Foreign Tax Credits in Singapore, Hong Kong & Malaysia

When the same foreign income can be taxed in both the source country and the taxpayer's home jurisdiction, foreign tax credits can help prevent or reduce double taxation.

Singapore, Hong Kong, and Malaysia all provide mechanisms for relieving double taxation, but the rules, eligibility requirements, and calculation methods differ between the three jurisdictions.

1. Singapore: Foreign Tax Credits and Double Tax Relief

Singapore tax residents can generally claim a Foreign Tax Credit (FTC) where the same income has been taxed both overseas and in Singapore.

There are two main mechanisms:

• Double Tax Relief (DTR) under an applicable Double Tax Agreement (DTA); and
• Unilateral Tax Credit (UTC) for certain foreign-sourced income from jurisdictions without a DTA with Singapore.

The basic credit is generally limited to the lower of the foreign tax paid and the Singapore tax attributable to the same foreign income.

However, an important condition is that the income must actually be subject to Singapore tax. If the foreign income is exempt from Singapore tax, a foreign tax credit generally does not arise for that exempt income.

2. Hong Kong: Bilateral and Unilateral Tax Credits

Hong Kong's territorial tax system means that many foreign-sourced profits are not subject to Hong Kong Profits Tax in the first place.

However, where foreign-sourced income is brought within the Hong Kong tax charge—for example, under the FSIE regime—double taxation relief may become relevant.

For specified foreign-sourced income of an in-scope MNE entity, Hong Kong provides:

• Bilateral tax credits where the relevant jurisdiction has a Comprehensive Double Taxation Agreement with Hong Kong; and
• Unilateral tax credits in certain circumstances where there is no CDTA.

The credit is generally capped at the lower of the foreign tax paid and the Hong Kong Profits Tax attributable to the same income.

For foreign-source dividends, Hong Kong's rules can also take account of tax paid on the underlying profits in certain circumstances, including where the relevant equity-interest requirement is met.

3. Malaysia: Bilateral and Unilateral Credits

Malaysia provides both bilateral and unilateral foreign tax credits.

A bilateral tax credit can generally arise under Section 132 of the Income Tax Act 1967 where the foreign country has a Double Taxation Agreement with Malaysia and the relevant treaty contains an elimination-of-double-taxation provision.

A unilateral tax credit under Section 133 can apply where foreign tax has been imposed by a country that does not have a DTA with Malaysia, subject to the statutory conditions.

The Malaysian credit mechanism is therefore not limited to countries with which Malaysia has a treaty.

4. The Three Systems Are Not Identical

Although all three jurisdictions seek to mitigate double taxation, the mechanics differ.

Singapore:

Foreign Tax Credit through DTA relief or unilateral credit, subject to conditions including the foreign income being taxable in Singapore.

Hong Kong:

Bilateral or unilateral credit can apply where foreign-source income is actually brought within the Hong Kong tax charge, including relevant FSIE situations.

Malaysia:

Bilateral credit under Section 132 and unilateral credit under Section 133 can provide relief where the same income is subject to Malaysian and foreign tax.

5. Why Exemption and Tax Credits Should Be Distinguished

A foreign-income exemption and a foreign-tax credit solve double taxation