Introduction
The Singapore 2020 Budget has introduced a suite of timely and welcomed initiatives to support Singapore's economy, especially in light of the recent COVID-19 outbreak. We have summarised below some of these new Budget initiatives and highlighted recent developments and possible changes on the horizon that may be of interest to asset and wealth managers.
2020 Budget Announcements
Business tax changes
In keeping with the theme of the 2020 Budget to help ward off a predicted downturn in the local economy, a suite of corporate tax changes were announced. These are not specific to asset or wealth managers but are potentially of interest nonetheless. Announcements include an increase in the tax rebate to 25% of tax payable, capped at S$15,000. The carry back of losses and allowances has been extended from one year to three, though it remains capped at S$100,000.
With effect from YA2021 a taxpayer may elect for accelerated rates of capital allowances to apply. 75% of the cost of plant and equipment may be claimed in the first year, with the remaining 25% to be claimed in the second year. A taxpayer will not be able to defer these allowances which is in contrast to the current rules. The deferral of capital allowances is common and reduces the potential impact of a change in ownership which can cause carried forward losses and unabsorbed capital allowances to be lost. In addition to accelerated capital allowance claims, taxpayers will also be given the option to claim qualifying renovation and refurbishment expenditure over one year instead of the current three years.
A big announcement as part of the 2020 Budget was the decision to defer the increase in GST from 7% to 9%. This increase is still due to take place by 2025, but sufficient notice will be provided by the government ahead of the increase.
Extension and modification of trading gains safe harbour
Section 13Z of the Income Tax Act ('ITA') was introduced in the 2012 Budget and provides a participation exemption style trading gains safe harbour. Under this provision, a company is not subject to Singapore tax on gains arising upon a disposal of ordinary shares in an investee company. It is necessary that at least 20% of the ordinary shares in the investee company were held by the disposing company for 24 months up to the time of disposal.
Excluded from the operation of Section 13Z of the ITA are gains made by insurance companies; disposals through partnerships; and those in relation to shares in unlisted companies which are in the business of trading or holding Singapore immovable property (other than property development).
It was announced as part of the 2020 Budget that Section 13Z of the ITA will be extended beyond its current sunset of 31 May 2022. It was however noted that on and from 1 June 2022, the carve-out applying to shares held in companies holding Singapore immovable property will be extended to companies holding foreign immovable property as well. The rationale given for this change was to ensure consistency in the tax treatment for property-related businesses. For such disposals, the question of whether a realisation gain is subject to Singapore tax will once again depend on whether the gain is capital or income in nature.
The relatively benign sounding alteration to the scope of Section 13Z could have potentially significant consequences for real estate managers who have used a Singapore company to own foreign immovable property through an in-country SPV. Such managers may have relied upon the combination of the foreign dividend exemption of Section 13(8) of the ITA and Section 13Z of the ITA to achieve a tax efficient result without needing to apply for approval under either the Section 13R or the Section 13X tax exemption schemes. Such managers may need to reexamine the efficacy of this planning, particularly if the sale by a Singapore fund or corporate SPV of the shares in a foreign property owning company is a possible mode of exit and a disposal of such shares is intended to take place on or after 1 June 2022.
Enhancement of incentive for venture capital funds
Section 13H of the ITA is a specific funds incentive for venture capital companies. It was extended as part of the 2020 Budget until 31 December 2025.
As part of the extension of this incentive, the scope of the tax exemption has been broadened from a narrow class of realisation gains, dividend income and interest from convertible stock to align with the scope of the tax exemption under the funds incentives of Sections 13CA, 13R and 13X. It has been expanded to now include foreign incorporated companies and VCCs.
The term of the approval under the incentive will be the life of the fund up to 15 years. This is an increase from the 10 year approval period which currently applies. An approved venture capital fund will be entitled to recover GST on its inputs at a fixed recovery rate. This will presumably mirror the relief which is available for Section 13CA, 13R or 13X funds which are taken to belong in Singapore.
These enhancements to the Section 13H scheme bring it into closer alignment with Section 13R in particular. In our experience it is common for the latter scheme to be used by fund managers instead of Section 13H which often is not even considered. One suspects that this is due to the approval condition that a certain percentage of the fund's subscribed capital must be invested into qualifying Singapore-related investments. This is a potentially restrictive condition for venture capital managers having a regional mandate.
Extension and enhancement of FTC scheme
The Finance and Treasury Centre ("FTC") scheme is a long-standing scheme that aims to incentivise multinational companies to use Singapore as their base for regional treasury management activities. It offers a concessionary tax rate of 8% to approved FTCs for certain trading, investment and services income. An approved FTC can qualify for a withholding tax exemption on interest payments made in respect of loans from banks, non-bank financial institutions and associated parties outside Singapore, provided that the funds are used for its approved qualifying activities or services. The FTC scheme was slated to expire on 31 March 2021.
As part of the 2020 Budget, the Government has announced that the FTC Scheme will be extended for another 5 years till 31 December 2026. The Government has also announced two enhancements to the FTC Scheme in respect of what an approved FTC may transact/invest in and where it can derive its source of funds from:
Previously, an approved FTC may only avail itself of the concessionary tax rate on income derived from a closed list of "qualifying activities" that includes investments and transactions in shares or stocks of companies or units in a unit trust among others. In recognition of the common structuring of private equity and venture capital funds as limited partnerships or other vehicles, the Government has expanded the list of qualifying activities to include transacting or investing into PE or VC funds that are not structured as companies. Income derived on or after 19 February 2020 by approved FTCs from this activity will therefore qualify for the concessionary tax rate.
As FTCs tap into increasing sources of funds for its activities, the Government has also extended the list of qualifying sources of funds to include funds raised via convertible debt issued on or after 19 February 2020.
As corporate treasury functions become increasingly complex and strategic, the above developments are welcome. It is however not immediately apparent just how common the investment by an FTC into venture capital and private equity funds actually is. FTCs are established to manage the liquidity of an MNC and are typically involved in short term cash management, cash pooling and intragroup financing. It is difficult to see an FTC using surplus liquidity to invest into venture capital and private equity funds as these are typically closed-ended and very illiquid.
Property tax rebates
The Budget 2020 also announced various property tax rebates that are targeted at alleviating the commercial burden faced by the tourism and integrated resort industries during this period. These property rebates are part of a wider array of initiatives in the 2020 Budget's S$4 billion-dollar Stabilisation and Support Package.
The property tax rebates apply to certain qualifying commercial properties in the tourism and integrated resort industries at various rates ranging from 10% to 30%. These rebates are payable for the period 1 January 2020 to 31 December 2020.
3. Looking back
Recent changes to the GIP Scheme
On 1 January 2020, the Economic Development Board of Singapore ("EDB") announced substantial changes to the qualifying criteria of the ("GIP Scheme"). The GIP Scheme is a popular pathway for UHNW individuals to apply for Singapore permanent residency ("SPR"). The announced changes better target owners of high-performing businesses, and widen the appeal of this scheme to next generation business owners and founders of fast-growth companies. These changes apply to all applications submitted from 1 March 2020 onwards.
In light of the increasing intergenerational transfer of wealth and the wider policy goal of attracting start-ups with high growth potential to Singapore, EDB has added two new groups of qualifying investors – next generation business owners and founders of fast-growth companies. As the qualifying criteria for these two new categories are arguably more "customised", this should widen the appeal and availability of the GIP Scheme to applicants who previously did not qualify.
Two other recent changes are worth noting:
Established business owners applying for SPR status under the GIP must now show that their main company has an average turnover of at least S$200m on average over the past 3 years, and turnover of S$200m in the immediate preceding year. This is fourfold increase from the S$50m turnover which was previously required.
Previously, applicants under the Family Office Option of the GIP Scheme have to provide a net worth certificate from a Singapore based law firm, bank, accredited audit firm or trust company stating that the family's net worth exceeds S$400m. It is often difficult to obtain this certification in practice where a family may hold significant illiquid assets overseas. Obtaining the necessary valuations can therefore be a major source of delay. Going forward, applicants under this option of the GIP will now have to obtain a certification proving at least S$200m in net investible assets (excluding real estate). After the applicant's SPR application is approved-in-principle, the applicant's Singapore family office will also have to manage at least S$200m in AUM of which only S$50m must be transferred to and held in Singapore.
Commencement of the VCC
The Variable Capital Companies Act 2018 ("VCC Act") came into operation on 14 January 2020. Its commencement has also been heralded as a timely and welcome addition to bolster Singapore's position as a leading funds domicile jurisdiction.
Various mechanisms have already been put in place to facilitate the uptake of VCCs, including the redomiciliation of collective investment schemes from other jurisdictions into Singapore. The MAS' and ACRA's VCC Pilot Programme has also been widely successful as it oversaw the completion of a total of 20 investment funds that were incorporated or re-domiciled into Singapore as VCCs. As part of MAS efforts to encourage the use of VCCs, it was also announced that a grant of up to S$150,000 is provided to help fund managers defray costs when incorporating or registering these entities.
From a Singapore tax perspective, the enactment of the VCC Act was accompanied by conforming income tax, stamp duty and GST changes. A VCC is treated as a company for Singapore income tax purposes irrespective of whether or not it is an umbrella VCC and the number of sub-funds it may have. However each sub-fund of an umbrella VCC is required to compute its chargeable income as if it were a single taxpayer. Any liability for Singapore income tax is imposed at the sub-fund level which is consistent with the ring-fencing of assets and liabilities within a sub-fund more generally. For stamp duty and GST purposes, each sub-fund is generally treated as a discrete taxpayer.
Looking forward
Renewed focus on the Singapore Limited Partnership
It is trite to say that offshore limited partnerships have been the default choice as a master pooling vehicle for private equity and venture capital funds for many years. The Cayman Islands exempted limited partnership is far and away the most popular choice.
We have observed an increase in interest by fund sponsors to move away from offshore structures. This can be attributed to a number of factors. These include developments such as the principal purpose test which is now included as a minimum treaty abuse standard in agreements amended by the Multilateral Amending Instrument; the recent wave of economic substance regulations in offshore jurisdictions; and enhanced regulatory and compliance costs. It is also clear that many European investors will not invest into a fund if it is domiciled in an offshore jurisdiction for reputational reasons.
Apart from the interest in Singapore's new VCC regime, we have observed fund sponsors exploring the feasibility of using a Singapore limited partnership as a master pooling vehicle. This shares many common features with the Cayman Islands limited partnership and is therefore a relatively easy sell to investors.
Singapore's limited partnership regime first came into effect in May 2009 and a number of improvements could be made. For example, the Cayman Islands Exempt Limited Partnership Law provides various statutory mechanisms that facilitate the fluid transfer of limited partnership interest from an outgoing investor to a new incoming investor of the fund. The US Uniform Limited Partnership Act, which is akin to a model law that facilitates the enactment of laws in separate states, also helpfully clarifies how limited partner investors do not have a fiduciary duty to the limited partnership. This is significant, considering how a limited partner investor may want to invest in another fund with competing interests. These features could be adopted into the local law as well as putting beyond doubt the question of whether Singapore stamp duty applies where there is a transfer of an interest in a Singapore limited partnership holding shares in an unlisted Singapore company.
Hong Kong has proposed the establishment of a limited partnership regime for funds. This was initially announced in the Hong Kong Financial Secretary's 2019-20 Budget Speech. As the development of this new regime is still in its early stages, it remains to be seen how certain conceptual changes will be implemented in legislation. There has also been an initial discussion paper issued by the Legislative Council which suggests enabling greater contractual freedom amongst the partners and clear safe harbours for the activities of a limited partner which could otherwise jeopardise their limited liability status.
An update of Singapore trust law?
It has been more than 15 years since the last round of trust law reform in Singapore in 2004, and Singapore's reputation as a wealth management hub and the depth of the local ecosystem continues to grow. A review of Singapore's trust law framework may therefore be timely.
A possible enhancement would include reviewing the rule against perpetuities. This manifests as a 100 year limit on the term of a Singapore law trust. Greatly extending or removing altogether this perpetuity period would enable a Singapore law governed trust to be used for intergenerational wealth transfer between successive generations. This is increasingly important given the wealth that exists in Asia.
Another change that would be favourably received would be the introduction of non-charitable purpose trusts. Singapore law follows the classic English law requirement that a trust must have beneficiaries to be valid. Trusts which exist for purposes as distinct from persons are generally only valid if they are charitable in nature. Non-charitable purpose trusts could be used in both commercial and wealth planning and succession planning contexts. For example, one of the ways in which the shares of a private trust company could be held is through a purpose trust. Enabling such trusts to be governed by Singapore law would further assist with the desire of many families to collapse their structure in one jurisdiction and to simplify the administration of their structure by one trust company.
Another change which may be welcomed is the introduction of a Variation of Trusts Act. This was proposed in a report released by the Singapore Academy of Law Reform Committee in April 2019. Broadly, an act of this kind would confer jurisdiction on the Singapore High Court to approve variations of trusts where this is not possible given the terms of the trust or due to other circumstances. There are a variety of circumstances where this may be useful. This includes where the Court is asked to consent to a variation on behalf of beneficiaries who are unborn or otherwise unable to provide consent, or where a trust instrument did not confer a power of variation in the first place.
Economic substance rules loom larger
This past year has seen a rapid adoption of economic substance rules in many traditional planning jurisdictions. As these rules continue to be reviewed and finessed, it is clear that many UNHW families are increasingly requesting for a wealth planning structure to be as compact as possible. This is to reduce the compliance burden and costs associated with offshore vehicles, and the encroachment of outside influences such as the EU and the OECD which present a serious change of law risk. Many believe that the current version of the economic substance rules are only the beginning and that these will become more stringent. Enhanced transparency is also an issue in the form of beneficial ownership registers which are not merely restricted to government access.
Against this backdrop, many UNHW families are looking to consolidate move away from entities established in traditional tax haven jurisdictions as the basis for their structures. Within the region Singapore offers the combination of tax efficient wealth planning structure, geopolitical security and a fully developed financial services ecosystem. There are thus both push and pull factors which are working together to make Singapore an attractive choice.
Many institutional asset managers will be observing closely developments in the Cayman Islands economic substance laws as they apply to funds. These were recently found to be inadequate by the EU and further changes are therefore likely.
BEPS 2.0
The BEPS project rolls on. In January 2019, the OECD described their two-pillar approach to tackle tax challenges arising from the digitalisation of the economy.
Pillar 1 focuses on the allocation of taxing rights amongst jurisdictions. The OECD has proposed the creation of a new taxing right on multinational enterprises that is based on allocating a portion of the profits of a multinational enterprise to the markets in which its goods or services are consumed. This is independent of the extent to which a multinational enterprise may actually operate within that market. This is targeted at digital service providers in particular and is not dissimilar to the concept of a digital permanent establishment which some jurisdictions have already adopted. Pillar 1 contemplates a mechanism for the allocation of a slice of the profits of a multinational enterprise which is in addition to existing and accepted methods of transfer pricing.
Pillar 2 is also referred to as the "GloBE" and is an initiative to establish a global minimum tax. The idea is that a tax authority would be entitled to refuse to apply lower rates of taxation on income sourced in that jurisdiction, unless it is subject to a minimum rate of taxation in the jurisdiction of residence. A number of consequences flow from this concept including the need for a residence jurisdiction to potentially move from an exemption to a credit mechanism for the avoidance of double taxation.
While the GloBE initiatives are still in the design phase, it is not difficult to see how these may impact fund structures which are comprised of Singapore resident vehicles. This includes in particular Singapore companies which have been approved under the Section 13R and Section 13X tax incentive schemes. It is hoped that accommodation is made within these rules for collective investment vehicles, and in particular widely held funds, as the details are worked through. This would be in keeping with the qualified application of the treaty abuse measures of the first iteration of BEPS.
Closing remarks
Many would agree that it has been a rocky start to 2020 and the short term outlook is not entirely encouraging. The 2020 Budget positions Singapore well to weather a predicted economic slowdown which can be mostly blamed on the COVID-19 virus. While there have not been a slew of new initiatives for the asset and wealth management industry, the incremental changes which were announced as part of the 2020 Budget and other recent developments are supportive of the continued attractiveness of Singapore as an asset and wealth management hub. The constant process of legislative review and renewal, evident in the introduction of the VCC, should ensure that the appeal of Singapore continues unabated.
Though the medium to long term outlook remains bright, real estate asset managers in particular should consider the potential impact of the changes to Section 13Z on structures which are not incentivised under Section 13X or Section 13R. Asset managers in general should continue to watch the development of the GloBE proposals as well as other anti-hybrid rules which may be adopted by source jurisdictions. These may impact upon the overall tax efficiency of Singapore based structures where treaty benefits are claimed and income is either not remitted or is otherwise exempt.
