Singapore, long considered a favorable destination for foreign investment, is facing increased scrutiny regarding the economic substance of companies operating within its borders. This development is poised to cast a "tax shadow" on investments routed through Singapore, particularly those directed towards India, while simultaneously cracking down on the use of shell companies.
Recent advance rulings by the Inland Revenue Authority of Singapore (IRAS) are at the heart of this shift. These rulings precisely define and endorse what constitutes "economic substance" for companies. If a Singaporean entity fails to meet these defined conditions, particularly since their inclusion in 2024 as Section 10L of Singapore's Income Tax Act, it risks being unable to prove it has adequate "substance." The implications of this are far-reaching, especially for multinational corporations (MNCs) and international funds using Singapore as a base for investing in and acquiring Indian companies.
The Indian Income Tax (I-T) Department could leverage this lack of "economic substance" to levy higher taxes. This could manifest as imposing tax on stock sale transactions or demanding increased tax on earnings from dividends and loan interest paid by an Indian company to its Singapore-based parent. Dealmakers and businesses with significant Indian operations are keenly observing these developments, understanding that the ground rules for cross-border transactions are potentially shifting.
The emphasis on economic substance signifies a move away from prioritizing legal form to prioritizing economic reality. Ashish Karundia, from the CA firm Ashish Karundia & Co., highlights that these rulings are the first to evaluate economic substance factors, which could be used by Indian tax authorities to determine whether a Singapore-based entity is merely a conduit, particularly when applying the Principal Purpose Test (PPT). PPT is a provision that allows tax treaty benefits to be denied if the primary purpose of an arrangement is to obtain a tax advantage.
The implications of this change are significant due to the change in law prioritizing substance and economic reality over legal form. Girish Vanvari, founder of Transaction Square, emphasizes that tax professionals and business leaders must recalibrate how Singapore is used in cross-border structuring, especially concerning Indian operations. If Singapore is being utilized as a holding or intellectual property base for investments related to India, a thorough review of the structure is essential.
Singapore has been India's largest source of Foreign Direct Investment (FDI) for the past seven years. Singapore's FDI contribution increased to $14.94 billion in 2024-25, representing approximately 19% of total inflows in 2024-25. The country has a flat 17% corporate tax rate for profits above S$300,000 and has over 80 double taxation avoidance agreements. Furthermore, Singapore generally doesn't tax capital gains.
However, Singapore has had its share of illicit dealings as well. In early March 2024, one of India's law enforcement agencies uncovered a money laundering operation involving fake invoices issued by purported shell companies in Singapore for software and other services. The Enforcement Directorate (ED) alleged that shell companies in India had paid the firms in Singapore using monies received from loan, gambling and betting apps controlled by "Chinese entities". The ED has frozen 1.23 billion rupees (S$19.9 million), suspected to be proceeds of crime belonging to Singapore shell entities and parked in bank accounts of Nium India.
Overall, companies must ensure that their Singaporean entities possess genuine economic activity, including substantial operations, employees, and decision-making processes within Singapore, to avoid falling under increased tax scrutiny.
