Prior to 1 Jan 2003, Singapore operated a full imputation system for all companies where corporate income was only subject to tax once at the shareholders' level at their respective marginal income tax rates. However, the imputation system discouraged companies with insufficient dividend franking credits from distributing dividends. Furthermore, the system was not well adapted to sophisticated business transactions, such as share buy-backs and share borrowing and lending. Complicated tax rules for these transactions had to be crafted to meet tax avoidance concerns. This increased compliance costs for companies.

The one-tier corporate taxation system was introduced in Budget 2002 to replace the imputation system. Under this system, profits are taxed at the corporate level and this is a final tax. Singapore dividends are tax exempt. The one-tier corporate taxation system greatly simplifies the tax code and reduces cost of compliance and administration for companies. It removes restrictions on the distribution of dividends from capital gains and this could result in higher dividend payouts for all shareholders. In addition, the one-tier corporate taxation system has the desirable consequence of allowing the unlimited flow-through of exempt dividends to all tiers of shareholders, regardless of shareholding level.

As many companies were not able to make full use of the dividend franking credits that they had accumulated before 1 Jan 2003, the government allowed a 5-year transitional period to enable companies with unutilised dividend franking credits to pay franked dividends. During this period, shareholders continued to receive dividends with credits attached from such payouts by companies. Companies that were on the imputation system during the transitional period were allowed to flow exempt dividends paid out of concessionary income to all tiers of shareholders without restriction on shareholding level. The transitional period ended on 31 December 2007.