Singapore: Direct link required for money borrowed | KPMG Global
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Singapore: Direct link required for money borrowed and income produced

Singapore: Direct link required for money borrowed

The High Court of Singapore issued a decision affirming that for interest deductibility purposes, there must be a direct link between the money borrowed and the income produced.


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The case concerns the deductibility of interest expenses incurred by the taxpayer on certain fixed-rate subordinated bonds related to a capital restructuring exercise. The High Court’s decision affirms findings announced earlier this year by the Income Tax Board of Review. 

The case is: BML v. Comptroller of Income Tax [2017] SGHC 118*

*The taxpayer in the case was originally named GBK, but the party to the case was redesignated as BML for the case report.


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.

In 2004, after the securitisation transaction, the taxpayer converted its capital structure from being substantially equity-based to one that was 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 because 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.

The Income Tax Board of Review agreed with the tax authority’s position. Read TaxNewsFlash-Asia Pacific

High Court’s decision

The High Court recently affirmed. Under section 14(1)(a) of the income tax law, there must be a direct link between the money borrowed and the income produced. Also, the Comptroller is given discretion to determine whether this requirement has been satisfied. 

In its decision, the High Court found that there were “problems” establishing a direct link between the shareholder bonds and the mall’s rental income, and that the Comptroller’s determination was not unreasonable or wrong.


Read an October 2017 report [PDF 275 KB] prepared by the KPMG member firm in Singapore

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