Tax Exemption for Startups

SUPPORT MECHANISM:

The Start-up Tax Exemption (SUTE) scheme for newly-incorporated companies is to enable startups to preserve their cash flow and profits. 

Tax Exemption for Startups is introduced by the Singapore Government, enabling qualifying startups to exempt paying the tax on the first S$100,000 of their income. The main objective of the scheme is to enable startups to preserve their cash flow and profits. A further 50% exemption is given on the next S$200,000 of income.

IMPLEMENTING AGENCIES:

Enterprise Singapore

ELIGIBILITY:

SUTE eligibility conditions include:

  • must have no more than 20 individual shareholders
  • in case of corporate shareholders, one individual must hold at least 10% of the issued shares
  • property and investment holding companies are not eligible

If the above three conditions are satisfied, tax exemption is given to start-ups on normal chargeable income of up to S$300,000 for each of the first three consecutive years of its operation.

  • For first S$100,000, after 100% exemption, the exempt amount is S$100,000
  • For next S$200,000, after 50% exemption, the exempt amount is S$100,000
  • Thus, the total exempt amount for income up to S$300,000 is S$200,000
Timeline:

Under this scheme, since 2005, a newly incorporated company that meets the qualifying conditions can claim for full tax exemption on the first $100,000 of normal chargeable income for each of its first three consecutive YAs.

Since 2008, a further 50% exemption is given on the next $200,000 of the normal chargeable income for each of its first three consecutive YAs.

In Singapore’s Budget 2018, however, Finance Minister Heng Swee Keat announced that, from year of assessment 2020, the full tax exemption on the first S$100,000 of a start-up’s normal chargeable income will be reduced to a 75% exemption, while the secondary 50% exemption on the next S$200,000 of normal chargeable income will apply only to the next S$100,000.

NOTES + ADDITIONAL CONTEXT:

About tax incentives directly aimed at startups:

Many startups focus on growth and gaining traction in the first few years of their existence, rather than profit-generation. Supportive policies will acknowledge this, aiming to improve cashflow and encourage reinvestment of any profits, whilst minimising the total tax taken from young firms (including quasi-taxation in the form of licences). Various national schemes exist which offer tax relief on income for new firms and tax credit for innovation-related expenditure. Tax credits for research and development, in particular, are a common policy tool to support innovative firms: Latvia, for instance, offers a ‘super-deduction’ of 300 per cent for qualifying R&D expenses, whilst Russia is currently experimenting with reduced social security contribution rates specifically for companies involved in software development.

Beyond the Singaporean example above, a corporate tax exemption is tool also used in Estonia and India. The Estonian corporate tax system was significantly reformed in 2000 with the objective of accelerating economic growth by making more funds available for business investment. One significant feature is that corporate taxation is not payable when profits are earned, but only when they are distributed.

Similarly in India, in 2016 the government passed its Startup Action Plan, a provision of which exempted startups from paying any tax in the first three out of five years of operations (a minimum alternative tax does, however, still apply to them).

A variation of this policy is in effect in Singapore, where the government passed an SME-friendly law that exempted qualified startups from corporate tax on the first S$100,000 of their income and provided a further 50% exemption on the next S$200,000.

Read more in Nesta's ‘Idea Bank’ for Policymakers.

CURATED BY

Nesta
UK
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