The Inland Revenue Authority of Singapore (IRAS) has issued an Advance Ruling (Income Tax) Summary No. 15/2025, clarifying that the endorsement of promissory notes to settle intercompany interest receivables does not trigger the “received in Singapore” requirement for foreign-sourced interest income under the Income Tax Act 1947.
Key Facts of the Ruling
- Parties: Company A (Singapore parent), Company B (Singapore, wholly-owned subsidiary of A), and Company X (foreign subsidiary of A, tax resident outside Singapore).
- Arrangement: Company X owed loans and interest to both Company A and Company B. These receivables were settled via:
- Company X issuing new promissory notes (representing new loans/capital injection).
- Endorsing these promissory notes to Company A and Company B (transferring the right to receive payment).
- Legal Question: Does this settlement method – specifically the endorsement of the promissory notes – mean the underlying foreign-sourced interest income from Company X is regarded as received in Singapore by Companies A and B under Section 10(25) of the Income Tax Act 1947?
IRAS Determination
IRAS ruled that the endorsement of the promissory notes does NOT result in the foreign-sourced interest income being regarded as received in Singapore for the purposes of Section 10(25).
Rationale
The ruling hinges on the legal nature of promissory note endorsement:
- Endorsement is Transfer of Right: Endorsing a promissory note constitutes the transfer of the right to receive payment from the issuer (Company X) to the endorsee (Companies A/B).
- Not Actual Receipt: This transfer of a right to future payment is distinct from the actual receipt of the interest income itself. The underlying interest income remains payable by the foreign entity (Company X) and was settled by transferring a debt instrument (the note), not by remitting cash or funds into Singapore.
- Section 10(25) Threshold: For foreign-sourced income (like interest) to be taxable in Singapore, it must be received in Singapore. Mere bookkeeping entries or transfers of debt rights via endorsement, without the funds physically or constructively entering Singapore, do not meet this threshold under the specific circumstances of this ruling.
Significance
This ruling provides crucial clarity for multinational corporations and groups with complex intercompany financing structures:
- It confirms that settling intercompany interest obligations via the endorsement of promissory notes, as described, is not equivalent to bringing the foreign interest income into Singapore for tax purposes.
- This offers certainty on the tax treatment of a specific non-cash settlement mechanism used within corporate groups.
- Companies utilizing similar debt restructuring or settlement techniques involving promissory notes should review this ruling carefully for its implications on their Singapore tax position regarding foreign-sourced interest.
Source: IRAS, 1 August 2025.