TaxDAO is now releasing a series of articles focusing on the site selection and operational strategies for multinational companies with a primary business in cryptocurrency assets. This article is the first in the series and primarily compares the macro-environment and tax policies of Singapore and Hong Kong.

As two of Asia’s most important financial hubs, both Singapore and Hong Kong offer well-established legal systems, open market environments, and low tax costs, attracting numerous multinational companies to establish headquarters or branch offices. With the advent of the Web3.0 era, cryptocurrency assets, as an emerging form of financial asset, have gained attention from the governments and regulatory bodies in both regions. Singapore and Hong Kong have both developed corresponding regulations and guidelines to regulate the development of the cryptocurrency asset market and have provided supportive policies, such as tax incentives and financial innovation funds.

However, there are some differences between the two locations in terms of fiscal and tax policies for the cryptocurrency industry. For example, in terms of fiscal policies, Singapore follows a territorial tax regime, taxing income that is derived from or received within Singapore’s borders. Hong Kong, on the other hand, follows a single-source tax jurisdiction, taxing only income derived from Hong Kong. In terms of cryptocurrency industry policies, Singapore’s Payment Services Act regulates all entities providing payment services, including virtual currency services, and establishes three different types of licenses. In contrast, Hong Kong’s proposed amendments to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance will introduce a new mandatory licensing regime for virtual asset exchanges.

TaxDAO is now systematically comparing and analyzing the advantages and disadvantages of fiscal policies in both regions, starting with Singapore and Hong Kong’s macro-environment and fiscal policies, to explore more suitable location and operational strategies for multinational companies dealing with cryptocurrency assets. This article is the first in the series, providing an overview and comparison of the business environment and tax policies in the two locations. In subsequent articles, TaxDAO will analyze how different types of enterprises in the cryptocurrency industry, including but not limited to cryptocurrency mining companies, exchanges, DeFi operators, can set up regional or global headquarters in these two locations. Readers are welcomed to follow the series for more insights!

1. Overview of Business Environments in Singapore and Hong Kong

In general, Hong Kong is more suitable for traditional financial industry enterprises, while Singapore is more suitable for innovative enterprises.

The Global Financial Centres Index (GFCI) is used to evaluate the competitiveness of financial cities, covering five major indicators: business environment, human capital, infrastructure, financial industry development, and reputation. According to the latest ranking (34th edition), Singapore leads China’s Hong Kong with a score of 1 point, ranking third globally and first in Asia, with Hong Kong following at fourth globally and second in Asia.

Additionally, the Global Asset Management Centre Index (AMCI) provides reference value for multinational companies choosing the location of their management entities. AMCI is an index that evaluates the level and potential of global asset management centers, covering four dimensions: market size, market activity, market openness, and market innovation. According to the 2022 AMCI report, Singapore has risen one place from 2021, surpassing China’s Hong Kong to become fourth globally and first in Asia.

The Global Innovation Index (GII) also offers valuable insights for the location choices of innovative enterprises. GII covers two aspects: innovation input and innovation output, including seven sub-indicators: institutions, human capital and research, infrastructure, market maturity, business maturity, knowledge and technology output, and creative output. In the 2022 GII report, Singapore ranks seventh globally and first in Asia, while China’s Hong Kong ranks 14th globally and third in Asia.

In summary, although there are slight differences in the macro-operating environments of Singapore and Hong Kong, the gap between the two regions is not significant. As a traditional financial center, Hong Kong has shown a trend of being overtaken by Singapore in innovative financial services, especially in the GII index, where there is a significant gap between the two.

However, Hong Kong still retains a clear advantage in traditional financial services. Apart from having a higher GDP than Singapore, Hong Kong’s traditional financial business volume is larger than Singapore’s. Hong Kong’s stock market size and activity far exceed those of Singapore, with a total market value of Hong Kong-listed companies being approximately eight times that of Singapore’s stock exchange in the first half of 2022, and the average monthly trading volume being about 17 times that of Singapore’s. Hong Kong’s bond market issuance size also surpasses that of Singapore, with Hong Kong’s initial issuance of Asian international bonds being 1.7 times that of Singapore in 2021. In addition, Hong Kong’s banking and insurance industries are more mature than Singapore’s, with total assets and total deposits in Hong Kong’s banking industry in 2021 being 1.5 times that of Singapore, and the total premium of the insurance industry being twice that of Singapore. Finally, in foreign exchange trading, Hong Kong remains the third-largest foreign exchange trading center globally, following only the United States and the United Kingdom.

In contrast, Singapore has a more pronounced advantage in innovative financial services. As offshore financial centers that offer low-tax or no-tax, highly confidential, and lightly regulated financial services to non-resident clients, Singapore has introduced corresponding regulations and policy support for areas such as digital currency payment services, digital assets, and DeFi. For example, in payment services, Singapore has introduced the Payment Services Act, which brings all entities providing payment services, including virtual currency services, under regulatory oversight and establishes three different types of licenses. In the area of digital assets, Singapore’s Securities and Futures Act defines and classifies digital tokens into payment tokens, utility tokens, and asset tokens, determining whether they fall within the categories of securities or futures contracts based on their nature and function. In the DeFi sector, Singapore’s Monetary Authority of Singapore Act authorizes the Monetary Authority of Singapore (MAS) to regulate DeFi projects. These regulations and policies provide clear guidance and protection for Singapore in innovative financial services, attracting many international financial institutions and technology companies to establish branches or partnerships in Singapore.

2. Comparative Study of Tax Systems

2.1 Corporate Income Tax

Corporate income tax is a direct tax levied on taxable profits earned by a corporation over a specified period. Different countries or regions have different methods and tax rates for corporate income tax, which can affect a company’s profitability and competitiveness.

2.1.1 Corporate Income Tax in Singapore

In general, Singapore’s corporate income tax follows a territorial principle, taxing income that is derived from or received within Singapore. However, for resident companies, the following types of income are taxable in Singapore: (1) income derived from or accrued in Singapore; and (2) foreign income received in Singapore.

Under Section 10(25) of the Income Tax Act, the following types of foreign income are considered “foreign income received in Singapore”:

(1) Remitted to, transmitted or brought into Singapore from a place outside Singapore.

(2) Used to pay off any debt incurred in carrying on a trade or business in Singapore.

(3) Used to purchase movable property (e.g., equipment, raw materials) outside Singapore and subsequently imported into Singapore.

Regarding the tax rates on corporate income tax, a unified rate of 17% is applicable to both resident and non-resident companies. However, Singapore also offers a range of preferential policies and exemptions to reduce the effective tax rates for businesses.

Firstly, according to Singapore’s Income Tax Act, Partial Tax Exemption (PTE) allows eligible companies to enjoy a partial exemption of 75% to 50% on their chargeable income. Specifically, within the regular chargeable income, the initial portion below 10,000 Singapore dollars is eligible for a 75% tax exemption. The portion between 10,001 and 200,000 Singapore dollars qualifies for a 50% tax exemption, while the portion exceeding 200,000 Singapore dollars is subject to the regular tax rate of 17%.

Secondly, Singapore provides full tax exemptions for eligible newly established companies. According to the 2018 new fiscal budget, newly introduced Singapore tax-resident companies or limited guarantee companies (except those engaged in investment holding or real estate development for sale or investment) are eligible for full tax exemptions within their first three years of operation. This exemption includes 100% on the first 100,000 Singapore dollars of chargeable income, 50% on the portion between 100,001 and 200,000 Singapore dollars (previously 300,000 dollars), and the portion exceeding 200,000 Singapore dollars is subject to the regular tax rate of 17%. Additionally, companies incurring research and development expenses in Singapore are entitled to a 250% deduction, and the Singapore government provides annual research and development funding grants to businesses engaged in R&D activities.

Thirdly, Singapore offers preferential tax rates to eligible Regional Headquarters (RHQ) and International Headquarters (IHQ). Specifically, multinational companies that establish their regional or international headquarters in Singapore, provided they meet certain scale, turnover, and employee criteria, can benefit from reduced corporate income tax rates. RHQs are subject to a rate of 15% for a duration of 3 to 5 years, while IHQs enjoy a rate of 10% or lower for a duration of 5 to 20 years.

2.1.2 Hong Kong Corporate Income Profits Tax (Profits Tax)

Hong Kong does not have a tax specifically called “income tax” but has a tax similar in nature known as “Profits Tax”. In this context, we treat it alongside the concept of corporate income tax. Unlike Singapore, Hong Kong applies a strict territorial source concept to corporate profits tax, meaning it only taxes income that is generated within Hong Kong or sourced from within Hong Kong. In other words, whether one is a Hong Kong tax resident has no impact on Profits Tax liability. Any profits derived from operating in Hong Kong are subject to Profits Tax, while profits originating from overseas are not subject to Profits Tax in Hong Kong.

Regarding tax rates, the Hong Kong tax legislation prescribes a flat rate of 16.5% for Profits Tax. However, Hong Kong also offers a range of incentives and exemptions to reduce the effective tax rates for businesses.

A key component of Hong Kong’s tax incentive system is the two-tiered Profits Tax regime. Specifically, starting from April 1, 2018, corporations are subject to a reduced Profits Tax rate of 8.25% on their first HKD 2 million (approximately SGD 350,000) of assessable profits, and the normal 16.5% rate applies to any assessable profits exceeding HKD 2 million. For unincorporated businesses or entities other than corporations, the two-tiered Profits Tax rates are 7.5% and 15%, respectively.

Hong Kong also provides a Research and Development (R&D) expenditure deduction for eligible R&D activities conducted or commissioned in Hong Kong. The government allows an additional deduction for qualifying expenditure related to basic research, applied research, or experimental development, with the first category of qualifying R&D expenditure (all incurred in Hong Kong) eligible for a 300% deduction on the first HKD 3 million and a 200% deduction on any amount exceeding HKD 3 million. The second category of qualifying R&D expenditure, which includes other qualifying expenditures that do not fall into the first category, is eligible for a 100% full deduction. Nevertheless, according to Deloitte Tax Insights No. H82/2018, the new policy does not fully address the tax issues that Hong Kong businesses, especially outsourced group-affiliated R&D expenses, typically face and are unable to claim a pre-tax deduction.

2.1.3 Comparison of Corporate Profits Tax Systems in the Two Regions

Both Hong Kong and Singapore have globally competitive corporate income tax rates. At first glance, Hong Kong’s 16.5% rate appears more attractive than Singapore’s 17%. However, Singapore offers more favorable policies for multinational corporations establishing global or regional headquarters, in addition to the previously mentioned RHQ/IHQ programs. Singapore has introduced other schemes, such as the Enhanced Tier Incentive Scheme (AITS), which can offer a 5%-10% tax incentive to eligible multinational corporations. This makes the effective tax rate in Singapore lower in terms of corporate income tax.

In comparison, while Singapore focuses on providing significant tax incentives for small enterprises, Hong Kong’s low tax rate has a broader appeal. Small enterprises registering in Singapore can benefit from substantial tax incentives, whereas medium and large enterprises might find Hong Kong’s low tax rate more advantageous. For instance, a newly registered company with assessable income of HKD 1 million (approximately SGD 175,000) would pay HKD 82,500 in tax if registered in Hong Kong (at 8.25%); if registered in Singapore, it would pay SGD 6,375 (about HKD 36,000) in tax.

In conclusion, for a newly registered company with an assessable income of HKD 1 million, registering in Singapore would result in significantly lower tax liability. However, as the company’s income reaches HKD 5 million, Hong Kong’s lower Profits Tax rate becomes advantageous.

2.2 Capital Gains Tax and Stamp Duty

Both Singapore and Hong Kong do not impose capital gains tax, aligning with their status as offshore financial centers.

In terms of stamp duty, both Singapore and Hong Kong levy stamp duty. Singapore’s stamp duty rates vary depending on the type of document, generally ranging from 0.1% to 4%. Hong Kong’s stamp duty rates typically range from 0.1% to 8.5%, with a higher rate of 20% for property seller’s stamp duty. Overall, stamp duty rates and collection have relatively minor impacts on the choice of location for multinational corporations’ headquarters.

2.3 Tax Treaties and Tax Exemptions

As financial centers, both Singapore and Hong Kong have signed comprehensive or limited bilateral or multilateral tax treaties with multiple countries and regions. Consequently, multinational corporations choosing to establish their headquarters in either Singapore or Hong Kong usually do not face issues of double taxation. In particular, Singapore has entered into 107 tax treaties with about 100 countries and regions, including 97 Double Taxation Agreements (DTAs), 8 Limited Taxation Agreements (Limit DTAs), and 2 Exchange of Information Arrangements (EOIs). Hong Kong, on the other hand, has DTAs with 47 countries and corresponding Limit DTAs and EOI Arrangements, covering a total of 67 countries and regions.

In terms of the breadth of bilateral tax treaties, Singapore has a slight advantage over Hong Kong. However, considering the differences in tax systems between Singapore and Hong Kong (with Hong Kong taxing only income sourced within its borders, while Singapore has a broader tax base), Singapore’s need for more DTAs to reduce taxes and simplify its tax regime becomes apparent.

On the other hand, both regions’ tax treaties generally cover major countries and regions. Therefore, multinational corporations primarily located in specific countries usually benefit from the tax incentives provided by both Singapore and Hong Kong. In terms of permanent establishments (PE) and information exchange, both regions follow international conventions and standards. Thus, Singapore and Hong Kong offer similar conditions regarding tax treaties and double taxation avoidance.

As the first part of this column, this article systematically compares and analyzes the fiscal and tax policies, as well as the cryptocurrency industry policies of two crypto-friendly financial centers, Singapore and Hong Kong. The aim is to explore the advantages and disadvantages of their respective tax systems and policies, ultimately guiding the selection and operational strategies for multinational enterprises in the cryptocurrency sector. Overall, Singapore exhibits more open and inclusive policies, while Hong Kong’s approach leans towards caution and protection. Hence, when multinational enterprises decide on the location for their headquarters or branch offices, they should consider a combination of factors such as business type, target markets, scale, and stage of development. These considerations should encompass tax costs, regulatory requirements, market conditions, and innovation potential to make the most informed decisions. TaxDAO will provide further insights into how different types of multinational enterprises can structure their management entities in both regions in subsequent articles. We invite our readers to stay tuned to our column for more information.

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