Many expats living in Singapore have had their fair share of adventures in Asia whether it be trekking in Nepal, riding a moto in Ho Chi Minh City, or using hand gestures to communicate over a language barrier in a small Laotian town.
In this regard, they exhibit characteristics of going out of their comfort zone, being curious, showing resourcefulness, and thinking outside the box. In other words, they possess many qualities of an entrepreneur. It makes sense why it is relatively common for them to open a business abroad.
Being a business owner can come with substantial benefits, including company equity, large potential for growth and building meaningful wealth, and tax advantages. However, it also comes with risks, especially for US persons due to US stringent tax rules that can require additional reporting, unexpected tax liabilities, and penalties for non-compliance.
Below are two common business types in Singapore, amongst others, and considerations for US persons when opening and structuring a foreign business.
This is similar to a US Sole Proprietorship in that the business is not a separate legal entity. In this respect, you do not have liability protection, so if there is a lawsuit, personal assets can be sought (e.g., cash, investments, property). This is a risk to be aware of, particularly if entering a business area prone to lawsuit.
To set one up, you must be at least 18 years of age and a Singaporean Citizen, Permanent Resident, or an eligible FIN holder. It involves choosing a business name, applying to the Accounting and Corporate Regulatory Authority (ACRA), and being issued a Unique Entity Number (UEN).
From a US tax standpoint, this would be like a US Sole Proprietorship. Income is reported on Schedule C of a federal income tax return and there are deductions that can decrease overall tax liability (e.g., office expenses, legal and professional fees, travel, meals). However, net income is subject to self-employment tax of 15.3% (7.65% employer portion and 7.65% employee portion) and there might be federal income tax due depending on the amount of net income. Saying that, the foreign earned income exclusion and foreign housing exclusion can be utilized to minimize federal tax.
Moreover, this enables Americans to accrue Social Security credits and achieve Medicare eligibility once 40 work quarters are attained.
A Sole Proprietorship can lead to a relatively high tax rate with self-employment and federal tax, but mitigates additional, burdensome foreign reporting requirements.
Private Limited Company
This is similar to the US version of a Limited Liability Company (LLC) and is a common business type in Singapore. The structure provides liability safeguards, which can protect personal assets in case of lawsuit. This structure might be more suited for those who engage in a business predisposed to litigation and have significant personal assets that can be pursued.
One of the big considerations when setting-up a Private Limited is the additional US reporting requirements. Depending on the other owners, their nationalities, and percentage of ownership, it might be considered a Controlled Foreign Corporation (CFC).
A CFC is an entity where more than 50% is owned by US persons who each own 10% or greater (i.e., because US persons own more than 50% of the company, it is “controlled” by them). This generally requires filing Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations, which can be time-consuming and costly to prepare.
Moreover, penalties for non-compliance can be severe (i.e., $10,000 USD plus an additional $10,000 for each 30-day period of not filing after the 90-day notice period up to a total maximum penalty of $60,000), so it would be beneficial to know and adhere to the requirements from the start.
Due to complexity and penalties, often, it is best to work with an experienced international tax professional to ensure correct reporting-filing.
Lastly, the 2017 Tax Cuts and Jobs Act adopted the Global Intangible Low-Taxed Income (GILTI) rules to prevent multinational companies from shifting income to low-tax jurisdictions and reducing their taxes. Since Singapore is a low-tax country, this can subject retained company earnings to US taxation. It is important to implement proper yearly tax planning to mitigate this liability.
While the above is not an exhaustive list of the ways to structure a Singapore business, it provides some of the considerations, particularly regarding US tax implications. Like moving from the US to Singapore, entrepreneurship is a journey that will come with learning, growth, highs, and lows. For assistance with navigating this entrepreneurial journey and foreign business structuring, please reach out to one of our Wealth Planners.
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