Singapore Tax Advance Rulings Summary: July 2025

Executive Summary

This insight summarises four key advance tax rulings issued by IRAS in the first half of 2025, covering:

Ruling 01/2025: Earnout settlement payments as capital receipts.

Ruling 02/2025: Employee partnership interests and foreign-sourced income.

Ruling 03/2025: Treatment of contingent consideration in share sale transactions.

Ruling 07/2025: Pure equity holding entities and the taxation gains from disposals are taxed under section 10L of the Income Tax Act.

Ruling 01/2025: Earnout Settlement as Capital Receipts

Issue

Whether a single earnout settlement payment received by a founding shareholder is considered taxable income under Section 10(1) of the Income Tax Act.

Facts

Company: Singco A, based in Singapore.

Transaction: Sale to foreign company (Holdco) with an earn-out clause.

Settlement: Because of poor performance and divestment, all future earnouts were paid in a single, reduced amount.

Ruling

The settlement payment is not taxable; it is considered a capital receipt rather than income under Section 10(1) of the Income Tax Act.

Key Reasoning

The payment was made in lieu of future earnout payments as part of a capital transaction (share sale and subsequent divestment). Application of badges of trade analysis:

The Settlement originated from the sale of the company, rather than from ongoing business operations.

Frequency: A single transaction, not ongoing trading activity.

Implications

Lump-sum earnout settlements may be considered as capital receipts under certain conditions.

Shareholders facing similar circumstances might gain from settlement amounts that are not subject to tax.

Structure matters: make sure the settlement is associated with the capital transaction, not the ongoing business.

Ruling 02/2025: Employee Partnership Interests

Issue

Tax implications of B Shares in foreign limited partnerships provided to Singapore employees as part of incentive compensation.

Facts

Entity: Singapore private equity firm.

Structure: B Interests in an overseas limited partnership (Fund X) located in Country Y.

Terms:

Employees pay the market value upon subscription.
Interests vest gradually, including provisions for call-backs.
Distributions occur only after five years and complete repayment by A/A2 investors.
Employees are responsible for research roles rather than making investment decisions.

Ruling

Acquisition: Treated as a benefit-in-kind under Section 10(1)(b), since Section 10(6) does not apply to partnerships.

Distributions: Foreign-sourced income is exempt under Section 13(7A) when received in Singapore.

Disposal: Capital gains are not subject to tax.

Key Reasoning

Partnership versus Company: B Interests represent partnership interests, not corporate shares, so the rules in Section 10(6) regarding employment income do not apply.

Foreign Source: A partnership that is legally and economically based outside of Singapore.

Capital Nature: Disposal constitutes a capital transaction.

Ruling 03/2025: Contingent Consideration in Share Sales

Issue

Whether additional "founder consideration" paid to founding shareholders based on post-sale performance targets is taxable income.

Facts

Company: Company A.

Sellers: Three founding shareholders.

Buyer: Overseas company.

Structure: An initial payment followed by additional founder consideration ($X) paid quarterly, contingent on sales targets.

Outcome: Two out of eight quarterly targets were achieved; founders received 25% of $X.

Ruling

The founder's consideration is not subject to tax; it is classified as capital in the share sale consideration.

Key Reasoning

The sale and purchase agreement explicitly states $X as equity consideration rather than compensation for employment.

Stamp Duty is payable on the total consideration, including $X, confirming it as share proceeds.

Performance Metrics: The right to $X depends on the company's overall performance, not the founders' performance.

Employment separation: founders maintained independent, arm's-length employment contracts without any overlap.

Breach Protection: Founders might still obtain portions of $X despite some conditions being violated.

Recommendations

When structuring similar transactions:

Clarify that contingent consideration pertains to the share transfer value.

Avoid linking payments to individual performance or ongoing employment.

Include contingent consideration when calculating stamp duty.

Note that payments may still be owed even if employment relationships change.

Ruling 07/2025: Pure Equity Holding Entities (PEHE)

Issue

Whether gains from the sale of shares in a foreign company by a Pure Equity Holding Entity are subject to tax under the foreign-sourced disposal gains regime.

Facts

Company A: A pure equity holding entity that owns shares in foreign Company B.

Transaction: Sale of shares in Company B.

Economic Substance: Company A satisfied the PEHE criteria outlined in Section 10L(16).

Ruling

Disposal gains are NOT subject to tax because Company A is considered an excluded entity according to Section 10L(8)(d) and (16).

Key Requirements Met

Annual Filing: Returns have been submitted to ACRA.

Singapore Management: Operations and activities are overseen in Singapore.

Adequate Resources: Sufficient personnel and premises in Singapore.

Function Test: The Entity's sole purpose is to hold shares of Company B, generating only incidental income and thus satisfying the PEFE requirement.

Important Limitations

All rulings are non-binding and specific to the facts.

Other taxpayers should obtain their own advance rulings or legal advice.

Tax law changes or IRAS interpretation shifts could influence future treatment.

Seeking professional advice is crucial when implementing similar structures.

This summary is for informational purposes only and does not constitute legal or tax advice. Each situation requires individual analysis and professional guidance.