Singapore: Return of capital, return of certainty - Tax-deferred distributions from foreign trusts

Tax-deferred distributions from a foreign property trust are a return of capital and not income, as confirmed by the Inland Revenue Authority of Singapore ("IRAS") in Advance Ruling Summary No. 13/2026 published on 3 August 2026.

The facts

Company A is a Singapore tax resident investment-holding company. It is the sole unitholder of X Property Trust. X holds Y Property Trust, which holds Z Property Trust. All three Property Trusts are in Country X. Z Property Trust owns rental property in Country X.

Z Property Trust earns rental income from its rental property and such income flows up the chain to Company A via trust distributions, and Country X imposes withholding tax on it.

Some distributions exceed the trusts’ net taxable income. These arise from building allowances, tax depreciation, and other timing differences. They are the "tax-deferred distributions".

The ruling

Under Section 10(1) of Singapore’s Income Tax Act, tax-deferred distributions are not taxable in Singapore to the extent of the capital invested in X Property Trust. They instead reduce the acquisition cost of Company A’s investment. Any taxable gain on a later disposal is computed on original cost less the distributions received.

Why it matters

The relief is a deferral and not an exemption. Every tax-deferred distribution erodes the cost base. As such, the gain on exit is correspondingly larger.

That matters because of Section 10L. Since 1 January 2024, gains on the disposal of foreign assets received in Singapore are taxable unless the seller is an "excluded entity". Units in a foreign trust would likely be considered a foreign asset. A holding company with thin substance may find that years of tax-free distributions crystallise as a taxable gain on sale.

Takeaway

Structures holding foreign trust units through a Singapore company should track cost base carefully, document capital contributions, and stress-test Section 10L substance before an exit. 

Further important changes (MAS Circular 05/2026 of 31 July 2026)

As at 1 January 2025, non-single-family office (“SFO”) funds no longer have to maintain annual minimum assets under management in designated investments (“AUM in DI”)—funds now must have the minimum AUM in DI at the point of application and at the end of each basis period; incentivised non-SFO funds are required to have third-party capital contributions; lesser IPs are required at the point of application; tokenised interests now qualify as designated investments; and the 5% cap on physical precious metals is lifted from 1 August 2026.