Friday, March 26, 2021

Why Do Indian Start-ups Register in Singapore

Singapore is known to be a compliance-oriented, corruption-free economy with accommodative regulations towards start-ups, which are very pro-growth and innovation friendly. It is currently rated as the second easiest place in the world to do business by the World Bank, and is the only Asian nation to receive an AAA credit rating from all three major credit agencies. It is also the fourth largest financial center in the world, with strong institutions and prudent economic management.

A number of tech start-ups observe while approaching marquee Venture Capital (VC) funds that the investors often request for or prefer a Singapore registered entity to fund. At this juncture, it's important for these businesses to identify the reasons for such ask and how the overall business as well as the investors could benefit from such a structure.

Here's identifying a few such reasons.

A. Tax Benefits in Singapore vis-a-vis India

1) Corporate Tax Rate of ~17% in Singapore as against Indian tax rates of 25-30% for resident entities and 40% for foreign entities. 

2) Indirect Tax, GST/VAT rate of 5% to 28% and more in India, as against a flat ~7% in Singapore.

3) Capital Gains Tax rate between 10-20% in India as against 0% in Singapore. This is one of the most attractive reasons why investors invest through Singapore, as they can substantially save on tax costs at the time of exit.

It is also important to note here that the Indian government attempts to tax capital gains on sale of shares in companies which have substantial business operations in India. However, investors continue to register in other geographies as at least some precautionary safeguard against such capital gains tax by incorporating a company that holds the intellectual property rights to the tech product or software in a foreign land. An Indian entity is registered that uses such intangible to operate in India, while paying royalty for use of the actual intangible to the Singapore entity, which may be its holding company, or an associate enterprise.

4) Dividend Tax: There are no taxes on dividends in Singapore which follows a one-tier corporate tax structure. However, in India, profits are first taxed in the company's hands, and the dividends distributed are then taxed also in the hands of the shareholders/investors with minor exemptions which only benefit very small shareholders. Thus, there is double taxation of dividends in India as per the current structure.

5) Tax Exemption: For the first three years, newly incorporated companies in Singapore can enjoy full tax exemption on their first Singapore Dollar 100,000 of chargeable income. Beyond such threshold, 8.5% tax on the next S$ 200,000 of the chargeable income.

6) Double Tax Avoidance Agreements: Much like India, Singapore also has Double Tax Agreements (DTAA) with more than 50 countries, which ensure that the tax payers do not end up paying taxes in two countries. The benefits being avoidance of double taxation, lower withholding taxes, preferential tax regime.

B. Administrative Benefits in Singapore vs. India

1) Company Incorporation Time: In Singapore, a company registration takes 1-2 business days, which considering all paper work requirements, may extend to a maximum of one week for all practical purposes. However, in India, it practically takes a minimum of 3 weeks to set up a private limited or an OPC. The compliance while registration and the process is also more seamless and one-window in Singapore, which India is attempting to reach, but is yet to.

2) Full Foreign Ownership: Ownership of 100% of shares is allowed in a Singapore company by an Indian citizen or an Indian company. The entity does not need any local partners or shareholders hence there is no dilution of control and one can freely choose the type of capital structure they want for their company. For every Indian company, there has to be at least one Director resident in India for over six months in a financial year. The FDI norms of India also do not allow 100% foreign ownership in a number of sectors discussed later.

3) Listing on Stock Exchange: The Singapore Stock Exchange (SGX) is inviting Indian companies to list on their exchange and raise capital. SGX can play a vital role in providing Indian companies with access to capital markets overseas. The listing requirements in Singapore are more lenient in comparison to the regulatory requirements by SEBI in India.

4) No Corruption: Singapore has economic-political stability and a government structure that is ranked highly on rankings for no-corruption or red-tapism.

5) Intellectual Property & Arbitration Laws: The IP protection laws in Singapore are more mature and robust owing to the number of international companies registered in the geography that are intangible tech product focused. In addition, it is noticed often that in international contracts between parties from different countries, the place for arbitration is preferred to be Singapore as the arbitration laws there are more mature in comparison to India. Further, the arbitration awards in Singapore enjoy more sanctity in comparison to India where almost every award is challenged in the court of law, and arbitration is seen to an expensive process only to delay the resolution process.

6) Access to Venture Capital Funds: A huge number of international VC funds are registered within Singapore, and prefer to invest through this route. Thus, access to a network of mature and upcoming start-ups, VC funds, angel investors, etc. is another big attraction for founders.

C. Foreign Direct Investment (FDI) Restrictions in India

The following are the sectoral caps on FDI (percentage of shareholding as can be held by a foreign company) in India effective October 2020 by which government approval may be required through the RBI before a foreign partner can invest in India in any such industry.

News & Media
Terrestrial Broadcasting FM (FM Radio): 49%
Up-Linking of ‘News & Current Affairs’ TV Channels: 49%
Uploading/Streaming of News & Current Affairs through Digital Media: 26%
Publishing of newspaper and periodicals dealing with news and current affairs: 26%
Publication of Indian editions of foreign magazines dealing with news and current affairs: 26%

Banking & Finance
Infrastructure companies in Securities Markets, namely, stock exchange, commodity exchanges, depositories and clearing corporations in compliance with SEBI Regulations: 49% Automatic
Banking - Private Sector: 74% (Automatic up to 49%)
Banking - Public Sector subject to Banking Companies (Acquisition & Transfer of Undertakings) Acts 1970/80: 20%
Insurance Company: 49% Automatic
Pension Sector: 49% Automatic

Other Sectors
Multi Brand Retail Trading (MBRT): 51%
Power Exchanges registered under the Central Electricity Regulatory Commission (Power market) Regulations, 2010: 49% Automatic

Further, if you belong to any of the following industries, you may have to specifically go through the FDI Guidelines here to ensure that your category of operations is covered under the 100% Automatic route or there are additional conditions to fulfill.
- Agriculture and Plantation
- Mining
- Petroleum & Natural Gas
- Manufacturing
- Defence
- Broadcasting & Media
- Civil Aviation & Air Transport
- Construction & Infrastructure incl. Industrial Parks, Satellites
- Private Security Agencies 
- Telecom
- Trading
- E Commerce
- Single Brand Retail Trading (SBRT)
- Railways
- Asset Reconstruction Companies, Credit Information Services
- Pharmaceuticals

D. Upcoming Businesses Registering in Singapore

Among several others, the following seem to be upcoming sectors seeing a surge in registrations.

- Digitisation and AI
- Telemedicine
- Ed-tech
- Subscription as a Service (SaaS)
- E-commerce
- Broadcasting, Media and Live streaming
- Cyber Security
- Virtual Reality (VR) and Augmented Reality (AR)