Section 10L Tax Treatment of Gains or Losses from Sale of Foreign Assets

The Inland Revenue Authority of Singapore (IRAS) has issued Advance Ruling Summary No. 2/2026 (dated 2 January 2026) read together with IRAS Advance Ruling Summaries Nos. 7/2025, 10/2025, 14/2025, addressing the economic substance requirements for non-PEHEs.

The ruling confirms that a Non-Pure Equity-Holding Entity (non-PEHE) must satisfy the full economic substance test under Section 10L(8)(d) to qualify as an “excluded entity”. The reduced PEHE standards do not apply

Case Facts

Company A is a Singapore-incorporated and tax-resident entity. It holds strategic investments in entities across the Asia-Pacific region and earns interest income from related-party loans. Consequently,

Company A does not qualify as a pure equity-holding entity (PEHE) under Section 10L(16) of the Singapore Income Tax Act 1947 (ITA), as its income includes interest (non-dividend passive income) in addition to dividends and disposal gains. Company A disposed of shares in a foreign company during the basis period for a given Year of Assessment (YA).

IRAS Ruling Clarification

To qualify as an excluded entity, a non-PEHE must demonstrate in the relevant basis period:

*Source: IRAS Advance Ruling Summary No. 2/2026; IRAS e-Tax Guide (Third Edition)*

Application to Company A

As a non-PEHE earning interest income from related-party loans, Company A must meet the full economic substance test – not the reduced PEHE criteria. Accordingly:

• If Company A satisfies the above requirements (adequate local employees, expenditure, and Singapore-based decision-making), it will qualify as an excluded entity. The foreign-sourced disposal gains from the share sale will not be subject to tax under Section 10(1)(g) ITA when remitted to Singapore.

• If Company A fails to meet these requirements, the gains will be subject to Singapore corporate tax at 17% upon remittance or deemed remittance.

Practical Issues for Tax Accountants

1. PEHE Classification Risk – The PEHE definition under Section 10L(16) is narrow. Entities earning any non-dividend passive income (e.g., interest, rental, royalty) fall outside the PEHE classification and must meet the more stringent non-PEHE substance test . Accountants should review holding company income streams to confirm classification.

2. No Minimum Thresholds – IRAS has not established quantitative minimums for employee headcount or business expenditure. Substance adequacy is assessed on a facts-and-circumstances basis. Entities should document all substance-related activities comprehensively .

3. Outsourcing Arrangements – Outsourcing of core income-generating activities is permitted only if:

   • Activities are performed in Singapore by the outsourced entity;

   • The outsourcing entity maintains direct and effective control;

   • Dedicated resources (e.g., manhours) are allocated by the service provider .

4. Advance Ruling Recommended – Given the absence of bright-line tests, entities contemplating material foreign asset disposals should proactively seek an IRAS advance ruling to confirm excluded entity status. Rulings provide tax certainty for up to five YAs .

5. SPV Structures – For special purpose vehicles (SPVs) with no local footprint, IRAS has confirmed (Advance Ruling 14/2025) that economic substance may be assessed at the ultimate holding company level, provided the holding company exercises effective control, derives economic benefits, and defines core investment strategies .

6. Documentation Requirements – Entities must maintain contemporaneous records demonstrating:

   • Employee qualifications and roles;

   • Business expenditure breakdown (Singapore vs. foreign);

   • Board meeting minutes showing Singapore-based decision-making;

   • ACRA filing compliance .

Recommendations

Sources: IRAS, 2 April 2024