Location Selection for Multinational Crypto Enterprises: A Comparative Analysis of Taxation and Regulation in Singapore and Hong Kong

Author: TaxDAO

TaxDAO now publishes a series of articles on the site selection and operational strategies of multinational companies primarily engaged in cryptocurrency assets. This article is the first in the series, mainly comparing the macro environment and tax policies of Singapore and Hong Kong.

As one of the most important financial hubs in Asia, both Singapore and Hong Kong have advantages such as a sound legal system, an open market environment, and low tax costs, attracting numerous multinational companies to establish their headquarters or branches there. With the arrival of the Web 3.0 era, cryptocurrency assets, as an emerging form of financial assets, have gained attention from the governments and regulatory bodies of both regions. Both Singapore and Hong Kong have formulated corresponding regulations and guidelines to regulate the development of the cryptocurrency market and provide some supportive policies, such as tax incentives and financial innovation funds.

However, there are also some differences between the two regions in terms of fiscal policies and support policies for the cryptocurrency industry. For example, in terms of fiscal policy, Singapore implements a territorial principle for tax administration, taxing income derived from or received in Singapore from overseas payments; while Hong Kong adopts a single-source tax jurisdiction, taxing only income sourced from Hong Kong. In terms of cryptocurrency industry policies, Singapore's Payment Services Act includes all institutions providing payment services (including virtual currency services) under regulatory oversight 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 system for virtual asset exchanges.

TaxDAO now systematically compares and analyzes the advantages and disadvantages of the fiscal policies of Singapore and Hong Kong, two cryptocurrency-friendly financial centers, through thematic articles, to explore more suitable site selection and operational strategies for multinational enterprises in the cryptocurrency sector. This article serves as the first in the series, providing an overview and comparison of the business environments and fiscal policies of both regions. In the future, TaxDAO will specifically analyze how different types of enterprises in the cryptocurrency industry can set up regional or global headquarters in both regions, including but not limited to mining companies, exchanges, DeFi operators, and other multinational companies; readers are welcome to follow along!

1 Overview of the Business Environment in Singapore and Hong Kong

Overall, Hong Kong is more suitable for traditional financial industry enterprises, while Singapore is more suitable for innovative enterprises.

The Global Financial Centers Index (GFCI) can be 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 34th ranking, Singapore leads Hong Kong by 1 point, ranking third and fourth globally, and first and second in Asia, respectively.

In addition, the Global Asset Management Center Index (AMCI) also has certain reference value for multinational companies 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 rose one place from 2021, pushing Hong Kong down to become the fourth globally and first in Asia.

The Global Innovation Index (GII) has certain reference value for the site selection of innovative enterprises. This index covers two major aspects of innovation input and 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 ranked 7th globally and 1st in Asia; Hong Kong ranked 14th globally and 3rd in Asia.

Thus, while there are slight differences in the macro business environments of Singapore and Hong Kong, the gap between the two regions is not significant. As a traditional financial center, Hong Kong has recently been overtaken by Singapore in innovative financial services, especially in the GII index, where there is a large gap in scores between Hong Kong and Singapore.

However, Hong Kong's advantages in traditional finance and services remain evident. In addition to Hong Kong's GDP being higher than Singapore's, the scale of traditional financial business in Hong Kong also exceeds that of Singapore. The scale and activity of Hong Kong's stock market far surpass that of Singapore; in the first half of 2022, the total market capitalization 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 greater. The scale of bond market issuance in Hong Kong also exceeds that of Singapore; in 2021, the first issuance scale of Asian international bonds in Hong Kong was 1.7 times that of Singapore. Additionally, Hong Kong's banking and insurance industries are more mature than those in Singapore, with total assets and total deposits in Hong Kong's banking sector being 1.5 times that of Singapore in 2021, and the total premiums in the insurance industry being 2 times that of Singapore. Finally, in foreign exchange trading, Hong Kong remains the third-largest foreign exchange trading center in the world, following the United States and the United Kingdom.

In contrast, Singapore's advantages in innovative financial services are more pronounced. Like Hong Kong, Singapore is also an Offshore Financial Center (OFC), providing low or no tax, high confidentiality, and relaxed regulation for non-resident clients. Singapore has established corresponding regulations and policy support facilities in areas such as digital currency payment services, digital assets, and DeFi. For example, in payment services, Singapore introduced the Payment Services Act, which includes all institutions providing payment services (including virtual currency services) under regulatory oversight and establishes three different types of licenses; in digital assets, Singapore's Securities and Futures Act defines and classifies digital tokens into payment tokens, utility tokens, and asset tokens, determining whether they fall under the category of securities or futures contracts based on their nature and function; in DeFi, Singapore's Monetary Authority of Singapore Act authorizes the Monetary Authority of Singapore (MAS) to regulate DeFi projects. The establishment of these regulations and policies provides clear guidance and assurance for Singapore in innovative financial services, attracting numerous international financial institutions and technology companies to establish branches or partnerships in Singapore.

2 Comparative Study of Taxation in Both Regions

2.1 Corporate Income Tax

Corporate income tax is a direct tax levied on the taxable profits earned by companies over a certain period. Different countries or regions have varying methods and rates for levying corporate income tax, which can affect the profitability and competitiveness of companies.

2.1.1 Corporate Income Tax in Singapore

Overall, Singapore's corporate income tax adopts a territorial principle, taxing income generated or sourced from within Singapore. However, for resident companies, the following income must be taxed in Singapore: (1) income sourced from Singapore or accrued in Singapore; (2) foreign income earned within Singapore.

According to Section 10(25) of the Income Tax Act, the following foreign income falls under the category of "foreign income earned within Singapore":

(1) Income brought in from overseas, transferred, or carried into Singapore;

(2) Income used to repay debts incurred from trade or business activities conducted in Singapore;

(3) Income from the purchase of tangible assets (such as equipment, raw materials, etc.) overseas, which are then imported into Singapore.

In terms of corporate income tax rates, both resident and non-resident companies must pay corporate income tax at a uniform rate of 17%. However, Singapore also offers a range of preferential policies and exemptions to reduce the effective tax rate for companies.

Firstly, partial exemptions (PTE) are available under Singapore's Income Tax Act, allowing existing companies to enjoy partial exemptions ranging from 75% to 50%. Specifically, for normal taxable income, the first portion below SGD 10,000 can enjoy a 75% exemption; the portion from SGD 10,001 to SGD 200,000 can enjoy a 50% exemption; and the portion exceeding SGD 200,000 is taxed at the normal rate of 17%.

Secondly, Singapore provides full tax exemptions for qualifying new start-up companies. According to the 2018 new budget proposal, newly established Singapore (tax resident) companies or limited guarantee companies (excluding companies engaged in investment holding or real estate development for sale or investment) can enjoy a 100% exemption on the first SGD 100,000 of taxable income for the first three years after establishment; the portion from SGD 100,001 to SGD 200,000 can enjoy a 50% exemption (previously SGD 300,000); and the portion exceeding SGD 200,000 is taxed at the normal rate of 17%. Additionally, research and development expenses incurred in Singapore can enjoy a 250% deduction, and the Singapore government provides annual research funding subsidies to companies engaged in R&D.

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

2.1.2 Corporate Income Tax (Profits Tax) in Hong Kong

Hong Kong does not have a tax called "income tax," but it has a similar tax called "profits tax," which this article treats similarly to corporate income tax. Unlike Singapore, Hong Kong's corporate income tax adopts a strict source principle (Territorial Source Concept), taxing only income generated or sourced from within Hong Kong. This means that whether or not a company is a Hong Kong tax resident does not affect the imposition of profits tax; any profits generated by a business operating in Hong Kong must be taxed in Hong Kong, while profits sourced from overseas are not subject to profits tax in Hong Kong.

In terms of tax rates, Hong Kong's legislation stipulates a uniform profits tax rate of 16.5%. However, Hong Kong also offers a range of preferential policies and exemptions to reduce the effective tax rate for companies.

At the core of Hong Kong's tax incentive system is the two-tier profits tax system. Specifically, starting from April 1, 2018, the profits tax rate for the first HKD 2 million (approximately SGD 350,000) of a corporation is 8.25%, while the tax rate for assessable profits exceeding HKD 2 million is the normal rate of 16.5%. For individuals other than corporations, the two-tier profits tax rates are 7.5% and 15%, respectively.

Hong Kong provides R&D tax deductions for qualifying R&D enterprises. Specifically, expenses incurred by companies conducting or commissioning qualifying R&D activities in Hong Kong can enjoy additional deductions. The Hong Kong government includes expenses related to basic research, applied research, or experimental development in the additional deduction scope, where: the first category of qualifying R&D expenses (incurred entirely in Hong Kong) can enjoy a 300% deduction on the first HKD 3 million and a 200% deduction on amounts exceeding HKD 3 million; the second category of qualifying R&D expenses (other expenses that do not belong to the first category but still qualify) can enjoy a 100% full deduction. However, according to Deloitte's Hong Kong Tax Review H82/2018, the new policy has not addressed the tax issues faced by Hong Kong companies mentioned above, as R&D expenses outsourced to group affiliates are generally still not eligible for tax deductions.

2.1.3 Comparison of Corporate Income Tax Systems in Both Regions

Both Hong Kong and Singapore have relatively low corporate income tax rates globally. On the surface, Hong Kong's 16.5% rate is slightly better than Singapore's 17%. However, the Singapore government has more favorable policies for attracting multinational companies' global or regional headquarters. In addition to the aforementioned RHQ/IHQ program, Singapore has also introduced other multinational company attraction programs such as the Approved International Trader Scheme (AITS). For example, under the IHQ program, multinational companies can receive a tax incentive of 5%-10% if they meet the introduction criteria, making the effective corporate income tax rate in Singapore lower.

Compared to Singapore's emphasis on supporting small enterprises, Hong Kong's low tax rate has a broader coverage. Small enterprises registered in Singapore enjoy significant tax benefits; however, for medium to large enterprises, Hong Kong's lower tax rate has greater advantages. For instance, if a newly registered company earns taxable income of HKD 1 million (approximately SGD 175,000) at its registered location, if the company is registered in Hong Kong, its tax liability would be HKD 100 * 8.25% = HKD 82,500; if the company is registered in Singapore, its tax liability would be SGD 75,000 * 50% * 17% = SGD 6,375, approximately HKD 36,000.

Thus, for a newly registered company with taxable income of HKD 1 million, the tax payable for registering in Singapore is significantly lower, but if the company's income reaches HKD 5 million, the advantages of Hong Kong's lower income tax become apparent.

2.2 Capital Gains Tax and Stamp Duty

In terms of capital gains tax, neither Singapore nor Hong Kong levies capital gains tax, which aligns with their positioning as "offshore financial centers."

Regarding stamp duty, both Singapore and Hong Kong impose stamp duties. In Singapore, the stamp duty rates vary depending on the type of document, generally ranging from 0.1% to 4%; while in Hong Kong, the stamp duty rates generally range from 0.1% to 8.5%, with property transfer seller stamp duty reaching as high as 20%. Overall, the stamp duty rates and collection do not have a significant impact on the site selection of multinational company headquarters.

2.3 Tax Treaties and Tax Relief

As financial centers, both Singapore and Hong Kong have signed comprehensive or limited bilateral or multilateral tax treaties with multiple countries or regions. Therefore, regardless of whether multinational companies set up their headquarters in Hong Kong or Singapore, they generally do not face issues of double taxation. Specifically, Singapore has signed 107 tax treaties with approximately 100 countries and regions, including 97 double taxation avoidance agreements (DTA), 8 limited tax treaties (Limit DTA), and 2 exchange of information arrangements (EOI Arrangement); Hong Kong has signed DTAs with 47 countries, along with corresponding Limit DTAs and EOI arrangements, totaling 67 countries with DTA or EOI arrangements.

In terms of the breadth of bilateral tax treaties, Singapore is slightly ahead of Hong Kong; however, considering the differences in tax systems between Singapore and Hong Kong—where Hong Kong only taxes income sourced from within its territory, while Singapore has a broader tax base for resident companies—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 regions generally cover major countries and regions. Except for multinational companies with primary business layouts in specific countries, those with major operations in key countries often enjoy tax incentives provided by both regions. In terms of permanent establishment (PE) setup and information exchange, both regions adhere to international practices and standards. Therefore, Singapore and Hong Kong have similar conditions regarding tax treaties and avoidance of double taxation.

As the first part of this column, this article systematically compares and analyzes the tax systems and policies of Singapore and Hong Kong, two cryptocurrency-friendly financial centers, exploring more suitable site selection and operational strategies for multinational enterprises in the cryptocurrency sector. Overall, Singapore's policies are more open and inclusive, while Hong Kong's policies are more cautious and protective. Therefore, when multinational enterprises choose the location of their headquarters or branches, they need to comprehensively consider factors such as their business type, target market, scale, and development stage, along with the tax costs, regulatory requirements, market environment, and innovation potential of both regions, to make the best decision. TaxDAO will introduce how different types of multinational enterprises can design their management institutions in both regions in subsequent articles, and readers are welcome to continue following our column.