Budget 2023 Update – Enterprise Innovation Scheme

The Enterprise Innovation Scheme (“EIS” or “Scheme”) was announced earlier this year in Budget 2023 and detailed guidelines on the Scheme was released by the Inland Revenue Authority of Singapore (“IRAS”) on 30 June 2023.

Under the EIS, enhanced tax deductions and allowances will be granted for qualifying expenditure incurred by businesses in the following 5 categories of activities:

1. Qualifying Research & Development (“R&D”) activities undertaken in Singapore,
2. Registration of intellectual property (“IP”s),
3. Acquisition and licensing of IP rights (“IPR”s),
4. Training, and
5. Innovation projects carried out with polytechnics, the Institute of Technical Education (“ITE”) or other qualified partners.

Features of the Enterprise Innovation Scheme

The scheme applies to qualifying expenditure incurred during the basis periods (financial years) for the 5 Years of Assessment (“YA”s) 2024 to YA 2028. These YAs relate to financial years ending in 2023 to 2027.

Businesses that carry on a trade or business will be able to claim enhanced deductions on up to $400,000 of qualifying expenditure incurred for each qualifying activity under categories (a) to (d) above and up to $50,000 of qualifying expenditure incurred for the qualifying activity under category (e). Alternatively, businesses may choose to opt for a cash grant for the expenditure. The amount of expenditure qualifying for enhanced deductions, allowances or cash grant is net of any grant or subsidy received from the Government.

The above cap or limit of $400,000 on the amount of expenditure for each of the 5 categories is applied on a per YA basis and cannot be combined across YAs. This means that any “unused” portion of the cap or limit of $400,000 cannot be “carried forward” to future years. There are specific provisions for how these expenditure caps are to be applied to sole-proprietorships and partnerships, including partnerships with partners that are companies.

Under the EIS, enhanced deductions or allowances will be granted in addition to the base deductions or allowances currently available under income tax rules. Together with the base deductions or allowances, a total of up to 400% of qualifying expenditure for each qualifying activity up to $400,000 will be granted as deductions or allowances in computation of chargeable income.

Enhanced deductions that cannot be fully utilised to be offset against the taxable income of a business are treated as unutilised trade loss or allowance. These may be carried forward, transferred under the Group Relief system or carried back to the immediately preceding YA.

Under certain circumstances, the amount of deductions and allowances for partners of Limited Liability Partnerships (“LLP”s) and limited partners of limited partnerships (“LP”s) may be curtailed.

Option to convert into cash

Alternatively, in lieu of tax deductions or allowances, eligible businesses may also choose to convert up to $100,000 of the total qualifying expenditure for each YA into cash at a conversion rate of 20% – i.e. to receive cash grant of up to $20,000 per YA. This grant is not taxable.

The cash grant may relate to expenditure for any one or more of the qualifying activities listed above. The limit of $100,000 of expenditure eligible for cash conversion is the total amount for all the 5 categories of qualifying activity. Each application for cash conversion is subject to a minimum expenditure of $400.

Upon conversion, the amount of qualifying expenditure converted into cash is no longer available for tax deduction or allowance. The option to convert the qualifying expenditure into cash is irrevocable. Where a partnership opts to convert the qualifying expenditure into cash, it is assumed that all the partners have agreed to the option.

Businesses should consider if it is more beneficial to opt for deductions and allowances or to choose the cash conversion option. For example, chargeable income above S$200,000 for companies will be taxed at the full corporate income tax rate of 17%. With deductions or allowances of 400%, the deductions or allowances will translate to a reduction in income tax payable of 68% compared to a cash conversion ratio of 20%.

Applications for EIS cash may be subject to audit by IRAS.

Eligibility for EIS cash grant

A business which is eligible for the EIS cash grant is one which:

1. is a company, partnership or sole-proprietorship,
2. carries on business operations in Singapore and
3. has at least three full-time local employees in employment for six months or more during the basis period for that YA (i.e. the financial year).

Local employees refer to Singapore Citizens or Permanent Residents with Central Provident Fund (“CPF”) contributions.

An employee is considered a full-time employee if he or she earns a gross monthly salary of at least $1,400 and is required under his or her contract of service to work for at least 35 hours a week. Employee also includes a person who is deployed to a business under a centralised hiring arrangement or secondment arrangement subject to certain conditions. However, for the purposes of the EIS cash grant, an employee excludes sole-proprietor, partner of the partnership and shareholder who is also a director of the company.

There are also specific conditions for conversion of qualifying expenditure for registration of intellectual property and acquisition and licensing of intellectual property rights into cash. In order to receive the EIS cash grant, the business must be carrying on a trade or business and not have ceased business at the time of disbursement of the cash payout. It is likely that a Singapore bank account is required for the business to receive the cash disbursements.

There are also other specific conditions relating to each of the five qualifying activities. These are discussed below.

Specific provisions for Research & Development (“R&D”)

There are specified cost components that will be considered as qualifying expenditure for R&D activities. Expenditure must exclude any cost subsidised by grant or subsidy from the Government. For fees payable to R&D organisations and R&D cost-sharing arrangements, 60% of these will be considered as qualifying R&D expenditure under the EIS. If a business has opted to converted some of its qualifying expenditure into the cash grant, the maximum amount that qualifies for enhanced deduction is reduced by the amount converted into the cash grant.

There is specified adjustment factor to be applied to the deductions for businesses that are subject to tax at normal and concessionary tax rates or that are taxed at different concessionary tax rates.

Specific provisions for Registration of Intellectual Property (“IP”)

Enhanced tax deduction for registration of IPs must be claimed on the full cost of a filing subject to the cap of $400,000. Costs which are subsidised by grants of subsidies from the Government are excluded.

All the costs relating to a single application for registration of an IPR must be included in the application for the cash grant. Costs exceeding the expenditure cap will be forfeited and will not be eligible as deductions.

Where the registration of an IP takes more than 1 year to complete, conversion into EIS cash grant can only be applied for when the registration for the IP has been completed, whether the application is approved or rejected. If a business decides to opt for the cash grant, it should not claim for base or enhanced deductions on the costs including earlier YAs. As such, it is recommended that businesses determine whether they intend to apply for the cash grant and, if so, to ensure that deductions are not claimed when submitting their income tax returns.

There is a requirement for a minimum ownership period of 1 year for the IP. If this condition is not met, enhanced deductions that were granted will be deemed as taxable income and cash grants will be recovered.

Specific provisions for Acquisition and Licensing of Intellectual Property Rights (“IPR”s)

Costs of acquisition of IPRs are currently allowed Writing-Down Allowances (“WDA”s) over 5, 10 or 15 years at the taxpayer’s choice. Under the EIS, the WDAs will be enhanced such that a total of 400% WDA is granted on the first $400,000 of costs of acquiring qualifying IPRs for each YA subject to certain conditions. The enhanced WDA is to be claimed together with the base 100% WDA. Costs exceeding $400,000 will continue to be eligible for the 100% base WDA.

Both the base WDA and enhanced WDA are available only if the acquired IPRs are legally and economically owned by the business. IPRs that were granted a waiver of the legal ownership condition do not qualify for the enhanced WDA.

For licensing of IPRs from other parties, an enhanced deduction of 300% will be allowed in addition to the base deduction of 100% for the first $400,000 of qualifying IPR licensing expenditure.

The enhanced allowances and enhanced deductions are only available to business which carries on a trade or business and has revenue of less than $500 million during the basis period (i.e. financial year). If it is a company that is part of a group, the revenue of the group must be less than $500 million. There are specific provisions for how this criterium applies to branches, sole-proprietorships and partnerships.

Under EIS, acquisition and licensing of IPRs are treated as one activity with a combined expenditure cap of $400,000 per YA. Qualifying expenditure is net of any grants or subsidies received from the Government. Enhanced deductions will not be granted for IPRs licensed from a related party which is carrying on trade or business in Singapore and acquired or developed the IPR.

The expenditure cap for IPRs acquired under instalment arrangements is determined based on the cost of the qualifying IPR. However, the enhanced WDA is allowed based on the amount of principal repayments made in the instalments paid during the respective financial years.

The cash grant option is available for acquisition and licensing of IPRs subject to the total limit of $100,000 per YA for all the 5 EIS activities. The full amount of qualifying acquisition costs per IPR must be converted into cash and the excess above the limit is forfeited (i.e. no WDAs will be allowed on the excess). IPRs acquired on instalment basis are also eligible for cash grant option subject to modified conditions being met. Costs of licensing IPRs are also eligible for cash grant option but this need not be applied on a per IPR basis.

There is also minimum ownership period of 1 year for enhanced WDAs and cash grants for costs of acquisition and licensing of IPRs. If certain specified events happen within 1 year from date of acquisition of the IPR, enhanced deductions that were granted will be deemed as taxable income. Cash grants will also be recovered if the specified events happen within 1 to 5 years from acquisition of the IPR.

EIS benefits are available for software acquired for use in own business provided it is not acquired for the purpose of licensing.

Specific provisions for Training expenses

Qualifying training expenses of up to $400,000 per will be eligible for enhanced deduction of 300% in addition to the usual base deduction of 100%, making a total of deduction of 400%. Expenditure above the $400,000 limit will continue to have 100% base deduction.

Qualifying training expenditure for employees under centralised hiring arrangements and secondment arrangements will also qualify under EIS subject to certain conditions being met. Qualifying training expenditure refers to those incurred on courses that are eligible for SkillsFuture Singapore (“SSG”) funding and aligned with the Skills Framework. Qualifying costs include course fees, assessment fees and certification fees and should be net of any Government grant or subsidy received by the employer or employee.

The cash grant option is available for training expenditure subject to the total limit of $100,000 per YA for all the 5 EIS categories.

Specific provisions for Innovation Projects carried out with Partner Institutions

Currently, costs incurred on innovation may not be eligible for deductions or allowances are they do not meet the required criteria. Under the EIS, a tax deduction of 400% will be granted on the first $50,000 of qualifying innovation expenditure incurred in each YA on qualifying innovation projects carried out with the partner institutions.

To qualify for the tax deduction, the business must collaborate directly with the partner institution on the qualifying innovation project and must be the beneficiary of the project. The relevant partner institution will determine if the project is a qualifying innovation project. Only the costs paid to the partner institution, net of any Government grant of subsidy received, will qualify for the deduction.

The cash grant option is available for innovation projects subject to the total limit of $100,000 per YA for all the 5 EIS activities.

Conclusion

We hope the above highlights will provide a brief overview of the Enterprise Innovation Scheme that was announced in Budget 2023.
There is other information which cannot be summarised or was otherwise not discussed in the above material. Let us know if you have any questions or require assistance on your specific scenarios or circumstances. Our Firm will be able to undertake a review and assist you with application of the rules to your case.
Kindly note that we may not be able to provide explanations of the tax rules and regulations or how they may be addressed or applied to specific circumstances unless a detailed review is undertaken.

Contact

Wee Kong Eng
Public Accountant, Tax & GST Consultant
Master of Taxation, CA (Singapore), CIA, Dip. in Law, ATP (Income tax & GST), Assoc CVA
K E Wee & Associates PAC, Public Accountants and Chartered Accountants
Email: kongeng@kewee.com.sg
Mobile: +65 97552868
Office: +65 67200950 ext 111

Contributors

Lee Hui Min
Lim Jia Yi

Disclaimer and limitations

Information is updated as of 9 July 2023 and may be subject to change. The above Information may have been summarized, simplified or paraphrased for easier understanding and to suit scenarios more commonly applicable to client companies. It is not meant to be a comprehensive guide or substitute for professional advice. All opinions or interpretations are solely those of ourselves and our partner firms and may be subject to agreement by the relevant authorities. While effort has been made to ensure the accuracy of the above information, we shall not be liable for loss arising directly or indirectly from any inaccuracy or omission in the information provided.