When a Singapore company pays a regulatory fine, composition sum or penalty, it generally cannot claim a tax deduction for it. IRAS lists statutory fines and penalties, and CPF late payment interest and fines, as non-deductible business expenses. Legal and professional fees are deductible only where they relate to the company’s trade or revenue transactions, not where they are capital or non-trade in nature. Separately, the board needs to decide whether a fine imposed on an individual director is the company’s to pay at all, because the Companies Act restricts how far a company can indemnify its officers. Record the decision and the accounting treatment properly.
Tax treatment at a glance
| Cost | Deductible for corporate income tax? |
|---|---|
| Statutory fines and penalties (for example ACRA, IRAS, MOM, Customs composition sums and court fines) | No |
| CPF late payment interest and fines | No |
| Non-statutory fines or penalties (for example a contractual late-delivery penalty under a trade contract) | Generally yes, if incurred in producing income |
| Legal and professional fees on trade or revenue matters | Generally yes |
| Legal and professional fees on non-trade or capital matters | No |
Source: IRAS’s list of deductible and non-deductible business expenses. IRAS’s older e-Tax guide on statutory and regulatory expenses explains that allowing a deduction for penalties for breaking the law would be against public policy, and that costs of defending charges of non-compliance are not deductible as statutory expenses. Whether a particular legal fee is deductible depends on what it was for, so have it reviewed in the tax computation.
Who should pay: company or director?
- Fines on the company are the company’s liability. Pay them from company funds and record them as non-deductible expenses.
- Fines on an individual director or officer are that person’s liability. The Companies Act restricts a company from exempting or indemnifying its officers against certain liabilities, so do not assume the company can simply pay. Get legal advice before the company pays an officer’s personal fine or legal costs.
- If the company does pay something for a director, the board should approve it, the minutes should record why, and the accounts should show whether it is a loan to be repaid or a cost of the company. Payments made for a director’s personal benefit can have tax consequences for that director; check the position before paying.
Accounting and records
- Record the fine or composition sum in a separate non-deductible account, so it is added back in the tax computation.
- Split legal fees by matter and nature (trade, capital, defence of charges), with invoices that describe the work.
- Keep the board resolution for any payment relating to an individual officer.
- Disclose material fines or proceedings in the financial statements where accounting standards require it.
Example
Example only, not a client case. A company pays a S$1,200 ACRA composition sum for late filing, S$3,000 of CPF late payment interest, and S$8,000 of legal fees, of which S$5,000 was for recovering a trade debt and S$3,000 for advising its director on an MOM investigation. In the tax computation, the composition sum and CPF interest are added back. The S$5,000 trade debt recovery fee is generally deductible. The S$3,000 relating to the director’s personal investigation needs review: it may not be deductible to the company, and the board should consider whether the company should bear it at all.
Frequently asked questions
Is a composition sum treated differently from a court fine for tax?
Both are penalties for breaching the law, and IRAS lists statutory fines and penalties as non-deductible.
Can we claim GST on legal fees for defending a charge?
GST input tax claims follow the normal input tax rules. Whether the fees are for the business, and who the client is, matters. Check with your tax adviser.
Can directors’ and officers’ insurance pay?
D&O policies may cover defence costs in some investigations, subject to their terms and exclusions; fines are commonly excluded. Notify the insurer early and read the policy.
More on the tax and GST hub, and see composition offers.
Need help with the treatment of fines and legal costs?
If your company has paid fines, composition sums or legal costs and needs the accounting and tax treatment right, contact the Raffles Corporate Services team at [email protected] or on WhatsApp at +65 8501 7133 or +65 9018 0072. We will review the entries, prepare the tax computation adjustments and draft the board resolutions. Where the company is considering paying an officer’s liabilities, we will refer you to a firm on our panel of Singapore law firms. Raffles Corporate Services is a corporate services provider, not a law firm, and this article is general information, not tax or legal advice.
Kevin Yeo, Raffles Corporate Services