Ruling 13/2023: Share Sale Gains with Milestone Payments

The strategic acquisition plan

A was a Singapore-incorporated and tax-resident investment holding company in Group X. X held a project interest with joint venture partners Y and Z. When Y decided to exit, X won the bid for Y’s interest, held through non-Singapore Company N.

Why Companies B and C were established

A wholly owned Singapore investment holding Company B, which wholly owned Singapore investment holding Company C. B was established so X could acquire Y’s interest indirectly through C’s acquisition of N for long-term strategic purposes. The transaction would increase X’s project participation and required Z’s consent.

The obstacle and subsequent buyer

Z withheld consent. Other parties, including the eventual Buyer, approached Y about buying its interest. Y did not want to restart the sale process and referred the Buyer to X to discuss acquiring the stake. This context explains the change from the intended strategic investment to the share sale.

Initial consideration and later milestones

In year T, A sold its B shares to the Buyer for an initial $XX plus $YY payable against specified milestones on completing the proposed acquisition. The acquisition completed in T. A recognised an initial gain in T and subsequent gains in T, T+1 and T+2; the second and third milestone payments were recognised only on receipt of cash in T+1 and T+2. The amounts and years are anonymised in the source.

IRAS’s decision and three factors

The B share sale was A’s first and only such transaction. IRAS held that both the initial and subsequent gains were capital gains and not taxable under the Income Tax Act. The summary cites section 10(1)(a) of the 2020 Revised Edition.

The stated factors were A’s intention when incorporating B, the frequency of similar transactions and the circumstances of the sale. The conclusion did not turn merely on the later payments being received in different years. The source also points to IRAS’s taxable/non-taxable income guidance on determining whether a trade is carried on.

Publication date and scope

This summary explains the IRAS advance ruling published on 1 December 2023. The ruling binds the applicant and the specified transaction only. Another taxpayer cannot assume that a similar arrangement will receive identical treatment. IRAS does not revise published ruling summaries when legislation or its interpretation changes. The provision numbers and conclusions below describe this dated source.