In the 2023 Budget, the Enterprise Innovation Scheme (EIS) was introduced by the Singapore government to encourage businesses to engage in research and development (‘R&D’), innovation and capability development activities. This article highlights some of the salient features of EIS, which candidates taking ATX-SGP should take note of. These candidates should also refer to the e-tax guide ‘Enterprise Innovation Scheme’ issued by Inland Revenue Authority of Singapore (IRAS) for further details.
Under the EIS, eligible businesses may claim certain benefits for qualifying expenditure incurred for the following qualifying activities:
(a). Qualifying R&D undertaken in Singapore
(b). Registration of intellectual property (‘IPs’)
(c). Acquisition and licensing of IP rights (‘IPRs’)
(d). Training, and
(e). Qualifying Innovation projects carried out with polytechnics, the Institute of Technical Education (‘ITE’) or other qualified partners.
The EIS is available from Year of Assessment (YA) 2024 to YA 2028 – ie qualifying expenditure must be incurred in the basis periods for these YAs to enjoy EIS benefits. Eligible businesses include sole-proprietorships, partnerships, companies (including registered business trusts), registered branches and subsidiaries of a foreign parent or holding company that carry on a trade or business in Singapore.
Under the EIS, for each YA from YA 2024 to YA 2028, eligible businesses will be able to enjoy enhanced deductions or allowances on up to $400,000 of qualifying expenditure incurred for each qualifying activity (except for innovation projects carried out with polytechnics, the Institute of Technical Education (‘ITE’) or other qualified partners), and up to $50,000 of qualifying expenditure incurred for qualifying innovation projects carried out with polytechnics, the ITE or other qualified partners.
The qualifying expenditure cap for each qualifying activity is applied on a YA basis and cannot be combined across YAs. The enhanced deductions or allowances are granted in addition to the existing deductions or allowances allowed.
In lieu of tax deductions or allowances, eligible businesses may opt to convert up to $100,000 of the total qualifying expenditure across all five activities for each YA into cash at a conversion rate of 20%. Each cash payout application (only one is allowed for each YA) is subject to a minimum expenditure of $400 and the cash payout is not taxable. Besides carrying on a trade or business in Singapore, an eligible business opting for a cash payout, should also satisfy the three full-time local employee condition – ie the business should have at least three full-time local employees in its employment for at least six months in the basis period of the relevant YA.
Businesses which do not carry on a trade or business, for example, investment holding companies deriving passive investment income, are not eligible for EIS benefits. In addition, any qualifying expenditure eligible for EIS benefits (whether in the form of enhanced deductions/allowances or cash payout) should be net of any government grant or subsidy.
Under the cash payout election, candidates should evaluate the potential tax savings foregone due to the forfeiture of deductions/allowances with the cash payout received in consideration of whether the election should be made. For example, if the business is incurring a loss and foresees poor financial performance will persist for the next few years, a cash payout election may be preferred as tax savings via the deductions/allowances may not be realised in the near future.
The remaining parts of this article highlight some key features of each specific EIS qualifying activity.
For each YA from YA 2024 to YA 2028, businesses may claim 250% deductions (comprising 100% ‘base deductions’ under Section 14C of the Income Tax Act (‘ITA’) and 150% ‘additional deductions’ under Section 14D of the ITA) for qualifying expenditure incurred on qualifying R&D undertaken in Singapore. Under the EIS, a further 150% deduction (‘Enhanced deductions’) is allowed for such activity, resulting in a total of 400% deduction for the first $400,000 of qualifying R&D expenditure. There is no requirement for the R&D to be related to the existing trade or business to qualify for the said R&D claims so long as the R&D is undertaken in Singapore1.
The qualifying expenditure eligible for the 150% additional deduction under Section 14D of the ITA and enhanced 150% deduction under EIS includes staff costs (excluding directors’ fees) and consumables. When the R&D activity is outsourced to a R&D organisation, 60%2 of the payment to the R&D organisation may be deemed as the qualifying expenditure for the additional and enhanced deductions. Such amount of deemed qualifying expenditure can be affected by the purpose of a government grant or subsidy received3, if any.
Illustration 1
In the financial year 2024, $900,000 is paid by a business to a R&D organisation for undertaking a R&D project in Singapore.
|
Deemed qualifying expenditure |
Base deduction under Section 14C |
Additional deduction under Section 14D |
Enhanced deduction under EIS |
No government grant/subsidy received |
60% x 900,000 = 540,000 |
100% x 900,000 = 900,000 |
150% x 540,000 = 810,000 |
150% x 400,000 (cap) =600,000 |
$100,000 Government grant/subsidy received to fund qualifying R&D expenditure (staff costs (excluding directors’ fees) and consumables) |
(60% x 900,000) – 100,000 =440,000 |
100% x (900,000 – 100,000) = 800,000 |
150% x 440,000 =660,000
|
150% x 400,000 (cap) =600,000 |
$100,000 Government grant/subsidy received to subsidise fees paid to R&D organisation in general |
60% x (900,000 – 100,000) = 480,000 |
100% x (900,000 – 100,000) = 800,000 |
150% x 480,000 =720,000
|
150% x 400,000 (cap) =600,000 |
The cash payout option when elected, reduces the deductions in respect of the qualifying R&D expenditure. In illustration 1, when there is no government grant/subsidy received and the business chooses to convert the maximum R&D qualifying expenditure of $100,0004 to cash and receives a cash payout of $20,000 (20% of $100,000), the base and additional deductions under Section 14C and Section 14D of the ITA will be recomputed as $800,000 (100% of ($900,000 – $100,000)) and $660,000 (150% of ($540,000 – $100,000)) respectively while the enhanced deduction will be recomputed as $450,000 (150% of ($400,000 – $100,000)).
Under the EIS, the tax deduction for the qualifying IP registration cost5 under Section 14A of the ITA is increased to 400% (comprising 100% base deduction and 300% enhanced deduction) for the first $400,000 of qualifying IP registration costs. A 100% base deduction will still be granted for any such costs in excess of $400,000.
The enhanced deduction for qualifying IP registration costs must be claimed on the full cost of an IPR filing, subject to the annual expenditure cap of $400,000. Partial costs of one IPR filing may be claimed only if this allows the enhanced deduction to be claimed up to the expenditure cap.
Illustration 2
In the financial year 2024, Patent A and Patent B were registered and qualifying registration costs were incurred as below.
|
Qualifying registration costs |
100% Base deduction in YA 2025 |
300% Enhanced deduction under EIS in YA 2025 |
Remarks |
Patent A |
$300,000 |
100% x 300,000 = 300,000 |
300% x 300,000 = 900,000 |
|
Patent B |
$200,000 |
100% x 200,000 = 200,000 |
300% x 100,000 = 900,000 |
Enhanced deductions claimed on the partial registration costs ($100,000) of Patent B |
In lieu of the base and enhanced deductions, the cash payout option is allowed on a per registration basis, subject to the overall expenditure cap of $100,000 across all five qualifying activities under the EIS for each YA. The total qualifying IP registration costs incurred in relation to a single application for registration of an IPR must be converted into cash, subject to the cap. Registration costs in excess of the cap will be forfeited and not be available for deduction against the income of the business. In illustration 2, if the business elects to convert the qualifying registration costs for Patent A to cash, a cash payout of $20,000 (20% of $100,000 (cap)) will be received and the excess $200,000 of registration costs ($300,000 – $100,000) will be forfeited – ie not eligible for base and enhanced deductions.
There is a minimum one-year ownership period for the registered IPR, failing which claw-back provisions apply. In illustration 2, if Patent A is sold for $250,000 within one year of ownership in financial year 2025, the amounts of $250,000 (based on lower of sale price ($250,000) or base deduction granted previously ($300,000)) and $900,000 (enhanced deduction granted previously) shall be deemed as income chargeable to tax in YA 2026. If cash payout election is made for the registration costs of Patent A instead, the cash payout received will be recovered by IRAS.
Candidates should be aware of the application of these claw-back provisions.
For acquisition of qualifying IPRs under Section 19B of the ITA by qualifying companies or partnerships under the EIS, a 400% WDA is granted on the first $400,000 of qualifying IPR acquisition costs (comprising 100% ‘base WDA’ and 300% ‘enhanced WDA’) for each YA, subject to certain conditions. Partial costs of one qualifying IPR may be claimed only if this allows the enhanced WDA to be claimed up to the expenditure cap.
The base WDA and enhanced WDA is to be claimed on a straight-line basis over the elected period of claim (five, 10 or 15 years).
Illustration 3
In the financial year 2024, a qualifying company acquired Patent C and elected five years to be the period of claim for WDA.
|
Acquisition costs |
100% Base WDA |
300% Enhanced WDA under EIS |
WDA to be claimed in each of YAs 2025 to 2029 |
Patent C |
$500,000 |
100% x 500,000 = 500,000 |
300% x 400,000 (cap) = 1,200,000 |
($500,000 + $1,200,000)/5 years = $340,000 |
A 300% tax deduction (enhanced deduction) is granted on the first $400,000 of qualifying IPR licensing expenditure incurred for each YA by qualifying businesses (including qualifying companies and partnerships). Together with the 100% base deduction allowed under Section 14U of the ITA, a total of 400% tax deduction is granted on the first $400,000 of qualifying IPR licensing expenditure. It should be noted that expenditure on licensing of IPR from related parties who meet certain criteria, is not eligible for enhanced deductions.
To enjoy EIS benefits for acquisition or licensing of IPRs, besides carrying on a trade or business, a qualifying business (including qualifying companies and partnerships) must derive less than $500 million in revenue in the basis period for the relevant YA if it is not part of a group6. When the business is part of a group, the group should derive less than $500 million in revenue in the basis period for the relevant YA for the business to be treated as a qualifying business. The qualifying IPR acquisition costs and IPR licensing expenditure incurred by non-qualifying businesses still enjoy 100% base WDA or base deduction.
The amount of qualifying IPR acquisition costs and qualifying IPR licensing expenditure eligible for the enhanced WDA and enhanced deduction is subject to a combined cap of $400,000 for each YA.
The cash payout option is only available on a per IPR basis for qualifying IPR acquisition costs, subject to the overall cap of $100,000 across all five qualifying activities under the EIS for each YA. When the acquisition costs of one qualifying IPR exceed $100,000 and cash payout is elected, the excess is forfeited – ie no WDA (whether base or enhanced) can be claimed on such excess. For instance, in illustration 3, if the qualifying business elects to convert the acquisition costs for Patent C to cash, a cash payout of $20,000 (20% of $100,000 (cap)) will be received and the excess $400,000 of acquisition costs ($500,000 – $100,000) will be forfeited – ie no base and enhanced WDA can be claimed on such amount.
The cash payout option is also applicable for qualifying IPR licensing expenditure, but this needs not be made on a per IPR basis – ie partial cash conversion is allowed.
Claw-back provisions shall apply for the acquisition of IPRs when the minimum one-year ownership period is not satisfied due to the occurrence of a specified event. A specified event occurs when the qualifying IPRs come to an end without being subsequently revived; or the company sells, transfers or assigns all or any part of the qualifying IPRs; or the company permanently ceases to carry on the trade or business for which the qualifying IPRs were acquired. For instance, in illustration 3, should Patent C be sold7 within one year of ownership in financial year 2025 for an amount of $650,000, a balancing charge of $100,000 (difference between sale price of $650,000 and tax written down value of $400,0008 and capped at the amount of base WDA claimed previously of $100,000) and a deemed income of $240,0009 (enhanced WDA claimed previously) shall be chargeable to tax in YA 2026. Any remaining enhanced WDA that has not been drawn down, will be forfeited.
Candidates should familiarise themselves with the claw-back of EIS benefits with respect to the acquisition of IPRs.
Under the EIS, a deduction of 400% (comprising 100% ‘base deduction’ and 300% ‘enhanced deduction’) is granted on the first $400,000 of qualifying training expenditure incurred by businesses on qualifying courses (courses that are eligible for SkillsFuture Singapore (‘SSG’) funding and aligned with the Skills Framework) attended by their employees including individuals deployed under centralised hiring agreement/secondment arrangements under certain conditions for each YA. Qualifying training expenditure includes course fees, assessment fees and certification fees paid by the employers to SSG registered training providers and should be net of any government grant or subsidy received by the employer or employee including a subsidy from SSG and SkillsFuture credit.
Illustration 4
Qualifying training expenditure of $40,000 is incurred on a qualifying course for all employees and a government grant of $5,000 is received by the business, only $35,000 ($40,000 – $5,000) qualifies for EIS benefits.
All training expenditure, including qualifying training expenditure exceeding $400,000, incurred continues to enjoy 100% base deduction.
The option to convert qualifying training expenditure into cash is subject to the overall cap of $100,000 across all five qualifying activities under the EIS for each YA. Similar to qualifying R&D undertaken in Singapore, licensing of IPRs and innovation projects carried out with polytechnics, the ITE or other qualified partners, partial cash conversion is allowed for qualifying training expenditure. For instance, in illustration 4, the business can elect to convert say $10,000 out of the $35,000 qualifying training expenditure at 20% conversion rate into cash and the remaining amount of $25,000 is still eligible for base and enhanced deductions.
Under the EIS, a deduction of 400% is granted for the first $50,000 of qualifying expenditure incurred for qualifying innovation projects carried out with polytechnics, the ITE or other qualified partners. Such qualifying expenditure relates strictly to the expenditure charged by the partner institutions which is not deductible as an allowable expense under Section 1410 of the ITA or Section 14C11 of the ITA. The 400% deduction is granted on the basis that the business collaborates directly with the partner institution on the qualifying innovation project and will be the beneficiary of the project.
The option to convert qualifying innovation expenditure into cash12 is subject to the overall cap of $100,000 across all five qualifying activities under the EIS for each YA.
References
(1). For R&D undertaken outside Singapore, 100% deduction can be claimed if the R&D is related to the trade or business; no deduction can be claimed if the R&D is unrelated to trade or business.
(2). If more than 60% of the fees are qualifying R&D expenditure such as staff costs and consumables, additional and enhanced deductions can be claimed on such qualifying R&D expenditure provided the business is able to substantiate the claim.
(3). Refer to paragraphs 2.3 and 2.4 in ANNEX D of e-tax guide ‘Research and Development Tax Measures (Seventh Edition)’.
(4). Partial cash conversion is allowed as deductions can still be claimed on the amount in excess of $100,000 converted to cash on the same R&D project.
(5). Professional fees and official fees.
(6). As defined per Financial Reporting Standard 110.
(7). Claw-back provisions are also applicable when the cash payout option is elected. Refer to the e tax guide ‘Enterprise Innovation Scheme’ for further details.
(8). Acquisition costs of $500,000 less base WDA claimed in YA 2025 of $100,000.
(9). (300% x $400,000) divided by five years.
(10). Expenditure is capital in nature.
(11). Project could not satisfy the definition of R&D.
(12). Partial cash conversion is allowed.
Written by a member of the ATX-SGP examining team