The following summary of certain Singapore income tax consequences of the purchase, ownership and disposition of the Units is based upon laws, regulations, rulings and decisions now in effect, all of which are subject to change (possibly with retroactive effect). The summary does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a decision to purchase, own or dispose of the Units and does not purport to apply to all categories of investors, some of which may be subject to special rules. Investors should consult their own tax advisers concerning the application of Singapore income tax laws to their particular situations as well as any consequences of the purchase, ownership and disposition of the Units arising under the laws of any other taxing jurisdiction.
Taxation of First REIT
Dividends from Singapore SPCs
First REIT's income will comprise substantially dividends received from its holding of ordinary shares in the Singapore SPCs. Provided that the Singapore SPCs are tax residents of Singapore for income tax purposes, these dividends will be one-tier (tax exempt) dividends and hence exempt from tax in the hands of the Trustee.
Gains on disposal of shares
Singapore does not impose tax on capital gains. In the event that First REIT disposes of its ordinary shares and/or redeemable preference shares in the Singapore SPCs, gains arising from the disposal will not be liable to Singapore income tax unless the gains are considered income of a trade or business. The gains may also be liable to tax if the ordinary shares and/or redeemable preference shares in the Singapore SPCs were acquired with the intent or purpose of making a profit from their subsequent disposal and not for long-term investment purposes.
Gains arising from the sale of the ordinary shares and/or redeemable preference shares in the Singapore SPCs, if considered to be trading gains, will be taxable on the Trustee.
Redemption of redeemable preference shares in Singapore SPCs
Where the circumstances require, the Singapore SPCs may redeem their redeemable preference shares on a periodic basis. The amounts received by First REIT from the redemption of redeemable preference shares in the Singapore SPCs are not taxable on the Trustee.
Taxation of Singapore SPCs
Dividends and interest from Indonesian SPCs
Provided that the Singapore SPCs are tax residents of Singapore for income tax purposes, the dividends received in Singapore from the Indonesian SPCs will be exempt from Singapore income tax under Section 13(8) of the Income Tax Act, if the following conditions are met:
in the year the dividends are received in Singapore, the headline corporate tax rate in Indonesia is at least 15.0%;
the dividends have been subject to tax in Indonesia; and
the Singapore Comptroller of Income Tax is satisfied that the tax exemption would be beneficial to the Singapore SPCs.
Based on the current tax laws in Indonesia, dividends paid by the Indonesian SPCs out of their income from the letting of the Properties will meet the aforesaid conditions (see "-Indonesian Tax Implications").
First REIT has obtained approval from the Singapore Ministry of Finance for the interest received by the Singapore SPCs on the shareholders' loans extended to the Indonesian SPCs to be exempt from Singapore income tax under Section 13(12) of the Income Tax Act. This is on the condition that the full amount of the remitted interest, less attributable expenses, must be distributed to First REIT for onward distribution to its Unitholders.
Gains on disposal of shares
Singapore does not impose tax on capital gains. In the event that the Singapore SPCs dispose of their ordinary shares in the Indonesian SPCs, gains arising from the disposal will not be liable to Singapore income tax unless the gains are considered income of a trade or business. The gains may also be liable to tax if the ordinary shares in the Indonesian SPCs were acquired with the intent or purpose of making a profit from their subsequent disposal and not for long-term investment purposes.
Gains arising from the sale of ordinary shares in the Indonesian SPCs, if considered to be trading gains, will be assessed to tax on the Singapore SPCs.
Repayment of loans by Indonesian SPCs
Where the circumstances require, the Indonesian SPCs may use surplus cash that cannot be distributed as dividends to repay partially the principal amount of the loans from the Singapore SPCs. The amounts received by the Singapore SPCs from the repayment of the principal amount of the loans are not taxable on the Singapore SPCs.
Taxation of First REIT's Unitholders
First REIT's Distributions
Subject to First REIT's distribution policy (see "Distributions"), First REIT's distributions will mainly be made out of the following receipts:
one-tier (tax exempt) dividends (i.e. tax-exempt income) received from the Singapore SPCs; and
capital receipts from the redemption of redeemable preference shares in the Singapore SPCs.
Distributions out of tax-exempt income
Unitholders will be exempt from Singapore income tax on distributions made out of First REIT's tax-exempt income.
For this purpose, although the profits derived from the Properties for a distribution period can only be received in Singapore by First REIT from the Singapore SPCs in the form of one-tier (tax exempt) dividends within one to two months after the end of that distribution period, First REIT has obtained approval from the IRAS to treat distribution based on tax-exempt income that First REIT expects to receive from the Singapore SPCs as distribution made out of tax-exempt income. This approval is subject to a rollover adjustment mechanism. Under this mechanism, the amount of tax-exempt income that First REIT expects to receive is compared to the actual amount of tax-exempt income it subsequently receives from the Singapore SPCs. In the event that the actual amount is lesser, the amount of tax-exempt income available for distribution for the distribution period ending immediately after the receipt of the tax-exempt income will be reduced by the amount of tax-exempt income over-distributed.
Distributions out of capital receipts
Unitholders will not be subject to Singapore income tax on distributions made by First REIT out of its capital receipts, comprising amounts received from the redemption of redeemable preference shares in the Singapore SPCs. These distributions will be treated as return of capital for Singapore income tax purposes. For Unitholders who hold the Units as trading or business assets and are liable to Singapore income tax on gains arising from disposal of the Units, the amount of such distributions will be applied to reduce the cost of the Units for the purpose of calculating the amount of taxable trading gain arising from a subsequent disposal of the Units. If the amount exceeds the cost of the Units, the excess will be subject to tax as trading income of such Unitholders.
Distributions out of gains from the disposal of shares in the Singapore SPCs
Distributions made out of gains from the disposal of shares in the Singapore SPCs, that is if the Manager exercises its discretion to distribute such gains, will:
not be assessable to tax on Unitholders if the gains are determined to be capital gains for Singapore income tax purposes, unless the distributions are considered gains or profits of a trade or business carried on by the Unitholder, for example, if the Units are held as trading assets; or
be assessable to tax on Unitholders if the gains are determined to be trading gains for Singapore income tax purposes, unless the Unitholder is specifically exempt from tax on such distributions, for example, if he is an individual who holds the Units as investment assets. Tax on such trading gains will be assessed on, and collected from, the Trustee and the tax paid by the Trustee will be imputed as a tax credit to Unitholders who are liable to tax on such distributions. This treatment of imputing the tax paid as a credit to Unitholders will cease to apply if an amendment in the Income Tax (Amendment) Bill 2006 that was introduced in Parliament on 8 November 2006 is legislated. Under the proposed amendment, distributions made out of income subject to tax on the Trustee will be exempt from tax in the hands of Unitholders.
Disposal of Units
Singapore does not impose tax on capital gains. Any gains on disposal of the Units are not liable to Singapore income tax provided the Units are held as investment assets. Where the Units are held as trading assets of a trade or business carried on in Singapore, any gains on disposal of the Units are liable to Singapore income tax under Section 10(1)(a) of the Income Tax Act. Where the Units are not held as trading assets but the Unitholder has no intention to hold the Units for purposes of long-term investment, any gains on disposal of the Units could be construed as "gains or profits of an income nature" liable to tax under Section 10(1)(g) of the Income Tax Act.
Stamp Duty
Stamp duty will not be imposed on instruments of transfers relating to the Units. In the event of a change of the Trustee, stamp duty on any document effecting the appointment of a new trustee and the transfer of the trust assets from the incumbent trustee to the new trustee will be charged at a nominal rate not exceeding S$10.00 as specified under Article 3(g)(iii) of the First Schedule to the Stamp Duties Act, Chapter 312 of Singapore.
