Singapore: Extension and refinement of fund management tax incentives – Key implications for institutional funds

As announced in Singapore Budget 2024, the economic criteria for qualifying funds under the fund tax incentive schemes would be revised with effect from 1 January 2025 with more details to be released by the Monetary Authority of Singapore ("MAS") by the third quarter of 2024.

On 1 October 2024, the MAS issued a circular detailing the changes as announced in the Singapore Budget 2024 statement to the Offshore Fund Tax Incentive Scheme (Section 13D of the Income Tax Act 1947 ("Section 13D")), the Resident Fund Tax Incentive Scheme (Section 13O of the Income Tax Act 1947 ("Section 13O")) and the Enhanced-tier Fund Tax Incentive Scheme (Section 13U of the Income Tax Act 1947 ("Section 13U")), and the introduction of the new Section 13OA of the ITA that would extend the Resident Fund Tax Incentive Scheme to funds constituted as limited partnerships registered under the Limited Partnerships Act 2008 ("Section 13OA") (collectively "Singapore Fund Tax Incentive Schemes"). 

Most of the economic criteria related changes would, subject to transitional measures, take effect from 1 January 2025 and apply to non-single family office funds^[1] (apart from the changes to Section 13D). 

This article sets out the key changes to the Singapore Fund Tax Incentive Schemes focusing on the key implications for institutional funds, i.e. funds whose assets are not primarily contributed, owned or controlled by one single family or member(s) of the same family, our firm has separately issued an update highlighting the implications for those funds whose assets are primarily contributed, owned or controlled by a family or member(s) of a family.  

Extension of the Tax Incentive Schemes 

The Section 13D, Section 13O and Section 13U schemes would sunset (if not extended) on 31 December 2029. On approval, an incentivised fund will continue to enjoy the exemption for the life of the fund subject to the fund fulfilling the conditions of the respective schemes. Goods and services tax remission and withholding tax exemption to interest and other qualifying payments made to non-residents by qualifying funds would continue to apply as is.

New definition of AUM 

With effect from 1 January 2025, the Asset under Management ("AUM") of a fund shall refer to the value of the fund's investments in Designated Investments ("DI"). At present, the AUM or size of a fund refers to the fund's net asset value (ie, assets less liabilities). 

Minimum AUM and Investment Professionals for Section 13O Funds 

Section 13O funds are required to maintain a minimum AUM of at least S$5 million in DI at the end of every financial year and the Singapore fund manager of the Section 13O fund must employ at least two investment professionals. At present, Section 13O funds are not required to maintain a minimum AUM throughout the life of the fund and/ or engage a Singapore fund manager that employs more than one investment professional. Investment professionals refer to portfolio managers, research analysts and traders who are earning more than S$3,500 per month and must be engaging substantially in the qualifying activity of management of the fund. Investment professionals are expected to have the relevant formal work experience or academic qualifications that is expected of an investment professional. 

As a transitional measure, Section 13O funds with a commencement date before 1 January 2025 are only required to fulfil the minimum investment professional headcount and to have and maintain a minimum AUM of S$5 million at the end of every financial year from its from financial year ending 2027 (year of assessment 2028). Section 13O funds with a commencement date between 1 January 2025 and the end of financial year 2026 are required to fulfil the minimum investment professional headcount from financial years ending in 2027 and the minimum AUM requirements by the end of the third year of the incentive. 

Minimum AUM throughout the life of a Section 13U Fund

Section 13U funds are required to maintain a minimum AUM of at least S$50 million in DI as at the end of each financial year throughout the life of the fund as of 1 January 2025. At present, a Section 13U fund is only required to maintain a minimum fund size of at least S$50 million at the point of application. 

As a transitional measure, Section 13U funds with a commencement date before 1 January 2025 are only required to fulfil the minimum AUM of at least S$50 million from its financial year ending 2027.

Tiered Local Business Spending

Both Section 13O and Section 13U funds will now need to incur Local Business Spending ("LBS") that is tiered to the fund's AUM in DI. The minimum LBS for both Section 13O and 13U schemes ranges from S$200,000 for AUM of less than S$250 million to S$500,000 for AUM of S$2 billion or more. For funds that apply on a committed capital basis for exemption under Section 13U, the minimum LBS shall correspond to the amount of committed capital or the actual AUM in DI, whichever is higher. 

At present, both Section 13O and Section 13U funds are only required to meet a minimum of  S$200,000 in total business spending and LBS, respectively. LBS refers to expenses paid to a Singapore payee whereas total business spending is not geographically specific. 

Section 13O funds with a commencement date before 1 January 2025 and between 1 January 2025 and the end of financial year 2026 (year of assessment 2027) will only be required to fulfil the LBS and tiered LBS criteria from financial year ending 2027 (year of assessment 2028) as a transitional measure. 

Section 13U funds with a commencement date on or after 1 January 2025 will only be required to fulfil the tired LBS criteria from its first financial year. However, as a transitional measure, Section 13U funds with a commencement date before 1 January 2025 are only required to fulfil the tiered LBS criteria from financial year ending 2027 (year of assessment 2028).   

Removal of newly set-up company requirement for Section 13O funds

Funds applying for exemption under Section 13O are no longer required to apply for exemption under Section 13O prior to the acquisition of investments. At present, a fund applying for exemption under Section 13O is subject to the condition in the letter of approval that it must not be a person that was previously carrying on a business in Singapore, where that business in Singapore generated income that would not have been tax-exempted. As a practical matter, the omission of this requirement would provide flexibility and certainty as funds can now submit a Section 13O application on or after the acquisition of investments without the need to apply the exceptions (ie, warehousing of investments) to the condition.   

Minimum Economic Commitments for Section 13D Funds

All funds that qualify for exemption under the self-administered Section 13D scheme are required to be managed or advised directly by a Singapore fund manager that employs at least one investment professional in each financial year with effect from financial year ending in 2027 (year of assessment 2028) to qualify for exemption under the Section 13D scheme in the corresponding Year of Assessment. This requirement will be self-assessed by the Section 13D fund. 

Waiver of the 30/50 rule for investors of Section 13O and 13D Funds

The application of the financial penalties provisions commonly referred to as the 30/50 rule is waived with effect from financial year 2024 (year of assessment 2025) for investors of Section 13O and 13D funds that are constituted as trusts or unit trusts and qualify for exemption under the self-administered Section 13D scheme. 

At present, investors of Section 13O and 13D Funds constituted as trusts or unit trusts and qualify for exemption under the self-administered Section 13D scheme that are non-qualifying investors are subject to the financial penalties provisions and have to pay a financial penalty to the Comptroller of Income Tax.  

Closed-end Fund Treatment 

Closed-end funds may make an irrevocable one-time election for “closed-end fund” treatment at the time of application for exemption under the Section 13O, 13OA or Section 13U scheme from 1 January 2025 that would waive both the minimum AUM and tiered LBS requirements after a specified period consistent with the nature of closed-end funds.

Section 13O and Section 13U funds with a commencement date before 1 January 2025 may make a fresh application to the MAS to avail itself of the “closed-end fund” treatment. 

Introduction of the Section 13OA Scheme for Limited Partnerships 

With effect from 1 January 2025, a new Section 13OA scheme will be introduced to extend the Section 13O scheme to funds constituted as limited partnerships registered under the Limited Partnerships Act 2008. As a limited partnership is pass through for Singapore tax income tax purposes, limited partners of a limited partnership that is approved under the Section 13OA would be exempted from tax on his share of Specified Income in respect of DI derived by the approved S13OA fund, subject to meeting the relevant conditions. 

Update to List of Designated Investments 

The MAS has clarified that real estate investment funds constituted in any form are within the list of DIs and the list of DIs will be updated in due course. 

FAQs 

We have put together a list of our clients' frequently asked questions and our responses in respect of the changes to the Section 13O and Section 13U schemes.  

Question 1. I understand that with effect from 1 January 2025 a Section 13U fund with a commencement date before 1 January 2025 will need to maintain S$50 million of AUM for each financial year, what is the impact to our existing Section 13U funds?

Answer 1. Yes, the new policy is that Section 13U funds will need to maintain a minimum AUM of at least S$50 million in Designated Investments as at the end of each financial year ("Minimum Section 13U AUM"). The AUM of a fund shall refer to the value of the fund's investments in Designated Investments. 

Having said that, as a transitional measure, existing Section 13U funds with a commencement date before 1 January 2025 are only required to fulfil the minimum AUM requirements from financial year ending 2027 (YA 2028).

Closed-ended funds such as, private equity and venture capital funds, that have a fixed lifespan (ie, less than 20 years),  designated fund-raising and redemption period(s) may consider making an irrevocable one-time election for “closed-end fund” treatment. Closed-ended funds that elect for “closed-end fund” treatment would only be required to fulfil the Minimum Section 13U AUM from its first to fifth year (inclusive) of incentive, and the annual tired local business spending condition will have to be met on a cumulative basis up to the tenth incentive year (inclusive). 

A Section 13U fund or fund structure that fails to satisfy the specified conditions for any basis period will not enjoy the tax exemption for that year of assessment relating to the basis period concerned. However, if the Section 13U fund or fund structure is able to satisfy the specified conditions in any subsequent basis period, it can continue enjoying the tax exemption in the year of assessment relating to that subsequent basis period. 

Question 2. Could you please share with us the key changes and impact of the changes on our existing Section 13O fund? 

Answer: At present, Section 13O funds are not required to have any AUM on application, to maintain a minimum AUM throughout the life of the fund, or to have a Singapore fund manager that employs at least two investment professionals. 

The new policy is that a Section 13O fund with a commencement date before 1 January 2025 will also need to maintain AUM of at least S$5 million in Designated Investments as at the end of each financial year ("Minimum Section 13O AUM"). In addition, the Section 13O's Singapore fund manager must employ at least two investment professionals. 

Having said that, as a transitional measure, Section 13O funds with a commencement date before 1 January 2025 are only required to fulfil the minimum investment professional headcount and to have and maintain a minimum AUM of S$5 million at the end of every financial year from its financial year ending 2027.

A Section 13O fund that fails to satisfy the specified conditions for any basis period will not enjoy the tax exemption for that year of assessment relating to the basis period concerned. However, if the Section 13O fund is able to satisfy the specified conditions in any subsequent basis period, it can continue enjoying the tax exemption in the year of assessment relating to that subsequent basis period. 

Question 3. We plan to set up master-feeder structures that hold their investments through special purpose vehicles and understand that under the current regime the structure's economic commitments would be based on the sum of economic commitment expected from each fund entity. Are there any changes? 

Answer: With effect from 1 January 2025, Section 13U structure such as, inter alia, master-feeder structures that hold their investments through special purpose vehicles, the Minimum Section 13U AUM and tiered local business spending requirements will apply, regardless of any trading feeder funds or special purpose vehicles in the structure, at the Section 13U structure level as though the structure is a single fund entity. The fund will need to submit a consolidated tax incentive application with details of all the entities in the structure to the MAS. Any changes to the fund structure such as the addition of feeder fund(s) or special purpose vehicle(s) to the fund structure must be approved by the MAS. Once approved, each entity in the Section 13U structure can enjoy the tax exemption for the life of the fund. 

Should you have any questions, please feel free to reach out to your usual Withers contact or any of the key contacts listed below for a consultation.