Advanced Ruling Summary No.1/2025 – Published 3 March 2025

The Inland Revenue Authority of Singapore (IRAS) recently issued an advanced ruling on the tax treatment of hybrid instruments, reinforcing the principles outlined in its e-Tax Guide on the Income Tax Treatment of Hybrid Instruments (Second edition), published on 21 October 2019. This ruling provides some guidance on the likely Singapore tax implications for businesses utilizing such instruments in their capital structures. We provide our comments on the Advanced Ruling and the key takeaways for consideration:

Key Insights from the Advanced Ruling

Classification Matters

The ruling emphasizes that the tax treatment of hybrid instruments hinges on their legal and economic characteristics rather than their mere nomenclature. In this specific case, the Comptroller of Income Tax (CIT) determined that the securities in question should be classified as debt securities under Section 43H(4) of the Singapore Income Tax Act and Regulation 2 of the Qualifying Debt Securities Regulations. This classification was based on the key features of the securities¹ such as the instrument’s obligation to pay a fixed return, its treatment under Singapore’s Qualifying Debt Securities regime, and its structuring within the issuer’s financing arrangements. While the instrument contained certain equity-like features such as subordination, these did not override its overall debt classification.

Interest Deductibility & Dividend Characterization

A core focus of the ruling was whether distributions payable on the securities would be treated as deductible interest expenses or as non-deductible distributions akin to dividends. Since the CIT had assessed that the securities should be classified as debt securities under the relevant statutory provisions and principles outlined in the e-Tax Guide², the distributions payable were recognized as interest rather than dividends. As a result, interest payments were eligible for deduction under Singapore’s tax rules, provided they met the necessary conditions for deductibility. This ruling shows the importance of analyzing not only the terms of an instrument but also its classification under specific legislative frameworks when determining tax treatment.

Cross-Border Considerations

In addition, a related consideration for businesses engaging in international financing structures is that they should also be mindful of potential mismatches in tax treatment between jurisdictions, which could lead to unintended tax consequences under Singapore’s tax framework and international tax developments such as BEPS Pillar Two. From a Singapore tax perspective, mismatches in classification could result in denied deductions, double taxation, or withholding tax implications where payments classified as interest in Singapore may be treated as dividends elsewhere. Under BEPS Pillar Two, multinational groups with hybrid instruments must also consider the impact of the global minimum tax, as differences in tax treatment across jurisdictions could affect their effective tax rate calculations and top-up tax obligations.

Application of the E-Tax Guide

The ruling aligns with the guidance provided in IRAS’ e-Tax Guide on Hybrid Instruments, underscoring key principles for determining whether an instrument should be treated as debt or equity for tax purposes. Taxpayers should carefully evaluate instruments against these guidelines to ensure compliance.

Next Steps for Businesses and How CLA Global TS Can Help

Given the complexities and potential tax risks associated with hybrid instruments, businesses should proactively assess their financing arrangements. Misalignment in tax characterization can result in denied deductions, unintended withholding tax obligations, or challenges under anti-avoidance provisions.

It is important to note that this advanced ruling applies specifically to the facts of the case presented and does not bind the CIT to adopt the same treatment in other cases. Businesses should exercise caution when relying on this ruling and seek professional tax advice tailored to their specific circumstances.

Our team of tax advisors is well-equipped to help businesses navigate these challenges and structure their financing arrangements optimally within Singapore’s tax framework. We encourage clients to reach out to us for tailored advice on the implications of this ruling and any broader tax considerations.

If you would like more information or to discuss your specific situation, please contact us.

View the full article in PDF here.

CONTACT US

Contact our Tax Advisory Specialists for a Discussion

Edwin Leow Co-Advisory Leader Head of Tax edwinleow@sg.cla-ts.com

John Chua Associate Director, Tax johnchua@sg.cla-ts.com