A Singapore company can deduct interest on borrowings only if the borrowed money is used to fund assets that produce income, under section 14(1)(a) of the Income Tax Act 1947. If the company cannot trace a loan to specific assets, and some of its assets earn nothing (for example, an interest-free loan to a related company, vacant property held for the long term, or shares that have never paid a dividend), IRAS applies the total asset method (TAM) by default. TAM disallows a share of the company’s common interest expense in proportion to the cost of its non-income producing assets over the cost of its total assets at the balance sheet date. The IRAS e-Tax Guide on TAM (third edition, 30 January 2026) sets out how it works.
Raffles Corporate Services works with a panel of experienced Singapore law firms who offer cost-effective and efficient legal service and advice. This article is general information only and is not legal advice.
This article is for owners and finance managers of trading and holding companies that borrow from banks, shareholders or group companies.
Direct identification comes first
If the company can show that a particular interest-bearing loan funded a particular asset, the interest on that loan is deductible against that asset’s income, or not deductible if the asset produces no income. IRAS calls this direct identification. Its guide gives the example of a company borrowing S$2 million to buy an office unit that is rented out: the interest is deductible against the rental income. IRAS also says TAM should not be used to attribute interest on a loan whose use can be directly identified.
TAM applies to the remaining common interest expense: interest on borrowings such as overdrafts and general facilities that cannot be traced to specific assets.
The formula
IRAS’s TAM formula is:
Interest disallowed = Common interest expense x (Cost of non-income producing assets at balance sheet date / Cost of total assets at balance sheet date)
Key definitions from the e-Tax Guide:
- Total assets are all current and non-current assets on the balance sheet, excluding assets financed by specific interest-bearing loans and right-of-use assets.
- Non-income producing assets include long-term investment properties that are vacant, shares that have not yielded dividends since acquisition, and loans on which no interest is charged.
- A block of shares that has yielded dividends in a year may be treated as income producing in later years even without further dividends.
- Non-financial assets are taken at historical cost; financial assets under FRS 109 default to balance sheet value, with an election available to use historical cost.
The guide also says that the cost of a non-income producing asset cannot be excluded from the formula on the ground that it was funded by non-interest-bearing funds, such as share capital, once TAM applies. TAM also applies to qualifying borrowing costs other than interest, and IRAS states that it may be used for loans to related parties in Singapore.
Worked example
Example only, not a client case. A Singapore company has a general bank facility and incurs S$200,000 of common interest in the year. At the balance sheet date:
| Asset | Cost (S$) | Income producing? |
|---|---|---|
| Trade receivables, inventory and cash | 3,000,000 | Yes |
| Plant and equipment used in the business | 1,500,000 | Yes |
| Interest-free loan to a sister company | 800,000 | No |
| Shares in a start-up that has never paid a dividend | 200,000 | No |
| Office unit bought with a specific mortgage (excluded) | (excluded) | Interest on mortgage handled separately |
| Total assets for TAM | 5,500,000 |
Non-income producing assets are S$1,000,000. Interest disallowed is S$200,000 x 1,000,000 / 5,500,000 = S$36,364. The company deducts S$163,636 of common interest. The mortgage interest on the office unit is deductible only if the unit produces income or is used in the business.
How companies reduce the disallowance
- Charge interest on intercompany loans. A loan that earns interest is income producing. The rate must be at arm’s length under the transfer pricing rules; see our guide to transfer pricing documentation. The interest received is taxable, so compare the overall effect.
- Use direct identification where possible. Take loans for specific purposes and keep loan agreements and bank records that show where the money went.
- Repay or restructure. If an interest-free advance to a related company is really a capital contribution, consider converting it, with advice on the accounting and legal steps.
- Do not borrow to pay dividends. IRAS treats interest on a loan taken to pay dividends as non-deductible.
- Review idle assets. Vacant property and dormant investments drag on the formula every year.
Records IRAS expects
Companies must include their interest restriction computation in the tax computation. Supporting documents need not be submitted with the return, but must be kept for IRAS if requested. Where records are missing or TAM is abused, IRAS may disallow interest and impose penalties. Keep:
- loan agreements and drawdown records;
- a schedule of assets classified as income producing or not, with costs;
- dividend history for each shareholding; and
- the TAM calculation reconciled to the balance sheet.
Where TAM often bites
- Investment holding companies with a mix of dividend-paying and non-paying shares; see tax for investment holding companies.
- Family companies that lend interest-free to directors or related businesses.
- Property companies with vacant units held for the long term.
- Groups where the operating company carries the bank debt and funds subsidiaries interest-free.
For capitalising interest in the accounts, a separate accounting question, see FRS 23 borrowing costs.
Frequently asked questions
Does TAM apply if all our assets produce income?
No disallowance arises if no assets are non-income producing. TAM matters only where some assets earn nothing.
Do we apply TAM to investments that pay one-tier or foreign dividends?
IRAS says interest and qualifying borrowing costs must be attributed to these investments and deducted against the dividend income. If that income is exempt, the attributed interest may in effect not reduce taxable income.
Can we use a different method agreed with IRAS years ago?
IRAS will continue an agreed variation until the relevant assets are disposed of or the loans repaid; after that, TAM is the default.
Is shareholder loan interest treated differently?
Interest paid to a shareholder is subject to the same deduction rules, plus transfer pricing and, if paid to a non-resident, withholding tax.
Need help with interest deductions?
If your company borrows and also holds idle assets or interest-free loans, contact the Raffles Corporate Services tax team at [email protected] or on WhatsApp at +65 8501 7133. We prepare tax computations including TAM schedules, review intercompany loan arrangements, and file Form C-S and Form C.
Kevin Yeo, Raffles Corporate Services