Ruling 13/2021: Exchange Fees as Break Costs on Debt Securities

The questions submitted

The applicant asked whether the Exchange Fee was a gain or loss on disposing of notes, outside section 12(6), or instead a break cost or prepayment fee within the Qualifying Debt Securities (QDS) framework. Under the proposed disposal analysis, taxation would depend on whether the holder’s gain was capital or revenue in nature. Under the proposed QDS analysis, the applicant sought the relevant exemptions, concessions and withholding-tax treatment. These were questions raised, rather than all being accepted conclusions.

Issuer, existing notes and exchange offer

The issuer was incorporated in Singapore and listed on the Singapore Exchange Securities Trading Limited. It issued a tranche of QDS under a multicurrency debt programme. A Singapore-law trust deed between the issuer and trustee set out the programme’s note conditions.

All noteholders were invited to offer their outstanding notes for exchange. The consideration comprised new notes issued under the programme, a cash amount, the Exchange Fee and accrued unpaid interest. Participating holders agreed that exchanging the old notes constituted a purchase by the issuer under the note conditions, with the consideration constituting payment for that purchase. The new notes were also intended to qualify as QDS; unexchanged notes remained outstanding.

What the Exchange Fee compensated

The Exchange Fee was paid in addition to the old notes’ principal amount. It compensated holders for loss arising from their early redemption. Its function, and the content of the note conditions, determined the classification addressed in the ruling.

Why section 12(6)(a) applied

IRAS held that the fee fell within section 12(6)(a), because it was connected with the indebtedness represented by the notes’ principal. The ruling therefore did not adopt the suggested analysis that the payment lay outside that provision merely as a disposal gain or loss.

Break cost rather than prepayment fee

IRAS rejected the classification as a prepayment fee under section 13(16): the note conditions did not provide for an amount payable for early redemption. It nevertheless classified the fee as a break cost under the same provision because the payment compensated the holders’ early-redemption loss. The distinction depended on the actual terms and compensation in this transaction.

QDS concessions and non-resident withholding tax

Subject to the governing QDS Regulations and sections 43N and 13(2F), where applicable, noteholders receiving the fee could obtain the concessions and exemptions under sections 13(1)(ba) and 43N. Individuals could obtain the section 13(1)(zk) exemption, except where the income arose through a partnership in Singapore or from carrying on a trade, business or profession in Singapore.

On those conditions, the issuer’s payment of the Exchange Fee to non-resident noteholders was not subject to withholding tax under the QDS scheme. The ruling does not give every early-redemption payment an unconditional exemption.

Date, legislation and limits of reliance

The summary was published on 1 September 2021 and cites the Income Tax Act’s 2014 Revised Edition, sections 12(6)(a) and 13(16), and the QDS Regulations. Other cited provision numbers are retained to describe that historical ruling.

IRAS states that the ruling binds only the applicant and the specified transaction. The Comptroller is not bound to give a similar transaction the same treatment, and published summaries are not updated for later changes in legislation or interpretation.