As Singapore continues to position itself as a premier global business hub, the concept of "economic substance" has become increasingly important for both local and international businesses. In 2025, understanding substance requirements is critical across three major areas of doing business in Singapore:
Over the past decade, jurisdictions worldwide have adopted economic substance requirements as part of global efforts to tackle tax avoidance and profit shifting. Singapore is no exception. While the country has long required genuine business activity to access its tax benefits, 2024 marked a turning point with the introduction of Section 10L of the Income Tax Act.
This provision now subjects foreign-sourced disposal gains to tax when received in Singapore—unless the receiving entity can prove sufficient economic substance locally. These rules remain firmly in effect in 2025, alongside broader expectations from banks and regulators concerning operational legitimacy.
This article provides a comprehensive guide to how substance rules apply across these domains and what businesses must do to stay compliant and operationally efficient in 2025.
Substance in Business Incorporation and Relocation
As of 2025, demonstrating economic substance is not just a requirement for favorable tax treatment—it is a core expectation across Singapore’s regulatory, financial, and commercial ecosystems. For businesses setting up or relocating to Singapore, this means going beyond mere incorporation formalities to establish a credible, functional, and locally active operation.
Business Incorporation: From Legal Presence to Operational Reality
Incorporating a company in Singapore is relatively straightforward from a procedural standpoint. However, banks, regulators, and tax authorities expect companies to transition from a "paper company" to a genuine business. Economic substance is central to this.
To demonstrate substance at the point of incorporation and shortly thereafter, companies should:
In essence, incorporation is no longer a standalone event—it is the beginning of a process that must evolve into demonstrable presence.
Bank Account Opening: Proving You Are Operational
Singapore’s banks have tightened onboarding in recent years due to AML/CFT regulations and pressure from the Monetary Authority of Singapore (MAS). As a result, opening a corporate bank account can be a significant hurdle without proper substance.
Banks typically expect:
Failure to demonstrate these factors is one of the leading reasons for account rejections or account freezes shortly after opening. Therefore, substance is not optional—it is a requirement to participate in Singapore’s financial system.
Business Relocation: Moving More than Just a Legal Entity
For businesses relocating to Singapore from other jurisdictions, regulators and tax authorities assess whether the move reflects a shift in strategic control—not just a change of address.
To establish real substance in the context of relocation:
Properly executed, relocation to Singapore positions a business to benefit from tax clarity, reputational credibility, and access to regional capital flows. But without substance, a relocated entity may be challenged by IRAS or foreign tax authorities under controlled foreign corporation (CFC) or anti-treaty shopping provisions.
Economic substance can be partially satisfied through outsourcing if:
Tax Compliance and Economic Substance: Navigating Section 10L in 2025
Tax compliance in Singapore in 2025 requires a precise understanding of Section 10L of the Income Tax Act 1947, which governs the tax treatment of foreign-sourced disposal gains. Introduced in 2024, this provision represents Singapore’s alignment with global tax principles—particularly the OECD’s BEPS (Base Erosion and Profit Shifting) standards—and its continued effort to uphold a robust, transparent, and fair tax regime.
Section 10L applies to entities receiving foreign-sourced gains in Singapore. These gains are taxable unless the entity can demonstrate that it has adequate economic substance in Singapore. This rule also reflects Singapore’s commitment to preventing the artificial shifting of profits through holding structures or passive offshore vehicles.
What Qualifies as Foreign-Sourced Disposal Gains?
Under Section 10L, "foreign-sourced disposal gains" include:
If these gains are received in Singapore, they will be taxed unless the receiving entity meets the economic substance test.
How Are Gains Deemed "Received in Singapore"?
Gains are considered received in Singapore if they are:
This includes both direct and indirect forms of receipt, which are closely monitored by IRAS.
Economic Substance: The Core Defense Against Taxation
To avoid tax under Section 10L, a company must prove it has economic substance. This includes:
For pure equity-holding entities (those solely holding shares and earning dividends or capital gains), the criteria are more narrowly defined but still require:
Special Case: Gains from Foreign Intellectual Property Rights (IPRs)
Section 10L imposes stricter rules on gains from the disposal of foreign IPRs. These are taxable even if the entity meets substance requirements. However, qualifying IPRs may be eligible for partial exemption through a transitional nexus ratio, phasing into a modified nexus approach by 2027.
Calculating the Taxable Amount
Taxable gains are calculated as net gains after allowable deductions, such as:
However, the following are not deductible:
Losses from the disposal of other foreign assets may be offset against taxable gains under specific conditions.
Advance Ruling: Gaining Certainty on Substance
Businesses planning significant disposals can apply to IRAS for an advance ruling on whether they meet the economic substance requirements. This ruling:
Practical Tips for Compliance
Summary
In 2025, Section 10L is not just a tax provision—it’s a litmus test for whether a business in Singapore is genuinely active or merely pass-through. For companies with foreign assets, demonstrating substance is now essential not just to obtain tax benefits but to avoid potential audit exposure and penalties. A proactive, well-documented approach to substance will provide both compliance and long-term stability.
A "covered entity" includes:
Entities entirely based in and operating solely within Singapore are generally excluded from Section 10L.
- Tax Compliance – especially under the foreign-sourced disposal gains regime (Section 10L of the Income Tax Act);
- Business Incorporation and Relocation – ensuring that newly established or relocated companies demonstrate genuine presence and activity;
- Banking and Financial Relationships – satisfying local banks’ due diligence expectations tied to operational legitimacy.
Over the past decade, jurisdictions worldwide have adopted economic substance requirements as part of global efforts to tackle tax avoidance and profit shifting. Singapore is no exception. While the country has long required genuine business activity to access its tax benefits, 2024 marked a turning point with the introduction of Section 10L of the Income Tax Act.
This provision now subjects foreign-sourced disposal gains to tax when received in Singapore—unless the receiving entity can prove sufficient economic substance locally. These rules remain firmly in effect in 2025, alongside broader expectations from banks and regulators concerning operational legitimacy.
This article provides a comprehensive guide to how substance rules apply across these domains and what businesses must do to stay compliant and operationally efficient in 2025.
Substance in Business Incorporation and Relocation
As of 2025, demonstrating economic substance is not just a requirement for favorable tax treatment—it is a core expectation across Singapore’s regulatory, financial, and commercial ecosystems. For businesses setting up or relocating to Singapore, this means going beyond mere incorporation formalities to establish a credible, functional, and locally active operation.
Business Incorporation: From Legal Presence to Operational Reality
Incorporating a company in Singapore is relatively straightforward from a procedural standpoint. However, banks, regulators, and tax authorities expect companies to transition from a "paper company" to a genuine business. Economic substance is central to this.
To demonstrate substance at the point of incorporation and shortly thereafter, companies should:
- Appoint at least one resident director: This is a statutory requirement, but it also signals that management decisions are anchored locally.
- Lease a physical office: A virtual address or co-working desk may suffice during initial setup, but longer-term credibility requires a dedicated business address with operational capacity.
- Employ local staff: Hiring local employees—even in modest numbers—shows commitment to Singapore’s economy and helps establish core income-generating activities within the jurisdiction.
- Register for GST (if applicable) and comply with annual filing and reporting obligations to IRAS and ACRA.
In essence, incorporation is no longer a standalone event—it is the beginning of a process that must evolve into demonstrable presence.
Bank Account Opening: Proving You Are Operational
Singapore’s banks have tightened onboarding in recent years due to AML/CFT regulations and pressure from the Monetary Authority of Singapore (MAS). As a result, opening a corporate bank account can be a significant hurdle without proper substance.
Banks typically expect:
- A clearly defined local business model: Including an explanation of operations, customers, and suppliers.
- Evidence of physical presence: Such as a tenancy agreement or service contract with a local office provider.
- Resident directors and signatories: Who are available for KYC meetings and correspondence.
- Employment records: At least initial hires or active recruitment efforts.
Failure to demonstrate these factors is one of the leading reasons for account rejections or account freezes shortly after opening. Therefore, substance is not optional—it is a requirement to participate in Singapore’s financial system.
Business Relocation: Moving More than Just a Legal Entity
For businesses relocating to Singapore from other jurisdictions, regulators and tax authorities assess whether the move reflects a shift in strategic control—not just a change of address.
To establish real substance in the context of relocation:
- Reallocate strategic functions: Board meetings, executive decision-making, and management oversight should occur in Singapore.
- Deploy or recruit senior personnel locally: A skeleton support staff isn’t enough; key employees with authority should be based in Singapore.
- Transfer assets and IP (where applicable): This demonstrates that Singapore is the true centre of gravity for operations.
- Adapt legal documentation: Employment contracts, vendor agreements, and IP ownership structures should reflect Singaporean jurisdiction.
Properly executed, relocation to Singapore positions a business to benefit from tax clarity, reputational credibility, and access to regional capital flows. But without substance, a relocated entity may be challenged by IRAS or foreign tax authorities under controlled foreign corporation (CFC) or anti-treaty shopping provisions.
Economic substance can be partially satisfied through outsourcing if:
- Services are provided within Singapore
- The entity maintains control and oversight over outsourced functions
- The outsourced party allocates dedicated resources and is not simply shared staff
Tax Compliance and Economic Substance: Navigating Section 10L in 2025
Tax compliance in Singapore in 2025 requires a precise understanding of Section 10L of the Income Tax Act 1947, which governs the tax treatment of foreign-sourced disposal gains. Introduced in 2024, this provision represents Singapore’s alignment with global tax principles—particularly the OECD’s BEPS (Base Erosion and Profit Shifting) standards—and its continued effort to uphold a robust, transparent, and fair tax regime.
Section 10L applies to entities receiving foreign-sourced gains in Singapore. These gains are taxable unless the entity can demonstrate that it has adequate economic substance in Singapore. This rule also reflects Singapore’s commitment to preventing the artificial shifting of profits through holding structures or passive offshore vehicles.
What Qualifies as Foreign-Sourced Disposal Gains?
Under Section 10L, "foreign-sourced disposal gains" include:
- Profits from the sale or disposal of immovable property located outside Singapore
- Disposal of equity or debt securities listed or unlisted, held abroad
- Sale of unlisted shares in foreign-incorporated companies
- Gains from the assignment of offshore loans
- Sale or disposal of foreign-registered Intellectual Property Rights (IPRs)
If these gains are received in Singapore, they will be taxed unless the receiving entity meets the economic substance test.
How Are Gains Deemed "Received in Singapore"?
Gains are considered received in Singapore if they are:
- Remitted, transmitted, or brought into Singapore
- Used to pay off debt incurred in the course of Singapore trade/business
- Used to acquire movable property brought into Singapore
This includes both direct and indirect forms of receipt, which are closely monitored by IRAS.
Economic Substance: The Core Defense Against Taxation
To avoid tax under Section 10L, a company must prove it has economic substance. This includes:
- Being managed and controlled in Singapore: Key business decisions and governance must occur locally.
- Having a local operational footprint: This includes office premises, employees, and relevant operational expenses.
- Engaging in income-generating activities in Singapore: Especially for non-pure equity holding entities.
For pure equity-holding entities (those solely holding shares and earning dividends or capital gains), the criteria are more narrowly defined but still require:
- Compliance with all local statutory obligations
- Management activities carried out in Singapore
- Adequate local presence through staff or outsourcing arrangements
Special Case: Gains from Foreign Intellectual Property Rights (IPRs)
Section 10L imposes stricter rules on gains from the disposal of foreign IPRs. These are taxable even if the entity meets substance requirements. However, qualifying IPRs may be eligible for partial exemption through a transitional nexus ratio, phasing into a modified nexus approach by 2027.
Calculating the Taxable Amount
Taxable gains are calculated as net gains after allowable deductions, such as:
- Acquisition costs
- Improvement and disposal expenses
- Related transaction costs
However, the following are not deductible:
- Previously deducted expenses under other provisions
- Pure capital expenditures with no income relevance
Losses from the disposal of other foreign assets may be offset against taxable gains under specific conditions.
Advance Ruling: Gaining Certainty on Substance
Businesses planning significant disposals can apply to IRAS for an advance ruling on whether they meet the economic substance requirements. This ruling:
- Is valid for up to 5 Years of Assessment
- Must be applied for at least 1 year before the expected disposal
- Provides valuable legal certainty and protects against future disputes
Practical Tips for Compliance
- Track all foreign asset disposals meticulously, including receipts and timing.
- Document internal decision-making, including board minutes and management oversight.
- Ensure real economic activities are ongoing in Singapore, not just nominal operations.
- Conduct annual substance reviews to ensure compliance with evolving IRAS expectations.
Summary
In 2025, Section 10L is not just a tax provision—it’s a litmus test for whether a business in Singapore is genuinely active or merely pass-through. For companies with foreign assets, demonstrating substance is now essential not just to obtain tax benefits but to avoid potential audit exposure and penalties. A proactive, well-documented approach to substance will provide both compliance and long-term stability.
A "covered entity" includes:
- Companies, partnerships, limited partnerships, LLPs, and trusts that are part of a relevant group.
- A relevant group is one where at least one member has a presence or operations outside Singapore.
Entities entirely based in and operating solely within Singapore are generally excluded from Section 10L.
NB! The information provided in this article is for general informational purposes only and does not constitute legal advice. While we strive to ensure the content is accurate and up-to-date, it should not be relied upon as a substitute for professional consultation. For personalized advice or assistance with legal matters, please contact our specialists directly.
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Company Incorporation & Business Setup – We assist businesses with company registration, structuring, and licensing in Singapore, ensuring full compliance with ACRA and MAS regulations.
Corporate Tax & Compliance Advisory – We help businesses leverage corporate income tax rebates, deductions, and incentive schemes, ensuring tax efficiency and compliance
Regulatory & Licensing Assistance – We guide businesses through the process of obtaining sector-specific licenses and ensuring compliance with MAS, IRAS, and other regulatory bodies, minimizing operational risks.
Enterprise Financing & Grant Support – We help businesses access Enterprise Financing Scheme (EFS), Private Credit Growth Fund, and SkillsFuture grants, aligning funding opportunities with business growth strategies.