These subsidiaries, in which the parent company owns more than 50 percent of the voting stock, have their own corporate bank accounts and operating capital. The subsidiaries can also own assets.
Notably, the shares owned by the parent company in its subsidiary are an asset in the parent company’s balance sheet.
Independence of a Singapore Subsidiary from its Parent Company
As subsidiary-parent business structure is connected through ownership, often stakeholders may treat the two entities as one company. To prevent this from happening, it’s always advisable for the parent company to ensure that its subsidiary operates independently by having a strong management team at the helm that can take independent business decisions. Separate reporting of annual financial returns also helps.
A subsidiary-parent company structure is created when one (parent) holds the controlling rights in the other (subsidiary). A parent company can create several subsidiaries with all under its control. If this happens, but the parent company has no primary business activity of its own, the parent is known as the holding company.
All subsidiary companies owned by the same parent company are known as sister companies. These sister companies may have no connection other than sharing the same parent company. Sometimes they may compete in the same market against each other. For instance, Exxon Mobile and ConocoPhillips (the sisters), both owned by Berkshire Hathaway (the parent), are competitors in the gas and oil markets.
In Singapore too, many foreign companies, in a bid to establish their presence in Asia’s business headquarter and take advantage of the city-state’s attractive corporate tax framework, prefer to incorporate a subsidiary company.
The subsidiary has a distinct legal identity than the parent foreign company in Singapore and is treated as a local tax-resident here. This means that the parent company’s liabilities are limited and its assets always remain protected. Do note that the parent company can either be local or overseas-based.
Moreover, ACRA, the national regulator of business entities and public accountants, allows 100% foreign shareholding in a subsidiary company and the liability of every shareholder is limited to the value of the shares it subscribes to.
- Enjoy tax benefits prevailing in the region where the subsidiary is incorporated.
- Cushion against liabilities as subsidiary is a distinct legal entity.
- Raise capital as incorporating a subsidiary allows the parent company to offer stocks in a portion of its share in the subsidiary; all this while the parent company’s stocks are not affected.
- As not all business operations are suitable for public investment and disclosure requirements, the parent company can choose which activities to make public and which to retain private by means of a subsidiary.
- Sometimes, incorporating a subsidiary is beneficial if its business activities are different from the parent company. This helps in keeping the brand identities separate for both the entities.
Some Singapore-specific reasons for setting up a subsidiary company include:
- The subsidiary company can have paid-up capital in the same currency as its parent company, which makes the accounting procedure easier.
- As every company in Singapore has the freedom of fiscal year determination, the subsidiary and parent can match theirs to streamline the operations.
- The subsidiary’s name can be different from that of the parent company.
- The subsidiary is free to repatriate all its profits and capital out of Singapore.
Incorporating Procedure for a Subsidiary Company in Singapore
The key requirements are also the same, as follows:
- at least one shareholder (individual or corporate entity)
- one resident director
- one company secretary
- initial paid-up share capital of at least S$1
- a physical Singapore office address
- Step 1 – Choose a company name. Maybe same or different from the parent company.
- Step 2 – Choose a description of the business activities using SSIC 2010.
- Step 3 – Decide the shareholding pattern and draft a shareholders agreement.
- Step 4 – Finalise the details of shareholders, directors, and company’s local office address.
- Step 5 – Appoint a Company Secretary.
- Step 6 – Finalise the Memorandum and Articles of Association (MAA).
- Step 7 – Appoint an auditor. (this must be done within three months of incorporation)
- Step 8 – After incorporation, you can acquire the subsidiary’s business profile, incorporation certificate, share certificate, first board resolution, and bank account opening resolution.
- Step 9 – Open a bank account.
- Step 10 – Additionally, you may want to get the company seal and company stamp made for the subsidiary.
Applying for Employment Pass
After the subsidiary is incorporated, all foreign employees working in the subsidiary will need work visas to be able to work in Singapore. We can assist you with our full spectrum of work visa processing services. This includes reviewing the candidacy, acting as a liaison with the Ministry of Manpower (MOM), applying for the work visa, processing renewals, appealing, as well as tracking the application status.
Work visas in Singapore range from work permits for domestic workers and labourers, S Pass for mid-level skilled workers, to Employment Passes (EP) for experienced professionals, managerial personnel, executives or specialists with good credentials.
Please click here to refer to our comprehensive guide on Singapore Employment Pass.
Statutory Compliance Requirements for a Singapore Subsidiary Company
Every company in Singapore, whether exempt private, public or a subsidiary, has several for-incorporation and post-incorporation requirements.
Please click here to read more about these mandatory compliance requirements and how we can assist you in fulfilling these.
Tax Benefits of a Singapore Subsidiary Company
While incorporating a subsidiary company in Singapore has many benefits including – availability of affordable funding, ease of doing business, robust IP protection and legal system, excellent connectivity, and strategic location among the world’s leading emerging markets; the most important from a corporate point of view is the city-state’s attractive tax framework.
Singapore resident companies are taxed on profits derived in Singapore, as well as on foreign soil, which are then remitted to Singapore. The corporate income tax rate since 2010 has been fixed at 17%. It is calculated on the basis of the company’s chargeable income i.e. taxable revenues less allowable expenses and other allowances.
In addition, there are various government incentives, subsidies and schemes such as Productivity and Innovation Credit (PIC) Scheme, Start-up Tax Exemption (SUTE) Scheme, as well as the Corporate Income Tax (CIT) rebate, which makes the effective tax payable to be even lower than 17 percent.
Tax Exemptions for Foreign Sourced Income
Also, if you incorporate a subsidiary company in Singapore, your main focus will always be on the company’s foreign sourced income. Here you can read about various tax exemption clauses for foreign sourced income of subsidiary companies as well as how to avoid pitfalls while adhering to these clauses.
Foreign sourced dividend, foreign branch profits, and foreign sourced service income, but only if the headline corporate tax rate in the foreign country from which the income is received is at least 15 percent, and the income had already been subjected to taxes in that particular country.
How to avoid pitfalls in exemptions?
Give close attention to the “subject to tax” and “fixed place of operation” clauses imposed by IRAS while determining the tax-residency of a subsidiary. Do note that the Authority also takes strong exception to the practice of “treaty shopping”.
Insolvency of Parent Company
If the parent becomes insolvent, what happens to the subsidiary?
If a subsidiary becomes insolvent, the effect on the parent company is rather limited. Parent companies are not traditionally held liable for the debts or actions of their subsidiaries, which was the primary reason they were set up in the first place.
But what if it’s the other way round, and the parent becomes insolvent?
The effect on a subsidiary depends on the level of insolvency of the parent company.
Generally, there are two kinds of insolvency, both of which involve the parent company being unable to meet its financial obligations. When liabilities exceed assets, it is called balance-sheet insolvency.
If the parent company cannot pay obligations as they become due, it is called cash-flow based insolvency, which can lead to legal insolvency proceedings. In this, a court determines the liquidation process of a company’s assets in order to pay the outstanding debts.
The parent company can still seek legal protection under bankruptcy laws and initiate action to pay creditors. If the parent company fails to take action to protect itself from dissolution, under any reasons, it will result in the selling of the stock of a subsidiary to repay debts of the parent. Please note that the above scenario predicated on the subsidiary’s stock being an asset on the balance sheet of the parent company.
Need help with incorporating a Singapore subsidiary company? Contact us now.