Tax Exemption for Startups

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The Start-up Tax Exemption (SUTE) scheme in Singapore is a tax relief program for entrepreneurs.
What are the main aims and objectives?

The Start-up Tax Exemption (SUTE) scheme in Singapore is primarily designed to foster entrepreneurship and support the growth of new local enterprises. Its main aims and objectives are to reduce the initial tax burden on start-ups during their crucial early years of operation, providing them with much-needed financial relief to establish and expand their businesses. By offering significant tax exemptions on chargeable income for the first three Years of Assessment, the scheme aims to improve cash flow for young companies, allowing them to reinvest more of their earnings into business development, innovation, and growth. This tax relief is intended to create a more favorable environment for start-ups to thrive, encouraging entrepreneurship, stimulating economic growth, and potentially creating more job opportunities in Singapore.

How does the program work?

Eligibility:

To qualify for the SUTE scheme, a company must meet several criteria. It must be incorporated in Singapore, be a tax resident of Singapore for the Year of Assessment (YA), and have its total share capital beneficially held directly by no more than 20 shareholders. At least one of these shareholders must be an individual holding at least 10% of the issued ordinary shares. However, investment holding companies and those undertaking property development for sale or investment are not eligible for this scheme.

Tax Exemption Structure:

For YA 2020 onwards, the SUTE scheme provides the following tax exemptions:

  • 75% exemption on the first $100,000 of normal chargeable income
  • 50% exemption on the next $100,000 of normal chargeable income

This means that the maximum tax exemption a qualifying start-up can receive per YA is $125,000 ($75,000 + $50,000).

Duration:

The SUTE scheme applies for the first three consecutive Years of Assessment following the company's date of incorporation. This gives new start-ups a significant tax advantage during their crucial early years of operation.

Application Process:

Companies don't need to apply separately for the SUTE scheme. When filing their annual corporate income tax return, they should indicate their eligibility for the tax exemption. The Inland Revenue Authority of Singapore (IRAS) will then assess the company's eligibility based on the information provided.

Limitations:

It's important to note that the tax exemption is allowed on a per YA basis. Any unused exemption amount cannot be carried forward to subsequent YAs. Additionally, companies must first set off any brought-forward losses against their current year's profits before applying the tax exemption.

Transition to Partial Tax Exemption:

After the first three YAs, companies transition from the SUTE scheme to the Partial Tax Exemption (PTE) scheme, which offers a different structure of tax benefits for SMEs.

What is the overall cost?

Cost

There is no available information about the cost of implementing SUTE

How was it implemented?

The Start-up Tax Exemption (SUTE) scheme in Singapore was introduced in 2005 as part of the government's strategic initiative to foster entrepreneurship and support the growth of local enterprises. The scheme was implemented by the Inland Revenue Authority of Singapore (IRAS) and took effect from the Year of Assessment (YA) 2005.

The scheme was designed to exclude companies whose principal activities were investment holding and those undertaking property development for sale or investment. This exclusion was intended to focus the benefits on companies that aligned with the entrepreneurial and innovative spirit the government aimed to foster.

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.

What impact has been measured?

Impact

There is no available information about the impact of the SUTE scheme.

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

Simona Bielli

Research Programme Coordinator – Digital Startups
Nesta
United Kingdom