Singapore funds and fund management – recent developments
December 2016 | SPECIAL REPORT: INVESTMENT FUNDS
Financier Worldwide Magazine
The Monetary Authority of Singapore (MAS) Asset Management Annual Survey reported in October 2016 that globally, assets under management (AUM) grew just 1 percent to US$71.4 trillion, weighed down by slower growth in emerging markets and fears of monetary policy normalisation in the US.
Asia (excluding Japan and Australia) remained a bright spot with AUM growing 10 percent to US$5.2 trillion. Singapore’s AUM grew by 9 percent to US$1.8 trillion, accounted for almost entirely by new assets under management, with private equity/venture capital and real estate growing by over 40 percent and 80 percent respectively, and traditional asset managers increased at a modest pace of 4 percent.
Singapore’s funds and fund management industry continues to grow apace and Singapore continues to be regarded as the investment funds hub for the region. The various tax incentives for funds and fund managers have been enhanced and the application processes streamlined. More categories of tax incentivised ‘designated investments’ for funds under section 13CA, section 13R and section 13X have been recognised and the list of ‘specified income’ expanded to cover all categories of income save for those explicitly excluded. The tax incentive for enhanced tier schemes under section 13X of the Income Tax Act have been extended to feeder funds and to special purpose vehicles of the master fund.
Open-ended, variable capital company
In March 2016, the government announced the proposed introduction of a new regulatory framework for open-ended investment companies in Singapore, similar to the open-ended investment companies in the United Kingdom, Luxembourg, Ireland and other funds jurisdictions, including the recently introduced open-ended fund company in Hong Kong. The rationale behind the proposed introduction is to encourage more asset managers to domicile their funds in Singapore and promote the development of the local fund administration industry by offering a fund administration structure which is more efficient than that under the Companies Act (Cap. 50). The proposed variable capital company structure would be referred to as the Singapore Variable Capital Company (S-VaCC).
The MAS indicated that “a new corporate and regulatory framework, the Singapore Variable Capital Company (S-VACC) Act, [will] facilitate fund domiciliation in Singapore and build up fund administration capabilities”. It is noted that such variable company structure would address the redemption and other problems encountered with Singapore corporate fund structures and would also be able to claim as a company on the treaty benefits of the double taxation agreements.
In October 2016, the government published its consultation paper on proposed amendments to the Companies Act to permit inward redomiciliation of companies. This is to allow foreign corporations to transfer their registration to Singapore. This may facilitate relocation by foreign corporations of their regional or worldwide headquarters to Singapore. Under the proposed regime, an inbound corporation which is redomiciled to Singapore will become a Singapore company and will accordingly be required to comply with the requirements of the Companies Act like any other Singapore company. It is noted that foreign fund corporations may also be redomiciled into Singapore and become a Singapore fund company. If comparable legislation to allow conversion of Singapore companies into S-VaCC is adopted, this would similarly allow such redomiciled companies to be converted into S-VaCCs.
Tax incentives schemes
The corporate income tax rate is 17 percent. There is no capital gains tax in Singapore.
The rate of value-added tax (goods and services tax) is a low 7 percent and other taxes are not onerous. Singapore has a territorial system of taxation. Companies in Singapore are subject to tax on income accruing in or derived from Singapore and on certain categories of foreign income received in Singapore from outside Singapore. Foreign-sourced dividends, profits from foreign branches and foreign-sourced service income received in Singapore by a person resident in Singapore are exempt from income tax if the headline tax rate of the foreign jurisdiction from which the income is received is at least 15 percent.
Where an exemption from such foreign-sourced income tax does not apply, the recipient is still allowed to claim tax credits for the foreign tax suffered on such foreign-sourced income. Under the current one-tier corporate tax system, corporate profits would be taxed at the corporate level. The corporate tax paid is a final tax, and dividends distributed out of the profits of corporations registered in Singapore are not taxed. Singapore does not impose withholding tax on dividends.
Singapore has a network of more than 65 double taxation agreements. Furthermore, a Singapore tax resident company would benefit from a reduced withholding tax rate or exemption from withholding tax on certain categories of income received by the Singapore company in a treaty country.
There are numerous tax incentive schemes in Singapore that would, if applicable, reduce the tax liability of a company even further. These include the financial sector incentives scheme, the regional headquarters tax incentive, international headquarters tax incentive, the treasury centre tax incentive, the global trader programme and various maritime development incentives. Under these schemes, qualifying income would be taxed at concessionary income tax rates of 0 percent, 5 percent or 10 percent.
There are also several fund management and funds tax incentive schemes. Some examples are outlined below.
Exemption scheme for foreign investors (Section 13CA of the Income Tax Act). This scheme exempts specified income derived from a ‘foreign investor’ from tax. The income must be derived from funds managed in Singapore by a fund manager in respect of designated investments. A ‘foreign investor’ would include non-Singapore citizens, foreign companies or non-resident trustees of a trust fund.
Qualifying foreign trust scheme (Section 13G of the Income Tax Act). This scheme exempts specified income in respect of designated investments derived from a trust constituted in Singapore from income tax. The trust must be administered by a licensed or exempt trustee company in Singapore. All the investors in such a scheme must be foreign investors (i.e., non-citizens and non-resident individuals or foreign companies where the shares are beneficially owned, directly or indirectly, by persons who are neither citizens nor residents of Singapore).
Qualifying resident fund company scheme (Section 13R of the Income Tax Act). This scheme exempts specified income received by an approved company in Singapore from tax, where such income is derived from designated investments in funds managed in Singapore by a licensed or exempt resident fund manager. However, the scheme will not be applicable if all of the approved Singapore companies’ issued securities are beneficially owned by Singapore persons. In addition, where a Singapore resident non-individual investor in the company is above the investment limit (i.e., it owns more than a prescribed percentage of the fund vehicle), such an investor will be liable to pay a penalty. The fund manager is required to incur at least S$200,000 in global business expenses a year and the fund’s administrator must be based in Singapore.
Enhanced tier resident fund scheme (Section 13X of the Income Tax Act). This scheme exempts specified income of an ‘approved person’ from tax, where such income is derived from funds managed in Singapore by an ‘approved fund manager’ in respect of designated investments. Such ‘approved persons’ could comprise Singapore companies, Singapore limited partnerships or Singapore trusts. This scheme requires a minimum of S$50m of fund assets under management. There is no requirement for participation by foreign investors in the fund and even a fund which is 100 percent owned by Singapore persons may qualify for the tax exemption under this scheme. The ‘approved fund manager’ is required to be approved by the MAS, have at least three investment professionals and incur at least S$200,000 in local business expenses a year.
Financial sector incentive (fund management) company scheme. This scheme offers fund managers concessionary tax rates of 10 percent in respect of qualifying income, subject to certain conditions. These conditions include having at least three professional staff engaged only in fund management or investment advisory services.
Setting up of funds and fund management companies in Singapore
Several of the above tax incentive schemes require the retaining of a fund manager that is licensed or exempt under the Securities and Futures Act or a trustee company in Singapore. The services of these licensed fund managers are readily available and the fund management platform company structure is accepted in Singapore.
It is also relatively easy to establish an exempt fund manager in Singapore. An exempt fund manager is restricted in its clientele to a maximum of 30 ‘qualified investors’. These ‘qualified investors’ are limited to accredited investors, of which not more than 15 ‘qualified investors’ could be funds where all the investors in each such fund are ‘accredited investors’. Each exempt fund manager has to employ a minimum of two investment professionals, each of whom must have at least five years’ relevant investment management experience, reside in Singapore and be full time employees of the fund manager.
The abovementioned tax incentives contemplate the establishment of a fund. It is not difficult to establish a fund in Singapore if the investors in these funds are restricted to ‘accredited investors’ or ‘institutional investors’ or offered on a private placement basis. Where the fund is offered pursuant to the accredited investor offering exemption, there is a further requirement for the fund to be registered with MAS as a ‘restricted scheme’ which is not an unduly onerous process principally requiring the fund manager to be licensed or regulated in its place of jurisdiction.
Preferred gateway jurisdiction for funds
Singapore is a favoured jurisdiction from which to access India, China, Indonesia and the Asian region and the recent developments enhanced such preferred status. Tax advisers and other professional consultants should consider using Singapore as a gateway jurisdiction when advising their clients on structuring their fund’s investments in these markets.
Petrus Y. S. Huang is a director at Drew and Napier LLC. He can be contacted on +65 6531 2208 or by email: firstname.lastname@example.org.
© Financier Worldwide
Petrus Y. S. Huang
Drew and Napier LLC