The Battle of Choosing Locations for Transnational Cryptocurrency Companies (Part 1) Comparative Analysis of Taxation and Regulation between Singapore and Hong Kong

Comparing Taxation and Regulation for Transnational Cryptocurrency Companies A Battle of Choosing between Singapore and Hong Kong (Part 1)

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

As two of Asia’s most important financial hubs, both Singapore and Hong Kong have advantages such as robust legal systems, open market environments, and low tax costs, which have attracted numerous multinational companies to set up headquarters or branch offices here. With the advent of the Web3.0 era, cryptocurrency assets, as a new form of financial assets, have received attention from the governments and regulatory authorities in both places. Singapore and Hong Kong have established corresponding regulations and guidelines to regulate the development of the cryptocurrency asset market and have provided some support policies, such as tax incentives and fintech innovation funds.

However, there are also some differences between the two places in terms of fiscal and tax policies and support policies for the cryptocurrency industry. For example, in terms of fiscal and tax policies, Singapore implements territorial principle taxation and imposes taxes on income derived from outside of Singapore or received within Singapore’s territory; while Hong Kong implements a single source principle and only taxes income derived from Hong Kong. In terms of policies for the cryptocurrency industry, Singapore’s Payment Services Act brings all institutions that provide payment services (including virtual currency services) under regulation and establishes three different types of licenses; while Hong Kong’s Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Bill will introduce a new mandatory licensing regime for virtual asset exchanges.

TaxDAO now systematically compares and analyzes the advantages and disadvantages of fiscal and tax policies in both Singapore and Hong Kong, starting from the fiscal and tax policies of the two cryptocurrency-friendly financial centers, through a dedicated series, in order to explore the site selection and operational strategies that are more suitable for multinational companies with cryptocurrency assets. This article is the first in the series and provides an overview and comparison of the business environment and fiscal and tax policies of both places. In the future, TaxDAO will specifically analyze how different types of enterprises in the cryptocurrency industry can establish regional or global headquarters in both places, including but not limited to mining companies, exchanges, DeFi operators, and other multinational companies. Reader attention is welcomed!

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1. Overview of the Business Environment in Singapore and Hong Kong

All in all, Hong Kong is more suitable for companies in the traditional financial industry, while Singapore is more suitable for innovative companies to land.

The Global Financial Centres Index (GFCI) is used to evaluate the competitiveness of financial cities. It covers five major indicators: business environment, human capital, infrastructure, financial industry development, and reputation, which can systematically reflect the competitiveness of financial centers. According to the latest ranking in the 34th edition, Singapore leads China’s Hong Kong by 1 point and ranks third globally and first in Asia, while Hong Kong ranks fourth globally and second in Asia.

In addition, the Asset Management Center Index (AMCI) provides a certain reference value for multinational companies in choosing the location of management institutions. AMCI is an index that evaluates the development 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 Hong Kong, China to become the fourth globally and the first in Asia.

The Global Innovation Index (GII) also has a certain reference value for the location selection of innovative enterprises. This index covers two major 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 7th globally and 1st in Asia; Hong Kong, China ranks 14th globally and 3rd in Asia.

Therefore, although there are slight differences in the macro-business environment between 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 in recent years, especially in the GII index, where there is a significant difference in scores between Hong Kong and Singapore.

However, Hong Kong still maintains its advantages in traditional finance and services. In addition to having a higher GDP volume than Singapore, the size of Hong Kong’s traditional financial business is also larger than Singapore’s. The market size and activity of Hong Kong’s stock market far exceed Singapore. In the first half of 2022, the total market value of listed companies on the Hong Kong Stock Exchange was about 8 times that of the Singapore Exchange, with an average monthly trading volume 17 times that of the Singapore Exchange. Hong Kong’s bond market also has a larger initial issuance size compared to Singapore. In 2021, the size of the first issuance of Asian international bonds in Hong Kong was 1.7 times that of Singapore. In addition, Hong Kong’s banking and insurance industries are more mature than Singapore’s. The total assets and total deposits of the banking industry in Hong Kong in 2021 were 1.5 times that of Singapore, and the total insurance premiums were 2 times that of Singapore. Finally, in terms of foreign exchange trading, Hong Kong is the world’s third-largest foreign exchange trading center, following only the United States and the United Kingdom.

In comparison, Singapore’s advantages in innovative financial services are more prominent. As offshore financial centers (Offshore Financial Center, that is, countries or regions that provide low or no taxes, high confidentiality, and loose regulation for non-resident customers), both Singapore and Hong Kong have formulated corresponding regulations and policy support facilities in the fields of digital currency payment services, digital assets, and DeFi. For example, in the payment services sector, Singapore has introduced the Payment Services Act, which brings all institutions that provide payment services (including virtual currency services) under regulatory oversight and establishes three different types of licenses. In the field of digital assets, Singapore’s Securities and Futures Act defines and classifies digital tokens into payment tokens, utility tokens, and asset tokens, and determines whether they belong to the category of securities or futures contracts based on their nature and function. In the field of DeFi, 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’s innovative financial services, and have also attracted many international financial institutions and technology companies to establish branches or partnerships in Singapore.

2 Comparative Study of Taxation in Two Locations

2.1 Corporate Income Tax

Corporate income tax is a direct tax levied on the taxable profits of a company over a certain period of time. Different countries or regions have different methods of imposing and rates of corporate income tax, which can affect the profitability and competitiveness of businesses.

2.1.1 Corporate Income Tax in Singapore

In general, Singapore’s corporate income tax system follows the territorial principle, meaning that it taxes income generated within Singapore or derived from Singapore sources. However, for resident companies, the following types of income obtained must be taxed in Singapore: (1) income derived from or accruing in Singapore, and (2) foreign-sourced income received in Singapore.

According to Section 10(25) of the Income Tax Act, the following types of foreign-sourced income fall within the aforementioned “foreign-sourced income received in Singapore” category:

(1) Brought into Singapore, transferred to Singapore, or carried into Singapore from overseas;

(2) Used to settle debts arising from trade or business activities conducted in Singapore;

(3) The purchase of tangible movable property (such as equipment, raw materials, etc.) overseas and the subsequent importation of such property into Singapore.

Regarding the tax rate for corporate income tax, both resident and non-resident companies must pay at a flat rate of 17%. However, Singapore also offers a range of incentives and reliefs to reduce the effective tax rate for companies.

Firstly, Partial Tax Exemption (PTE) allows eligible companies to enjoy partial tax exemptions ranging from 75% to 50%. Specifically, within the normal chargeable income, the first portion below SGD 10,000 is eligible for a 75% tax exemption, the portion between SGD 10,001 and SGD 200,000 is eligible for a 50% tax exemption, and the portion exceeding SGD 200,000 is subject to the normal tax rate of 17%.

Secondly, Singapore provides full tax exemption for qualifying newly incorporated companies. According to the 2018 New Financial Budget, newly incorporated Singapore tax resident companies or limited up to three years of establishment, the first SGD 100,000 of taxable income is eligible for a 100% tax exemption, the portion between SGD 100,001 and SGD 200,000 is eligible for a 50% tax exemption (previously SGD 300,000), and the portion exceeding SGD 200,000 is subject to the normal tax rate of 17%. Additionally, companies can enjoy a tax deduction of 250% for qualifying R&D expenses, and the Singapore government also provides annual R&D grants to companies engaged in R&D activities.

Thirdly, Singapore offers preferential tax rates for qualifying Regional Headquarters (RHQ) or International Headquarters (IHQ). Specifically, multinational corporations that establish their regional or international headquarters in Singapore can apply for lower corporate income tax rates, provided they meet certain criteria in terms of scale, turnover, and employment. The tax rate for regional headquarters is 15% for a period of 3 to 5 years, while the tax rate for international headquarters is 10% or lower for a period of 5 to 20 years.

2.1.2 Hong Kong Corporate Income Tax (Profit Tax)

Hong Kong does not have a tax called “income tax,” but it has a similar tax called “profit tax,” which will be treated together with the concept of corporate income tax in this article. Unlike Singapore, Hong Kong’s profit tax adopts a strict territorial source concept, which means that only income generated within Hong Kong or derived from within Hong Kong is subject to taxation. In other words, whether someone is a tax resident of Hong Kong does not affect the levy of profit tax. Any person who conducts business in Hong Kong and generates profits must pay tax on the relevant profit income in Hong Kong. Profit derived from overseas is not subject to profit tax in Hong Kong.

In terms of tax rates, the Hong Kong legislation sets a unified tax rate of 16.5% for profit tax. However, Hong Kong also provides a series of preferential policies and reliefs to reduce the actual effective tax rate for companies.

At the core of Hong Kong’s tax incentive system is the two-tiered profit tax system. Specifically, starting from April 1, 2018, the tax rate for the first HK$2 million (approximately SGD 350,000) of assessable profits for corporations is 8.25%, while the tax rate for assessable profits beyond HK$2 million is the normal rate of 16.5%. For individuals other than sole proprietorships or partnership businesses, the corresponding tax rates for the two tiers are 7.5% and 15% respectively.

Hong Kong also provides Research and Development (R&D) expenditure deduction for eligible R&D companies. Specifically, expenses incurred by companies in Hong Kong or commissioned to carry out R&D activities that meet the requirements are eligible for additional deductions. The Hong Kong government includes expenditures related to basic research, applied research, or experimental development in the scope of additional deductions. For the first category of qualified R&D expenditure (incurred entirely in Hong Kong), a deduction of 300% is allowed for the first HK$3 million and a deduction of 200% for the amount exceeding HK$3 million. The second category of qualified R&D expenditure (i.e., other expenses that do not fall under the first category but still meet the requirements) is eligible for a 100% full deduction. However, according to the views expressed in Deloitte’s Hong Kong Tax Alert H82/2018, the new policies have not addressed the tax issues faced by Hong Kong companies mentioned earlier. In general, research and development expenses of outsourced group affiliated parties of Hong Kong companies are still not eligible for pre-tax deduction.

2.1.3 Comparison of Corporate Income Tax Systems in the two regions

Hong Kong and Singapore both have relatively low corporate income tax rates worldwide. At first glance, Hong Kong’s tax rate of 16.5% seems lower than Singapore’s 17%. However, the Singapore government offers more favorable policies for attracting multinational companies to establish global or regional headquarters. In addition to the RHQ/IHQ scheme mentioned earlier, Singapore has also introduced other plans, such as the Approved International Trader Scheme (AITS), to attract multinational companies. Taking the IHQ scheme as an example, multinational companies can enjoy a tax concession of 5% to 10% if they meet the requirements, resulting in a lower effective tax rate for corporate income tax in Singapore.

Compared to Singapore’s emphasis on supporting small businesses, Hong Kong’s low tax rates have a wider coverage. Small businesses registered in Singapore enjoy significant tax benefits, while for medium-sized and large enterprises, Hong Kong’s low tax rates offer greater advantages. For example, let’s say a newly registered company earns taxable income of HKD 1 million (approximately SGD 175,000). If the company is registered in Hong Kong, its tax liability would be HKD 1 million * 8.25% = HKD 82,500. On the other hand, if the company is registered in Singapore, its tax liability would be SGD 75,000 * 50% * 17% = SGD 6,375, approximately HKD 36,000.

From this example, we can see that for a newly registered company with taxable income of HKD 1 million, Singapore offers much lower tax payments. However, if the company’s income reaches HKD 5 million, Hong Kong’s advantage of lower income tax rates becomes evident.

2.2 Capital Gains Tax and Stamp Duty

Both Singapore and Hong Kong do not impose capital gains tax, which aligns with their positioning as offshore financial centers.

Both Singapore and Hong Kong levy stamp duty. In Singapore, the stamp duty rate varies based on the type of document, generally ranging from 0.1% to 4%. In Hong Kong, the stamp duty rate typically ranges from 0.1% to 8.5%, with a maximum of 20% for property transfer seller’s stamp duty. Overall, the stamp duty rates and collections do not have a particularly significant impact on the choice of headquarters location for multinational companies.

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 numerous countries or regions. Therefore, whether multinational companies choose to establish their headquarters in Hong Kong or Singapore, they generally do not face double taxation issues. Specifically, Singapore has signed 107 tax treaties with approximately 100 countries and regions, including 97 Avoidance of Double Taxation Agreements (DTAs), 8 Limited Treaties (Limit DTAs), and 2 Exchange of Information Arrangements (EOI Arrangements). Hong Kong has signed DTAs with 47 countries and has corresponding Limit DTAs and EOI Arrangements, totaling 67 countries with DTAs or EOI Arrangements.

In terms of the breadth of bilateral tax treaties, Singapore slightly surpasses Hong Kong. However, considering the differences in their tax systems, Hong Kong only taxes income derived from within its territory, while Singapore has a broader taxation of resident enterprises. Therefore, it is necessary for Singapore to sign more DTAs to reduce taxes and promote tax system simplicity.

On the other hand, the DTAs signed by both places generally cover major countries and regions. In addition to specific countries where businesses are primarily located, multinational companies with significant operations in major countries can often enjoy tax benefits provided by both places. Both Singapore and Hong Kong adhere to international conventions and standards in Permanent Establishments (PE) and information exchange. Therefore, Singapore and Hong Kong have similar conditions in terms of tax treaties and the avoidance of double taxation.

As the first part of the column, this article starts from comparing and analyzing the tax policies and industry policies of the two cryptocurrency-friendly financial centers, Singapore and Hong Kong. It systematically explores the advantages and disadvantages of the tax systems and policies in order to discuss the most suitable location and operational strategies for multinational companies in the cryptocurrency industry. Overall, Singapore has a more open and inclusive policy while Hong Kong’s policy is more cautious and protective. Therefore, when choosing the location for their headquarters or branch offices, multinational companies need to consider factors such as their business type, target market, scale, and development stage, and comprehensively assess the tax costs, regulatory requirements, market environment, and innovation potential of both places in order to make the best decisions. How different types of multinational companies can design and manage their entities in these two locations will be discussed in subsequent articles by TaxDAO. We welcome readers to continue following our column.

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