed rate Distributions, payable semi-annually in arrears (each a “Distribution Payment Date”). The Rate of Distribution does not depend on the profit performance of the Issuer. Distributions may be made even if the Issuer does not have profits for the payment of dividends. There is a step-up feature.
- The Issuer may in its sole discretion elect not to pay a Distribution which would otherwise be payable on a Distribution Payment Date (“Arrears of Distribution”), except in certain specified situations.
- Distributions will accrue on each Arrears of Distribution for so long as such Arrears of Distribution remains outstanding at the same Rate of Distribution as the Principal Amount of the Securities bears at
such time (“Additional Distribution Amounts”) and will be added to such Arrears of Distribution (and thereafter bear Distributions accordingly) on each Distribution Payment Date. - The Issuer is not subject to any limit as to the number of times Distributions and Arrears of Distribution may be deferred.
- If on any Distribution Payment Date, payment of all Distributions scheduled to be made is not made in full by reason of the Issuer deferring such Distributions in accordance with the terms of the Securities, the Issuer is not allowed to pay discretionary dividends, distributions or make any other discretionary payment on any class of the Issuer’s Junior Securities (other than a dividend, distribution or other payment in respect of an employee benefit plan or similar arrangement), or to redeem, reduce, cancel, buy-back or acquire for any consideration any of the Issuer’s Junior Securities (other than a redemption, reduction, cancellation, buy-back or acquisition in respect of an employee benefit plan or similar arrangement) until the Issuer has satisfied in full all outstanding Arrears of Distribution; or is permitted to do so with the consent of the Security holders of at least a majority in aggregate principal amount of the Securities then outstanding.
- The Securities have no fixed redemption date. The Issuer has the option to redeem the Securities in certain instances.
- The Securities constitute direct, unconditional, unsecured and unsubordinated obligations of the Issuer and will at all times rank pari passu with each other and with all other outstanding, unsecured and unsubordinated obligations of the Issuer, past and future, but, in the event of insolvency, only to the extent permitted by applicable laws relating to creditors’ rights.
- The Securities do not confer any voting rights on Security holders.
- The Securities are treated as equity for tax purposes in Country X in accordance with Country X’s accounting rules.
It was ruled that:
- Following the characterisation of the Securities as “debt securities” for tax purposes under s 43N(4) of the SITA and Regulation 2 of the QDS Regulations, the Distributions (including Arrears of Distributions and any Additional Distribution Amounts) due and payable on the Securities will be regarded as interest payable on indebtedness.
- The Securities will be regarded as QDS under the ITA and the Distributions (including Arrears of Distributions and any Additional Distribution Amounts) will enjoy the tax concessions and exemptions available for QDS, provided that the other requisite conditions for the Securities to be QDS are satisfied
- Subject to satisfying the governing conditions for the Securities to be regarded as QDS, the Security holders will be entitled to the tax concessions and exemptions available for QDS
For more information about the ruling, please go to the IRAS website.
Source, IRAS, 3 Dec 2020