The Inland Revenue Authority of Singapore (IRAS) has issued an Advance Ruling (Individual Income Tax) Summary No. 3/2025, clarifying the tax treatment of contingent consideration paid to founding shareholders as part of a company acquisition. The ruling determines such payments are capital in nature and thus not subject to income tax.
The case involved the acquisition of a Singapore-based company by an overseas buyer (the Buyer). The transaction, governed by a Sale and Purchase Agreement (SPA), involved the transfer of all equity and preference shares held by the company’s three founding shareholders, alongside institutional and individual investors, to the Buyer.
The total acquisition consideration comprised two key elements:
- An initial payment; and
- Additional founder consideration payable solely to the founding shareholders.
This additional founder consideration was structured in eight equal tranches. The payout of each tranche was explicitly contingent upon the acquired company achieving specific quarterly gross sales value targets over the two-year period following the takeover.
The critical question before IRAS was whether these contingent tranche payments received by the founding shareholders constituted income (and thus taxable) or represented a capital receipt.
IRAS Ruling:
IRAS ruled that the additional founder consideration is capital in nature. The payments arise directly from the disposal of the founders’ shareholdings, forming part of the capital proceeds for the sale of their equity interest in the company. The contingent nature of the payments, based on post-acquisition performance targets, did not alter their fundamental character as part of the capital sum received for the disposal of their capital asset (the shares).
This ruling provides significant clarity for founders and tax practitioners involved in mergers and acquisitions. It confirms that earn-out structures linked to future performance, when tied to the sale of shares by founders as part of an exit, can be treated as part of the capital proceeds from the share disposal, provided the structure aligns with the specifics of this case. Such capital receipts are not subject to Singapore income tax.
Source: IRAS, 4 April 2025.