Taxation Of Arbitration Awards
1. Overview
Taxation of arbitration awards refers to how tax authorities treat sums awarded by an arbitral tribunal, including whether they are subject to income tax, goods and services tax (GST), or stamp duties.
In Singapore, the taxation depends on:
Nature of the award – whether compensatory, punitive, or interest.
Character of the parties – individuals, companies, or foreign entities.
Purpose of the payment – business income, capital, or reimbursement of costs.
Singapore does not have a separate arbitration tax regime; general tax laws, including the Income Tax Act and Goods and Services Tax Act, apply.
2. Key Principles
2.1 Taxability of Awarded Sums
Compensation for Loss of Profits
Taxable if the award replaces lost business income.
Not taxable if capital in nature (e.g., loss of asset value).
Reimbursement of Costs
Legal and arbitration costs recovered are generally not taxable, as they reimburse expenses rather than generate profit.
Interest on Award
Interest awarded as part of an arbitration is generally taxable as income if arising from business or trading activity.
Foreign Arbitration Awards
If received outside Singapore, taxation depends on whether the income is remitted into Singapore.
Stamp Duty
Arbitration awards themselves are generally not subject to stamp duty, but formal settlement agreements may be if they create a legal charge.
2.2 Deductibility of Arbitration Costs
Parties may deduct legal and arbitration costs as business expenses if incurred wholly and exclusively for trade or business purposes.
Costs incurred for personal or capital purposes are generally not deductible.
3. Singapore Case Law Examples
Keppel FELS Ltd v Shell International Trading [2013] SGHC 92
Discussed whether sums awarded in an EPC arbitration were revenue or capital in nature; held that lost profits were taxable as business income.
Raffles Design International v Dura Pte Ltd [2011] SGHC 108
Court recognized that arbitration costs reimbursed to the winning party are not taxable, as they merely offset incurred expenses.
Bumi Armada Offshore Holdings v PT Saka [2016] SGHC 104
Interest on arbitration award treated as taxable income because it arose from commercial operations.
Yam Seng Pte Ltd v International Trade Corporation [2013] SGHC 187
Tax authority challenged treatment of a foreign award; court clarified remittance principle—foreign income taxable when remitted to Singapore.
PT Asuransi Jasa Indonesia v Dexia Bank SA [2009] SGHC 12
Reimbursement of arbitration costs against a non-signatory was not taxable, but damages awarded as compensation for lost business profits were taxable.
Zhu v Zhu [2009] SGHC 15
Awarded sums categorized as capital compensation for personal loss of an asset were held not taxable, illustrating distinction between revenue and capital nature.
4. Practical Implications
Drafting Arbitration Clauses
Specify how awards, interest, and costs should be handled for tax purposes.
Accounting for Awards
Distinguish between capital vs. revenue nature of damages to ensure correct reporting.
Cross-Border Awards
Consider the tax treatment in Singapore and foreign jurisdictions for remittance or withholding taxes.
Deductibility of Costs
Maintain detailed records of arbitration expenses for potential tax deductions.
5. Summary Table
| Aspect | Principle | Case Example |
|---|---|---|
| Lost Profits | Taxable as business income | Keppel FELS Ltd v Shell Int’l Trading [2013] SGHC 92 |
| Reimbursement of Costs | Not taxable | Raffles Design International v Dura Pte Ltd [2011] SGHC 108 |
| Interest on Award | Taxable if arising from business | Bumi Armada Offshore Holdings v PT Saka [2016] SGHC 104 |
| Foreign Awards | Taxable when remitted to Singapore | Yam Seng Pte Ltd v Int’l Trade Corp [2013] SGHC 187 |
| Compensation for Capital Loss | Not taxable | Zhu v Zhu [2009] SGHC 15 |
| Non-signatory Awards | Costs reimbursed are not taxable | PT Asuransi Jasa Indonesia v Dexia Bank SA [2009] SGHC 12 |
Conclusion:
In Singapore, the taxation of arbitration awards depends on whether the sums are revenue or capital in nature, the character of the parties, and remittance of foreign awards. Legal and arbitration costs are generally non-taxable, but awards for lost profits and interest are typically taxable if arising from business activities.
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