WhatsApp Us +65 8699 8821

Tax Benefits Unveiled: A Guide to M&A Allowance

Tax Benefits Unveiled: A Guide to M&A Allowance

In Singapore’s economic strategy, a key focus is on strengthening businesses and industries. One significant aspect of this strategy is the encouragement of mergers and acquisitions (M&A) for registered companies. Introduced in 2010, the Mergers and Acquisitions (M&A) Scheme offers numerous benefits to Singapore-based companies, including the M&A allowance, stamp duty relief, and double tax deductions for transaction costs. 

The M&A allowance, part of Singapore’s M&A Scheme, is a vital funding source, especially for newer businesses. Simply put, it’s a tax benefit received by the acquiring company but meant to be shared with the target company. 

This article aims to comprehensively explore the M&A Allowance, its eligibility criteria, and the principles governing different M&A situations. 

Qualifying for M&A Allowance under the M&A Scheme

In the framework of the M&A scheme, an M&A allowance is provided to a company (referred to as the acquiring company) that purchases the ordinary shares of another company (known as the target company) within the period from April 1, 2010, to December 31, 2025, inclusive of both dates. This M&A allowance is distributed evenly over five years and cannot be postponed.

To retain eligibility for the M&A allowance throughout the five-year writing-down period, companies need to meet specific conditions for each Year of Assessment (YA).

Qualifying Periods for M&A Allowance

The M&A allowance is awarded for eligible share acquisitions that take place in the following timeframes:

  1. April 1, 2016, to December 31, 2025
  2. April 1, 2015, to March 31, 2016
  3. April 1, 2010, to March 31, 2015

A Snapshot of  M&A Allowance & Qualifying Conditions for all the Qualifying periods

Table 1: Amount of M&A Allowance during the three periods

Period M&A Allowance Rate Cap on Value of Acquisition M&A Allowance Cap
April 1, 2010 – March 31, 2015 5% of the value

of acquisition

$100 million $5 million per qualifying share acquisition
April 1, 2015 – March 31, 2016 Increased to 25% of

the value of

acquisition

$20 million $5 million per qualifying share acquisition
April 1, 2016 – December 31, 2025 25% of the value

of acquisition

$40 million $10 million per qualifying share acquisition

Table 2- Common Qualifying Conditions for Shareholding for all the periods

Company Type Qualifying Conditions
Acquiring Companies – Incorporated and tax-resident in Singapore.

– Must have an active trade or business in Singapore.

 Maintain at least 3 local employees (excluding directors) for 12 months before share acquisition

No connection with the target company for at least 2 years prior to share acquisition.

Acquiring Subsidiaries – Must not claim M&A scheme tax benefits.

Should not have an active trade or business on the acquisition date.

Must be directly and wholly-owned by the acquiring company.

 For acquisitions from Feb 17, 2012, to Dec 31, 2025,

the wholly-owned acquiring subsidiary may also be indirectly held. In such cases, it and intermediate companies must primarily exist to hold shares.

Target Companies – Must have an active trade or business in Singapore or elsewhere.

– Need a minimum of 3 employees for 12 months before share acquisition.

– These conditions may also apply to subsidiaries directly or indirectly owned by the target company for acquisitions from Feb 17, 2012, to Dec 31, 2025.

Qualifying for M&A Allowance: Different Periods, Amounts, and Conditions

A. For Share Acquisitions between April 1, 2016, and December 31, 2025:

(i) Amount of M&A Allowance:

  • M&A allowance rate: 25% of the acquisition value.
  • Cap on the acquisition value: $40 million.
  • The maximum M&A allowance is $10 million for all qualifying share acquisitions within each Year of Assessment (YA).

(ii) Qualifying Conditions for Share Acquisition:

Shareholding in the Target Company

  • The acquiring company must own either:
    • At least 20% of the target company’s ordinary shares (if they had less than 20% before the acquisition).
    • More than 50% of the target company’s ordinary shares (if they owned less than or equal to 50% before the acquisition).
    • The acquisition can be direct or indirectly through an acquiring subsidiary.

Acquiring Companies

  • To qualify, the acquiring company must:
    • Be incorporated in Singapore and a tax resident of Singapore.
    • Be engaged in business in Singapore on the date of share acquisition.
    • Employ at least three local workers (excluding company directors) throughout the 12 months before the share acquisition.
    • Not be connected to the target company for at least two years before the share acquisition.

Acquiring Subsidiaries

  • When the acquisition is made through an acquiring subsidiary:
    • The acquiring subsidiary must not claim M&A scheme tax benefits.
    • It should refrain from conducting business on the acquisition date.
    • The acquiring company must directly and wholly own it.

Target Companies

  • The target company must:
    • Be engaged in business in Singapore or elsewhere on the share acquisition date.
    • Have a minimum of 3 employees throughout the 12 months before the share acquisition.

B. For Share Acquisitions between April 1, 2015, and March 31, 2016:

(i) Amount of M&A Allowance:

  • M&A allowance rate: 25% of the acquisition value.
  • Cap on the acquisition value: $20 million.
  • The M&A allowance is capped at $5 million for all qualifying share acquisitions within each Year of Assessment (YA).

(ii) Qualifying Conditions:

Refer to the segments above on Shareholding in the Target Company, Acquiring Companies, Acquiring Subsidiaries, and Target Companies.

C. Qualifying for M&A Allowance (April 1, 2010, to March 31, 2015):

(i) M&A Allowance Amount:

  • M&A allowance rate: 5% of the acquisition value.
  • Cap on acquisition value: $100 million.
  • M&A allowance is capped at $5 million for all qualifying share acquisitions within each Year of Assessment (YA).

(ii) Conditions for Qualification:

Shareholding in the Target Company:

  • Before April 1, 2015, the acquiring company must own either:
    • More than 50% of the target company’s ordinary shares (if they had less than or equal to 50% before the acquisition).
    • At least 75% of the target company’s ordinary shares (if they owned more than 50% but less than 75% before the acquisition). The 75% threshold was removed starting from April 1, 2015.
    • The acquisition can be direct or indirectly through an acquiring subsidiary.

Acquiring Companies:

  • See the ‘Qualifying Conditions for Acquiring Companies’ segment for details.

Acquiring Subsidiaries:

  • Refer to the ‘Qualifying Conditions for Acquiring Subsidiaries’ segment.

Target Companies:

  • Refer to the ‘Qualifying Conditions for Target Companies’ segment.

Maintaining M&A Allowance Eligibility over 5 Years

To remain eligible for M&A allowance during each Year of Assessment (YA) within the 5-year writing-down period, companies must adhere to these requirements:

  1. The acquiring company and, if applicable, its ultimate holding company must meet the conditions for acquiring companies (refer conditions as stated above).
  2. If the acquisition is made through an acquiring subsidiary, the acquiring subsidiary and every intermediate companies above it must fulfil the conditions for acquiring subsidiaries (refer conditions as stated above). Remember that acquiring company gets the M&A allowance.

For companies seeking the M&A allowance based on the 20% shareholding threshold for acquisitions since April 1, 2015, they must also have:

  • At least one director representing the acquiring company on the Board of Directors of the target company.
  • Acquired a shareholding of at least 20% in the target company, with the target company recognised as an associate under specific accounting standards.

Note:
Failure to meet these conditions for any YA during the five years results in the M&A allowance no longer being applicable from that YA.

Double Tax Deduction on Transaction Costs

  • Applies to share acquisitions from February 17, 2012, to December 31, 2025.
  • Get double tax deductions after removing grants or subsidies, with a limit of $100,000.
  • The limit is the same for all transaction costs, no matter when or which company incurs them.
  • Transaction costs include fees for lawyers, accountants, valuations, and professionals (except for loan-related costs).
  • When to claim: You can deduct transaction costs in the tax year when you first claim the M&A allowance for the share acquisition, or in the tax year relating to the period when the transaction costs were spent, whichever is later.

Example:

  • Suppose you bought a company in March 2019 and claimed the allowance in 2020.
  • The costs increased over three years: $10,000 in 2019, $60,000 in 2020, and $50,000 in 2021.
  • You’d get a double tax deduction of $140,000 [($10,000 + $60,000) x 2 = $140,000)] for 2020 and $60,000 ($30,000* x 2 = $60,000) for 2021.

* The transaction cost of $50,000 in YA 2020 is limited to $30,000, as the total allowable amount is ($100,000- $10,000 – $60,000). Any amount exceeding $30,000, is not considered for deduction.

Note:
Costs from share acquisitions between April 1, 2010, and February 16, 2012, can’t be deducted. They do Not form part of the Qualifying share acquisition cost under the M&A allowance.

Unutilised M&A Allowance & Double Tax Deduction on Transaction Costs

  • M&A allowance and double tax deductions can’t be shared under Group Relief.
  • Unused M&A allowance and double tax deductions can’t be used to set-off the acquiring company’s assessable income for the preceding year.
  • If certain conditions are met (shareholding test- See FAQ 3), unused M&A allowance and double tax deductions can be saved for future use.
  • The shareholding test is like the one for unused capital allowances.

Conclusion

In conclusion, Singapore’s Mergers and acquisitions (M&A) scheme offers significant incentives to businesses, facilitating growth, international expansion, and the enhancement of market positions. By providing M&A allowances, stamp duty relief, and double tax deductions, the government encourages companies to come together, address structural weaknesses, and prepare for a more robust and competitive future. The M&A scheme’s flexibility and eligibility conditions allow various companies to leverage these benefits, fostering a dynamic business environment in Singapore.

We are pivotal in guiding companies through the complex landscape of M&A transactions, ensuring they meet the eligibility criteria, secure M&A allowances, and make informed decisions for long-term success. Our deep understanding of the M&A landscape, coupled with Singapore’s supportive environment, empowers us to assist clients in unlocking the full potential of their mergers and acquisitions, ultimately driving growth and competitiveness.

FAQs on M&A Singapore

  • Mergers and acquisitions (M&A) refer to a strategic business move where two companies join forces to unlock their full potential. While each business can generate profits individually, combining their strengths can lead to greater efficiency and financial success in both the short and long term. In an M&A, one company becomes the acquiring entity, and the other becomes the target. This union qualifies the resulting company for an M&A Allowance. If only a portion of the target company’s shares is acquired, the M&A Allowance applies only to the acquiring company. Singapore encourages M&A to strengthen businesses and prepare them for future growth.
  • It could be a company, its customer roster, distribution network, or brand equity, all of which can reap the rewards post-acquisition. This principle extends to domains such as fresh product innovation and research and development, where the pace facilitated by M&A is seldom achievable via organic strategies.
  • The Shareholding Test evaluates if a company has significantly changed its ownership and shareholding structure. Two important dates are chosen for evaluation: the last day when specific benefits originated and the first day when these benefits will be applied. Common shareholders with shares on both dates are identified. The total number of shares they hold is calculated, and their ownership percentage relative to the total shares is assessed. A 50% or more percentage indicates no substantial change, while less than 50% implies a significant ownership transformation. This test is vital for tax and benefit eligibility purposes.

Let’s Connect

Ready to explore the Mergers and acquisitions opportunities in Singapore?

About the Author

InCorp Content Team

InCorp's content team includes talented copywriters from our regional group and globally. We contribute informative, thought leadership, and market-trending articles to guide aspiring business entrepreneurs to a higher level across the Asia-Pacific region.

More on Business Blogs

Contact Us