Singapore: Extension and refinement of fund management tax incentives – Key implications for Single Family Funds

On 16 Feb 2024, the Singapore Government announced in its 2024 Budget that it would extend the tax exemption schemes under S13D,  S13O and S13U of the Income Tax Act 1947 ("ITA") for fund vehicles managed by Singapore-based fund managers from 2025 onwards. 

It was indicated at the time that new criteria would be introduced.

Subsequently, on 1 Oct 2024, the Monetary Authority of Singapore ("MAS") announced the new criteria in circular FDD Cir 10/2024 ("Cir 10/2024"). 

These will apply to new awards granted between 2025 and 2029, but in some respects discussed below, the new criteria will also apply to existing funds after a grace period. Assuming that a fund awarded an incentive complies with the relevant criteria, the incentive applies for the whole life of the fund (even after 2029).

This update seeks to highlight certain key implications of particular interest for fund vehicles with assets primarily contributed, owned or controlled by one family or member(s) of the same family ("Single Family Funds"), whether the fund is managed by a licensed/regulated fund manager ("Regulated FMC") or an exempt single family office ("Exempt SFO").

Some of our key takeaways for Single Family Funds are as follows:

• The new criteria introduced for S13O and S13U incentive entities managed by a Regulated FMC are generally not difficult to satisfy. 
• There had been much speculation (after the Singapore Budget 2024) as to whether the criteria for a S13D incentive "offshore" entity (such as a non-Singapore-incorporated, non-Singapore-tax-resident company) would be substantially tightened and/or aligned with the criteria for a S13O or S13U award, but this did not occur.
• MAS has removed the requirement to satisfy multiple sets of economic criteria for a S13U fund structure with trading feeder funds and SPVs – this is a very welcome development (and we have confirmed with the MAS that the change also applies to a fund structure managed by an Exempt SFO).
• MAS appears to have changed/broadened the definition of assets under management ("AUM") to be one based on the total value of investments into designated investments ("DIs") instead of the present net-asset-value ("NAV") based approach.

Our firm has published a separate update analysing the implications of Cir 10/2024 for non Single Family Funds managed from Singapore.

I.    New Economic Criteria for Section 13O funds managed by a Regulated FMC

The economic criteria for a S13O fund managed by a Regulated FMC have been refined as follows:

The commencement dates for the new S13O incentive criteria are as follows:

A.    For new awards commencing between 1 Jan 2025 and FY ending in 2026

• AUM requirement – by the end of the 3^rd year of the incentive
• IP Requirement and Tiered LBS Requirement – from FY ending in 2027 (YA 2028)

B.    For new awards commencing in an FY ending in (or after) 2027

• AUM requirement – by the end of the 3^rd year of the incentive
• IP Requirement and Tiered LBS Requirement – form the 1^st year of the incentive

C.    For existing awards

• Must satisfy the AUM Requirement, IP Requirement and Tiered LBS Requirement from FY ending in 2027 (YA 2028)

Comments:

The revised criteria should not be difficult to satisfy in most cases.

II.    S13O incentive can be applied for by companies with previous investments

Currently, a S13O incentive entity must not have previously conducted business (including acquiring investments) before its incentive period, although MAS since March 2024 already permitted investments to be acquired on market terms within 3 months prior to the submission of the eligibility form for a Single Family Fund, and also allowed the Single Family Fund to commence trading from the time of submission of the eligibility form.

The announced change would widen the relief available, to enable a company with prior business (even transacted more than 3 months before submitting its eligibility form) to apply for a S13O incentive.

Cir 10/2024 also included a statement that, for the avoidance of doubts, all investments by a S13O incentive entity (whether before or after its application is approved) should be acquired on market terms and conditions.

Comments:

We believe that the change should apply equally to a S13O fund structure managed by an Exempt SFO.

The change is a welcome one, although MAS had already considerably mitigated the impact of the no-prior-business rule by way of its earlier March 2024 measures. Those measures, and the new changes in Cir 10/2024 extending them, assist Single Family Funds to commence investment activities before the commencement date of their incentives (which would typically be when their formal application is submitted and after MAS has vetted and cleared their eligibility, a process which would require several months). Naturally, investments made before the commencement date of the S13O incentive would not be tax exempt. 

MAS’ statement regarding the expectation for S13O entities to acquire investments on market terms was (we think) probably intended to refer to the current requirement that, where a S13O entity acquires investments from a person carrying on a taxable trade or business in Singapore, such acquisitions must be on market terms and conditions, rather than impose a  brand new requirement that all acquisitions by a S13O entity must always be on market terms.

III.    New Economic Criteria for S13U funds managed by a Regulated FMC

The economic criteria for a S13U fund managed by a Regulated FMC have been revised as follows:

Existing S13U funds with awards commencing before 1 Jan 2025 will have to satisfy the new AUM Requirement and Tiered LBS Requirement from the FY ending in 2027 (YA 2028)

Comments:

The new criteria should not be difficult to satisfy. 

By contrast, the LBS requirements for a Single Family Office managed by an Exempt SFO are more stringent as a percentage of AUM, namely:

AUM < S$50m – S$200,000

S$50m ≤ AUM < S$100m – S$500,000

AUM ≥ S$100m – S$1,000,000

This tiered LBS requirement would be even more significant than under current rules as the new "gross-assets-based" definition of AUM set out in Cir 10/2024 will be applicable to Single Family Funds managed by an Exempt SFO. 

IV.        Removal of additional minimum AUM and LBS requirements in respect of a SPV or trading feeder fund for S13U fund structures 

Currently, for every additional SPV or trading feeder fund in a S13U fund structure, the S13U fund structure must fulfil an additional S$50m of AUM at the point of application and incur an additional S$200,000 in LBS annually. Recognizing that there may not always be a strong correlation between a fund’s AUM or LBS and its number of SPVs or trading feeder funds, the additional AUM and LBS requirement for each additional SPV or trading feeder fund will be removed from 1 Jan 2025.

Comments:

The change is a significant positive move and very welcome, and is better aligned to commercial reality as compared to the previous policy (and we are glad the MAS has recognized this). It will also help Singapore Single Family Funds close a competitive gap with jurisdictions such as Hong Kong on this point.

We have specifically confirmed with MAS that the change applies to Single Family Fund S13U fund structures managed by an Exempt SFO. We are presently seeking further confirmation whether the option will apply only for new incentive applications or can also be utilized for pre-existing cases.

V.    Changes to the S13D incentive scheme

The S13D incentive scheme applies to "offshore" fund structures (such as non-Singapore-incorporated, non-Singapore-tax-resident companies) managed by a fund manager in Singapore.

The S13D incentive scheme is a self-administered scheme, and thus no notification to, or approval from, MAS was needed to enjoy the S13D incentive status.

This made a S13D incentive structure much quicker to set up than a S13O or 13U structure, which could take from 6 months to longer than a year to implement. 

While the MAS has committed to cutting its processing time for S13O and S13U awards especially from 2025 onwards, it would likely still require at least 6 months from the time a client first starts work on setting up a Single Family Fund in Singapore to the effective commencement date of its tax exemption (which would be typically backdated to the date of formal application for the tax incentive). Several further months would then be required to obtain the official approval of a S13O or 13U incentive status.

As noted above, post Singapore Budget 2024, there had been considerable speculation in the market as to what changes might be made to the S13D incentive scheme from 2025 onwards, and whether access to the scheme would be substantially tightened.

From Cir 10/2024, it is now clear that the requirements of the S13D incentive scheme have not been significantly tightened, including for Single Family Funds managed by an Exempt SFO, i.e.

A.    The S13D incentive scheme will remain a self-administered scheme with generally no reporting requirements to MAS under the fund tax incentive schemes. This is a welcome result.

B.    While the MAS has introduced a new requirement that the manager of a S13D incentive entity must have at least 1 IP with effect from FY ending in 2027 (YA2028), this is a modest requirement. Significantly, the MAS did not introduce any other requirements for a Single Family Fund seeking to benefit under S13D incentive, such as a minimum AUM requirement, or any Capital Deployment Requirement mandating investments into specific classes of local assets

Existing S13D funds would similarly have to satisfy the minimum IP requirements from the FY ending in 2027 (YA 2028)

Comments:

Despite some potential industry concerns before the issue of Cir 10/2024 as to what changes to the S13D scheme might be made, the announced changes to the S13D incentive regime are modest and should not be difficult to satisfy. This is a welcome result.

VI.    Changes to the method of computing AUM

Currently, the AUM of a fund is generally computed based on its NAV determined according to accounting principles. Cir 10/2024 indicated that with effect from 1 Jan 2025, the AUM of a fund will refer to the value of investments held by the fund which qualify as DI, which is a gross-assets-based measure. 

Comments:

We have confirmed with the MAS that the announced change to the approach to calculating AUM would apply equally to Single Family Funds managed by an Exempt SFO.

We note that in FAQ 13 in Cir 10/2024, it was stated that for funds which invest in derivatives (which may have either a positive or negative mark-to-market ("MTM") value) the AUM represented by the derivatives would be the net value of the positive and negative MTM values. However, Cir 10/2024 also stated that loans (including shareholder loans) taken to finance DI "need not be taken into account" as a liability in arriving at the gross asset value in DI.

While we are still confirming the position on this point with MAS, at present it appears likely that deducting loan (including shareholder loan) liabilities will no longer be an option, i.e. such loans "should not be" deducted as a liability in computing the AUM of a fund.

Assuming this to be correct, the change would effectively retire the option which funds have under the current rules to ‘self-select’ their AUM, so long as the minimum AUM requirements are satisfied. 

The level of AUM has several implications for a Single Family Fund, including:

1.    assisting to manage the quantum of the NAV which it has to report to MAS particularly on an ongoing basis in the fund's annual declaration, which could be desired by some Single Family Funds for various reasons including confidentiality although it may be noted that:

        a.        the current eligibility form for Single Family Funds would require disclosure of gross asset values at the point of application, in addition to the NAV; and

        b.        under MAS' new licensing exemption Framework for Single Family Offices, it is in any event expected that there would be a need to report the total aggregate assets under management of an Exempt SFO, and it is unlikely that such assets under management would be calculated on an NAV basis);

2.    the minimum LBS requirements which it must satisfy; and

3.    the amount of assets it has to invest into eligible investments under the Capital Deployment Requirement (or "CDR").

VII.    Some other changes

A number of other announcements were made in Cir 10/2024, including:

• MAS has confirmed that carbon credits (presumably including voluntary carbon credits) qualify as DI under the heading "emission derivatives and emission allowances". This has been the MAS' position for some time, although the public confirmation is welcome.
• Real estate collective investment vehicles in any form (e.g. a contractual co-investment vehicle) would be included as DI;
• S13D trusts (including unit trusts) incentivized under the S13 scheme investing into a S13O entity would not be subject to the financial penalty rule, with effect from YA2025; and
• From 1 Jan 2025, a new S13OA of the ITA would be introduced to allow incentives to be granted for Singapore limited partnerships.

We would be pleased to assist with any questions you may have regarding the revised criteria. Please reach out to your usual contact, or any of the following: