The Past
A full imputation tax system was adopted by Singapore prior to 1 January 2003. Taxes paid by companies resident in Singapore at the standard prevailing corporate tax rate could be used to frank dividend payments.
What this means is that the corporate tax paid by a company on its profits previously could be used to settle the tax which must be deducted from the amount of any dividend paid to a shareholder. A shareholder could then claim the tax deducted from dividend to set off his personal tax. This mechanism effectively taxed the distributed corporate profits at the marginal income tax rate of the individual shareholder.
It has greatly benefited the individual shareholders (especially retirees) whose marginal income tax rates are way below the corporate tax rate. It enabled them to obtain a refund from the IRAS, in addition to the post tax dividends distributed by the companies.
Current
The one-tier corporate taxation system was introduced with effect from 1 January 2003. In this regime, tax collected from corporate profits is final and Singapore dividends are exempted from further taxation.
In order to allow companies to utilise the dividend franking credits as at 31 December 2002, the government has allowed a 5-year transitional period from 1 January 2003 to 31 December 2007 for a company to continue to pay franked dividends. Shareholders who receive franked dividends will continue to enjoy the credits as in the past.
