Singapore: Interest expense from capital restructuring | KPMG | GLOBAL
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Singapore: Interest expense from capital restructuring disallowed

Singapore: Interest expense from capital restructuring

The Income Tax Board of Review disallowed a tax deduction for interest expense from shareholder bonds issued by the taxpayer. The bonds were a restructured form of capital from equity interests previously held by the shareholders.


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The case is: GBK v The Comptroller of Income Tax [2016] SGITBR 3


The taxpayer—a Singapore company that owns and operates a mall— assigned its rights to the rental income from the mall to a special purpose vehicle, as security for a loan.

From November to December 2004, after the securitisation transaction, the taxpayer converted its capital restructure from being substantially equity-based to one that is substantially debt-based by:

  • Reducing the share capital under a capital reduction exercise; and
  • Issuing fixed-rate shareholder bonds, which were subscribed by the shareholders using the proceeds from the capital reduction exercise.

The taxpayer claimed that the interest expense payable on the shareholder bonds represented interest payable on capital employed in acquiring the income. The tax authority, however, disallowed the deduction of the interest expenses incurred on the shareholder bonds because the interest expense did not fall within the scope of Section 14(1)(a). The tax authority also found no direct link between the interest expense and rental income as the latter had been assigned to the special purpose vehicle and the mall had been mortgaged as security for the loan. There was also no evidence that the proceeds from the shareholder bonds were used by the taxpayer to acquire rental income.

KPMG observation

Tax professionals have noted that this case clarifies the following issues: 

Applicability of “direct link” 

  • Reinforces that a “direct link” has to be something “real, tangible, precise and factual”
  • Establishes that something “hypothetical, speculative and not borne out of facts” would not create a direct link. 


What constitutes “substituted financing”

  • Substituted financing is a case when a loan refinances a prior loan and assumes the character of the previous loan. If interest on the previous loan is deductible under Section 14(1)(a), the interest on the new loan would also be deductible. Any restructuring of the capital structure from equity to debt would not constitute substituted financing.


Read a March 2017 report [PDF 513 KB] prepared by the KPMG member firm in Singapore

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