Singapore has a GDP of approximately $40.9 billion (as of first quarter 2009) and conducts trade with other countries to the tune of approximately $42.8 billion (as of first half 2009). With a resident working population of around three million people, Singapore is truly a macro economic jurisdiction and a real business and commercial hub in the far East.
Singapore has garnered a reputation as an investor-friendly jurisdiction: the World Bank's Doing Business 2009 Report ranked Singapore as the top country in the world for ease of doing business. The City of London's Global Financial Centre Index ranked Singapore the most competitive financial centre in Asia, and third globally, after London and New York. Singapore is also ranked first in corporate governance standards in Asia by The World Economic Forum's Global Competitiveness Report.
The success of Singapore as a business and financial centre can be traced to Singapore's strong economic fundamentals, socio-political stability and entrenched rule of law which eliminated the bane of corruption and ineffectual bureaucracy. Singapore's financial sector is built on a strong and progressive supervisory regime, coupled with a highly reputable legal and corporate governance framework that is of 'first world' standards. As a testimonial to this achievement, more than 166 commercial banks, private banks and merchants banks, and 110 licensed asset management companies have established branches and subsidiaries in Singapore according to the Monetary Authority of Singapore (MAS).
Asset management hub
For a long time, Singapore has been used a regional headquarters by multi-national fund managers. The Asset Under Management (AUM) of Singapore's fund management sector has been steadily increasing from $344 billion in 2002 to $814 billion in 2007, which recorded an impressive double digit year-on-year growth over that period. Yet despite having a sizeable fund management sector, Singapore is seldom considered for the domicile of an investment fund and Asian based fund managers traditionally opt for jurisdictions in the Caribbean and Pacific Islands. However, since 2006, Singapore has implemented a slew of policy measures designed to make it a compelling fund domiciliation jurisdiction.
No other jurisdiction in the world offers the following advantages as a fund domicile that Singapore could:
- 'AAA' sovereign rating
- network of 60 comprehensive avoidance of double taxation agreements
- ability to create tax neutrality for the fund such that the fund pays no income tax
- absence of capital gains tax, estate duties and wealth or inheritance tax
- internationally well-regarded funds regulator
The advantages in domiciling an investment fund in Singapore is increasingly becoming apparent to multi-national fund managers, especially alternative investment fund managers who stand to gain the most from the ability to access Singapore's tax treaties.
Fund domiciliation jurisdiction
Reputational considerations
Investors who put their monies in a fund are wittingly or unwittingly committing themselves and trusting that their legal rights would be robustly upheld in the jurisdiction where the fund is established. They would also believe the business and financial infrastructure in the jurisdiction to be fundamentally sound and will not be vulnerable to an overnight melt down, which unfortunately transpired elswhere when the global financial crisis erupted in August/September 2008.
The accolades that Singapore has received as listed above are indicators that Singapore is definitely a serious contender in this aspect.
Double Taxation Agreements (DTA)
Singapore's network of 60 comprehensive DTAs could be put to good use for an alternative investment fund such as a private equity fund or venture capital fund with substantial investments in jurisdictions which have entered into a DTA entered with Singapore. Countries with high levels of economic development potential and foreign direct investment, and which have signed a DTA with Singapore include China, India, Indonesia, Malaysia, Philippines, the Russian Federation, South Africa, South Korea, Taiwan, Thailand and Vietnam. Singapore has also entered into DTAs with OECD countries like Australia, Canada, France, Germany, Italy, Japan, Netherlands and the United Kingdom. These DTAs could be applied to good effect for investors of Singapore domiciled funds who are domiciled in those countries.
If a fund is domiciled in a jurisdiction with no treaty with China, any investment by the fund in a Chinese company will be subject to withholding tax of 10% on dividend payments to the fund. If the fund is domiciled in Singapore, owns at least twenty five percent of the equity interests in the Chinese company and submits a confirmation of tax residence issued by the Inland Revenue Authority of Singapore to the Chinese tax authorities, the withholding tax rate will be reduced to 5% under the PRC-Singapore DTA. As far as treatment of dividends is concerned, the PRC-Singapore tax treaty is just as favorable as any other tax treaty signed by China with other jurisdictions, including Hong Kong.
Again, for an investment by a fund in a Chinese company, without the benefits of a treaty, all divestment of the shares in the Chinese company will attract Chinese withholding tax of 10%. If the fund is domiciled in Singapore and is a portfolio investor (in other words, it holds less than twenty five percent of the equity interests in the Chinese company), provided that Chinese company does not derive more than half of its value from holding immovable property in China, the right to tax the capital gains will be ceded to Singapore. As Singapore does not impose any capital gains, the fund will not pay any capital gains tax at all in the divestment.
Under the Singapore-Vietnam DTA, any gains made by a Singapore resident entity from the assignment of shares in a Vietnamese company (regardless whether it holds Vietnamese immovable property or not) will be exempted from capital assignment profits tax in Vietnam as the right to tax this gain is ceded to Singapore. Due to the fact Singapore does not have any capital gains tax, if a fund is a Singapore resident entity, it will not pay any capital gains tax at all in the divestment.
Under the Singapore-India DTA, the right to tax capital gains realised by a Singapore resident entity from for divestment of the shares in an Indian company will be ceded to Singapore, but subject to certain limitations. The conditions are the Singapore resident entity shall not be a conduit vehicle used by a resident of other state to invest in India, and there are certain local presence requirements to be met such as minimum business expenditure of approximately $140,000 annually. It is interesting that it is expressly stated in the Singapore-India DTA this ceding of the right to tax capital gains should be co-terminous with the equivalent provision in the Mauritius-India DTA.
Although in structuring a fund, the sponsor could interpose an intermediate holding company in Singapore between the fund and the jurisdiction where the investment is made, this does not guarantee that the Singapore intermediate holding company will be able to access the benefits of the DTA. Tax authorities in both developed and developing countries (such as India and China) are increasingly becoming vigilant to, and clamping down on, the practice of tax treaty-shopping and demanding to see commercial substance in a foreign entity that is claiming benefits under a DTA.
Therefore, it is absolutely important to be able to show that the direct holding company of an investment is not established in a country merely to take advantage of the double taxation agreement of its jurisdiction of incorporation. Far too often where investment funds are involved, there is no commercial substance at all if the direct holding company is incorporated in a far-flung tax haven with no connection to the fund or the fund manager.
If a fund is incorporated in Singapore and managed out of Singapore as well, it will definitely be easier to show there is commercial substance in the fund. For instance, the board of directors of the fund would not comprise only professional nominee directors but will include officers actually and actively involved in the management of the fund.
As more countries put in place stricter general anti-avoidance rules to counteract tax treaty-shopping, promoters of funds should pay close attention to creating substance when devising investment holding structures. Incorporating a fund as a limited liability company in Singapore which is managed by a Singapore resident fund manager is one of the best way to demonstrate commercial substance when planning to access the benefits of a Singapore DTA.
Tax neutrality
Finally, tax neutrality is an absolute necessity when determining the domicile of a fund as no fund promoter will want to suffer a tax leakage by virtue only that the fund is established in a certain jurisdiction, when it could have been set up in scores of other jurisdictions.
The authorities in Singapore are aware of this fact and, although Singapore tax resident entities are subject to an income tax regime at the current rate of 17%, there are special tax exemption schemes available to exempt domiciled funds from virtually all incidents of income tax except where the income is sourced from Singapore immovable properties. Under the tax exemption schemes, it is immaterial whether the Singapore domiciled funds invest in Singapore or foreign securities, futures or other instruments.
There are two tax exemption schemes in Singapore for Singapore domiciled funds and they could be called Basic Tier Incentives and the Enhanced Tier Incentives. In both cases, an application to the MAS is necessary to obtain the tax exemption and the salient terms and conditions of the schemes are described in the following paragraphs.
Basic tier incentives
To qualify, the fund must be structured as a Singapore limited liability company and it must be a tax resident company in Singapore. All meetings of the board of directors must be held in Singapore, but there is no stipulation that investment committees meeting must be similarly held only in Singapore. The fund must not be 100% beneficially owned by Singapore resident persons and be managed or advised directly by a Singapore fund management company (FMC). There must be a Singapore-based fund administrator if the administration is outsourced by the fund manager. The FMC must hold a capital markets services licence from the MAS for the regulated activity of fund management, or be exempt from the requirement to hold such licence.
The fund must incur at least S$200,000 expenses each year based on accounting principles, which could include expenses paid in the form of remuneration, management fees and other operating costs. Also, it must not change its investment objective or strategy after it has been approved under the scheme.
If a Singapore domiciled fund is awarded the basic tier incentives, the fund will be exempted from Singapore income tax on the "specified income" derived from the "designated investments" of the fund. The rubric "specified income" and "designated investments" are exhaustively defined in Singapore regulations and would include virtually cover all forms of the income and investments made by an investment fund, including exotic investments like emission derivatives, but excluding investment in Singapore immovable properties.
Another consideration arising from the basic tier incentives scheme is that qualifying investors of the fund will be exempted from all Singapore tax on distributions made by the fund to qualifying investors. However, there will be a punitive effect on non-qualifying investors of the fund who shall be required to pay a financial amount to the Inland Revenue Authority of Singapore based on its share of the fund's income (as reflected in the fund's audited accounts) multiplied by the corporate income tax rate (which is currently 17%).
The following persons will be regarded as qualifying investors:
- any natural person investing in the fund;
- any bona fide non-Singapore tax resident investor that (i) does not have a permanent establishment in Singapore (other than a fund manager) or (ii) has a permanent establishment in Singapore but does not use funds from its Singapore operations to invest in the fund;
- any person so designated by MAS; and
- any person not covered in the preceding bullet points and who does not (on its own and with his affiliates) own more than 30% of the fund's equity if the fund has less than 10 investors, or 50% of the fund's equity if the fund has 10 or more investors.
Any person who is not a qualifying investor shall be a non-qualifying investor. For the basic tier incentive scheme to make commercial sense to an investor, the fund manager is effectively prohibited from sourcing mandates from any investor who is tax-resident in Singapore and who wishes to invest in more than 30% (or 50% if the fund has 10 or more investors) of the fund's equity to avoid the punitive financial amount.
Enhanced tier incentives
The limitations of the basic tier incentives scheme soon became obvious after the scheme was implemented and with the view to make Singapore a more attractive fund domiciliation jurisdiction, the MAS introduced the enhanced tier incentives on April 30, 2009. As its name implies, the scheme is an improvement to the basic tier incentives scheme and it modifies the main criteria in the following aspects:
- the fund can be structured as a company, trust (except as trusts approved under specific provisions of the Singapore Income Tax Act) or a limited partnership. There is no requirement of tax residency of the fund in Singapore anymore;
- the fund must have a minimum fund size of S$50 million ($35 million) at the time of application for enhanced tier incentives, or in the case of a private equity fund, it should investors' commitments of at least S$50 million;
- the same FMC requirement applies but the FMC is additionally required to employ at least three qualified investment professionals;
- the same business expenditure requirement applies but such spending must be local business spending;
- if the fund is incorporated in Singapore, it must use a Singapore-based fund administrator and the fund must also be a tax resident in Singapore with all board of directors' meetings to be held in Singapore; and
- as in the basic tier incentives scheme, the fund must not change its investment objective or strategy after it has been approved under the enhanced tier incentives scheme. The fund cannot concurrently enjoy any other tax incentive scheme in Singapore.
There is no concept of qualifying investors and non-qualifying investors under the enhanced tier incentives scheme and once a fund is approved under the latter, it will be exempted from Singapore income tax on the specified income derived from the designated investments as in the basic tier incentives scheme. Consequentially, all distributions made by the fund to its investors will not attract any Singapore tax.
Tax considerations
As indicated earlier, there is no capital gains tax, wealth tax or inheritance tax levied in Singapore which might be a deterrent for investors to invest in a Singapore domiciled fund. However, there is stamp duty payable for transfer of shares in Singapore incorporated companies but incidence of Singapore stamp duty can be mitigated or avoided with careful tax planning. In Singapore, goods and services tax (or value-added tax) is leviable on provision of business services and a Singapore domiciled fund may incur payment of goods and services tax to service providers. To mitigate this deterrent, on April 3, 2009, the MAS announced administrative measures which will allow a Singapore domiciled fund to recover most of the goods and services tax it would incur (the recovery rate is set at 93% at the present, and is subject to annual re-set) from the prescribed expenses. This are: management fees, trustee fees, fund administration fees, custodian fees, sub-custodian fees, depository fees, registrar costs, printing and distribution costs, audit fees, tax agent fees and legal fees.
There are two conditions in order to claim the recovery. Firstly, the fund should be approved under the basic or enhanced tier incentives scheme on the last day of its preceding financial year, and secondly, there should be a Singapore FMC managing or advising the fund.
It should be noted that the basic and enhanced tier incentives schemes described are subject to sunset clauses and officially will cease on March 31, 2014, but without affecting the tax exemption for all funds approved prior to the sunset date. Despite the existence of the sunset clause, the practice of the Singapore authorities for tax incentive schemes has been to renew the schemes for rolling five year periods subject to making fine-tuning adjustments. Given the importance of the fund management sector to Singapore's status as a financial centre, it is widely expected that the basic and enhanced tier incentives schemes will be renewed.
Singapore-based fund managers
For a fund manager located in Singapore, it would be subject to Singapore income tax (17%) on its net income from Singapore sources or remitted to Singapore from overseas but in practice, there are broad exemptions that save foreign sourced income from tax when remitted to Singapore. It is outside the scope of this article to discuss tax planning strategies for a Singapore based fund manager save for a mention that an application can be made to the MAS under the Financial Services Incentive – Fund Manager scheme. This allows the successful applicant to enjoy a concessionary tax rate of 10%.
| Author biography |
Low Kah Keong
Wongpartnership
Low Kah Keong heads WongPartnership's Asset Management & Funds Practice. He is also a Partner in the firm's corporate/mergers & acquisitions practice. Kah Keong's main practice areas are asset management, collective investment schemes, mergers and acquisitions and corporate finance.
In the arena of asset management, Kah Keong has acted for sponsors and fund managers of private equity funds, real estate funds, venture capital funds, hedge funds and regulated collective investment schemes. He has advised on the Singapore Tax Resident Fund Scheme and licensing considerations under the Securities and Futures Act of Singapore.
Kah Keong graduated from the National University of Singapore. He is admitted to the Singapore Bar and to the Roll of Solicitors of England & Wales.
Kah Keong is ranked as a recommended lawyer by PLC Which Lawyer - Investment Funds 2009. |