PwC in the News: Testing the Waters with a Representative Office

By David Ong, Tax Director and Ailbhe Horgan, Senior Manager at PwC Services LLP, Company Fiduciary & Administration Services

This article was contributed and first published in The Business Times on 11 July 2012.

After setting up a Representative Office, a foreign company has 3 years to decide if it wants a permanent presence here.

SINGAPORE is ranked the easiest place to do business; it is ranked first in the world as the city with the best investment potential; it has the best business environment in Asia Pacific and worldwide; it is the fourth easiest place in the world for paying taxes. These features together with many other accolades make Singapore an extremely attractive location for businesses.

Yet, it is quite typical that many foreign companies will want to put a toe in the water and get to know Singapore better before taking the plunge and setting up a permanent presence to do business in and from Singapore.

It is for this reason that International Enterprise (IE) Singapore introduced the Representative Office (RO) concept, to allow foreign investors to test the water.
The intention has always been that an RO is a temporary arrangement for businesses to assess the viability of setting up a permanent establishment in the Republic. An RO, though, must confine its activities strictly to conducting market research and feasibility studies. IE Singapore has a list of allowable and non-allowable RO activities - a list written in plain, unambiguous language.

For a start, it is relatively easy to register an RO with IE Singapore, for a small processing fee of only S$200. The RO will have to undertake that it will comply with the terms and conditions stipulated by IE Singapore. The RO status is renewable annually and, in the past, ROs have been known to have their status renewed year after year (for many years in some cases).

However, it is now expected that an RO should operate in Singapore for a maximum of three years from its commencement date, provided that its RO status is renewed annually after evaluation by IE Singapore. It is felt that businesses should need a maximum of only three years to decide whether Singapore is the right location for them to do business.

Sometimes, for various reasons, IE Singapore may request that applicants undertake to incorporate a private limited company or to register a branch of a foreign company, after only one year as an RO.

Other criteria that RO applications must meet include the following:

  • The sales turnover of the foreign entity must be more than US$250,000
  • The number of years of establishment of the foreign entity must be three years or more
  • The proposed number of staff for the RO should be fewer than five.

There has been feedback from affected ROs, who have been asked to upgrade to either a Singapore incorporated company or a branch, that IE Singapore's requirements contradict the government's efforts to make the Republic an attractive location for businesses.

The RO is left with no choice but to set up a company or a branch, which means it now has to deal with statutory reporting requirements and file income tax returns. These are things an RO is not required to do.

An alternative view is that IE Singapore has never changed its mission. It continues to drive Singapore's external economy and wants to attract and help foreign companies find their feet in Singapore. The scrutiny of ROs is merely to ensure that they do not conduct activities beyond what is allowed of an RO, and carry on a fully-fledged business in a tax-free environment.

What is the RO to do? If a trading activity is to be carried out in Singapore on a continuous basis, it needs to register the business with the Accounting and Corporate Regulatory Authority of Singapore (Acra).

The business may be organised as a:

  • sole proprietorship;
  • partnership;
  • private company limited by shares;
  • branch of a foreign company;
  • limited liability partnership; or
  • limited partnership.

Each business structure will have different features in terms of regulatory requirements, taxation, ease of set- up and exit, extent of liability to the owners, and so on.

Most ROs will decide to either incorporate a company or a branch. The choice will not be automatic, and there are many considerations that businesses need to analyse before deciding between a company and a branch.

Some of the considerations are:

  • whether the business needs to make use of the track record of the head office company, especially in the construction industry where licences are granted based on the applicant's track record;
  • whether the business is amenable to having its head office financial statements becoming publicly available in Singapore to competitors;
  • ease of exit from Singapore;
  • taxation;
  • ability to benefit from Singapore's double-taxation agreement network;
  • repatriation of profits.

There are also the human resource and immigration pass considerations when upgrading from an RO such as the need to:

  • review and issue new employment letters;
  • notify the relevant authorities - for example, the Inland Revenue Authority of Singapore and the Central Provident Fund Board;
  • notify vendors - for example, payroll service providers, banks and insurance companies;
  • cancel employment passes applied for under the RO and apply for new employment passes under the new entity. It is not possible to transfer employment passes from the RO to the new entity.

An RO is an effective temporary facility that allows the foreign investor to get a feel of what it is like to do business here without too much capital outlay and compliance costs.

Businesses must be aware, though, that the RO status is granted up to a maximum of three years only. It would be wise to start analysing and getting professional advice - sooner rather than later - on the form of legal entity that is most appropriate, should the business wish to stick around and enjoy the exciting commercial opportunities Singapore presents.