Tax treatment of ship pooling arrangements

Ship pooling arrangements have become more common as shipowners seek greater efficiencies in the deployment of their vessels.In advance ruling summary no. 15/2022, the Singapore tax authorities have clarified Singapore’s tax treatment of cross-border ship pooling arrangements that are managed out of Singapore.

Background

Various foreign pool participants contributed their vessels to a shipping pool. These vessels sail between Singapore and other countries, and between places outside Singapore. Legal ownership of the vessels remains with the respective pool participants. The pool participants are beneficial owners of the pool’s cash balances, i.e. income derived from the operation of their vessels.

A foreign pool management company (“company D”) subcontracted the pool management services to two other related companies, a Singapore company (“company A”) and another foreign company. Company A provides commercial management and administration services for the vessel pooling arrangement, including the management and administration of the flow of funds through the Singapore bank accounts of company D. Company A has employees in Singapore to perform the pool management and administration services. Those services of company A are compensated on an arm’s length basis.

The foreign pool participants’ presence in Singapore is merely through their participation in the pool – they assume all risks and rewards incidental to the ownership of the vessels contributed/committed to the pool, but undertake no further activities with regard to the member vessels in Singapore.

Issues

1. 1. Whether the pool profits (excluding interest income) remitted to the foreign pool participants from company D’s Singapore bank account managed by company A are exempt from Singapore corporate income tax, including withholding tax; and
   2. Whether the pool profits (excluding interest income) received by company A are exempt from income tax as qualifying shipping income under section 13A or 13E of the Income Tax Act 1947 (“ITA”) where company A is a pool participant.

Rulings

Issue 1

Although the foreign pool participants may have a permanent establishment in Singapore as a result of the activities/functions undertaken by company A in Singapore with regard to the pooling arrangement, there will be no further attribution of profits to such permanent establishment as long as company A has been remunerated at arm’s length for its services. Withholding tax is not required on pool distributions (excluding interest income) made to the foreign pool participants. However, the tax authorities may request for Transfer Pricing documentation to demonstrate that company A has been remunerated with an arm’s length fee.

Issue 2

For company A, pool distributions (excluding interest income) will be tax exempt, provided that the net income is a distribution out of qualifying income falling within the scope of section 13A or 13E of the ITA. Where applicable, company A must meet the conditions stipulated in section 13A or 13E.