Income Tax Board of Review: U Limited vs The Comptroller of Income Tax

On By taxsgIn Case Updates

27 July 2012

The Appellant was formerly a company within the O group of companies (“O Group”) prior to the takeover of ABC Bank by DEF Bank. During the material period, the Appellant carried on the business of a general insurer in Singapore and is and is registered as such under the Insurance Act (Cap 142).

The Appellant established the Singapore Insurance Fund (“SIF”) and an Offshore Insurance Fund (“OIF”) in respect of its Singapore and overseas policies respectively. The Appellant used its SIF and OIF to invest in the shares of ABC. The majority of the ABC shares were acquired from ABC directly through rights issues and bonus issues. The Appellant also used its OIF to invest in the shares of Q Limited (“Q Ltd”) and the shares of XY Limited (“XY Ltd”). The ABC shares, Q Ltd shares and XY Ltd shares shall collectively be referred to as the “Shares”.

On 29 June 2001, DEF offered to acquire ABC at a consideration comprising S$4.02 in cash and 0.52 new DEF share for each ABC share held. Pursuant to the takeover of ABC by DEF, the Appellant sold to DEF its entire portfolio of 13,459,214 ABC shares and received S$54,106,040 in cash and 6,998,791 DEF shares in 2001. Similarly, the Appellant received cash proceeds of S$16,699,280 when the Q Ltd shares and XY Ltd shares were sold to DEF in 2002.

The Comptroller of Income Tax (the “Comptroller”) took the view that the gains from the disposal of the Shares were revenue in nature and issued revised assessments for the Year of Assessment (“YA”) 2002 and YA 2003 to the Appellant.

The Appellant’s submitted that: 

  • The shares in ABC and Q Ltd were bought and held to preserve the corporate structure of the O Group and to afford a defence mechanism against any potential hostile takeover of any company in the O Group. These shares were referred to as core stocks in the Appellant’s record and such shares were segregated from other shares which were meant to be traded. The Appellant’s purpose in acquiring the XY Ltd shares was to provide capital for XY Ltd. Like the ABC Shares and the Q Ltd Shares, the XY Ltd shares formed part of the core stocks of the O Group.
  • In determining whether profits from the sale of the Shares should be taxed, the test should be based on the so called six badges of trade. Based on the so called six badges of trade, the Appellant argued that the Shares were capital assets and the profits arising from their sale were capital gains and therefore, not taxable.

The Respondent’s arguments were:

  • There is a mini regime for the taxation of insurance companies set out in sections 26(3) and 26(4) of the Act. In particular, the Respondent argued that section 26(4)(a) of the Act makes it clear that any gains or profits realised from the sale of investments by an insurance company are liable to tax. Therefore, in the view of the Respondent, whether the gains and profits from the sale of the shares of ABC, XY Ltd and Q Ltd are taxable depends on whether the gains and profits are gains or profits realised from the sale of investments. In view of this, the Respondent argued that even if the Shares were purchased and held for corporate preservation purpose, the gains would still be taxable.
  • In addition, the Appellant argued that the six badges of trade are therefore not relevant in relation to the taxation of the gains and profits from the sale of the Shares.

The appeal was allowed. The ITBR accepted the Appellant’s contention that the Shares were core stocks and the Shares were held for long term strategic purpose to preserve the corporate structure of the O Group. The Appellant should not be assessed to tax on profits derived from the sale of the Shares. It was held that:

  • Sections 26(3) and 26(4) have not done away with the distinction between gains and profits arising from the disposal of shares which amounts to business or trading profits and gains and profits arising from the disposal of shares which amounts to capital gains, in the case involving insurance companies.
  • Section 26(4) does not establish any principle that in the case of an insurance company the gains and profits from the sale of any investment would amount to income which is liable to tax. Section 26(4) is concerned with gains and profits derived by an insurance company from carrying on the business of insuring and reinsuring offshore risk or any other risk which is accorded a concessionary rate of tax or exemption from tax prescribed by regulations made under section 43C. In addition, Section 26(4)(a) only applies to “gains or profits realised from the sale of investments as may be specified in those regulations”. In this regard the regulations do not apply to the gains from the sale of the Shares. 
  • The taxpayer had not engaged in any trade or business in the transaction of the Shares. Therefore, the profits from the sale of the Shares for the relevant years of assessment should be treated as capital gains and are not taxable.
  • In relation to the shares in XY Ltd, these shares were shares of a non-listed company, unlike ABC and Q Ltd which were listed companies. Therefore, the case in relation to the gains and profits derived from the sale of the XY Ltd Shares being capital gains is even stronger.
  • In relation to the disposal of some shares of ABC and Q Ltd prior to the takeover, the Respondent was not able to establish clearly the link between these sales of shares and the use of the proceeds of the sales that these shares were sold to realise gains in order to meet the offshore claim liabilities. In any event, these shares were sold to other companies within the O Group, which further reinforced the corporate preservation policy.
  • Despite some dispute as to how long the Shares were held for and even using the method relied on by the Respondent, the period of 19 years is a long time for which the ABC shares were held. This supports the argument that the Shares were acquired for a long term strategic purpose. In addition corporate preservation policy of the O Group was also accepted by the Board of Review in OUF Private Limited v Comptroller of Income (1998) MSTC 5,256.

The above judgment was delivered on 20 June 2012.