The last year has been full of developments in Singapore. The jurisdiction continues to prove its pre-eminence in providing innovative solutions to the private wealth planning industry. In fact, the government of Singapore has specifically enacted legislative changes to continue to attract this industry.
The trust company licensing regime
The Trust Companies Act 2005 came into effect 1 February 2006 and is administered by the Monetary Authority of Singapore (MAS). The focus of the legislation is to provide a regulatory framework for the trustee company industry in Singapore. If a trust business is carried on, it is now mandatory to be licensed unless the company has a specific exemption from licensing.
All existing trust companies were required to lodge their trust licence application by 30 April 2006 if they:
It is important to note that the rules apply regardless of where the trust was created or where its assets are held. For example, if a Singapore trust company performs administration services for a non-Singapore trust then it will still have to be licensed.
As of 11 September 2006, 10 trustee companies licences have been issued. There are many more in various stages of the approval process.
Tax exemption for Singapore trusts
In the 2006 Singapore Budget there were some changes announced in relation to both Singapore domestic trusts and Singapore foreign trusts. These changes took effect from 17 February 2006 and are designed to further encourage the growth of the trust industry in Singapore.
There is a specific taxation exemption on certain income that is earned by qualifying foreign trusts (QFTs) administered by a trustee company licensed in Singapore. For the exemption to apply it must be specified income from designated investments, for example, dividend income from non-Singapore companies received by a Singapore QFT would be exempt from taxation in Singapore.
The definition of a QFT has been quite limited in the past. For a trust to be treated as a QFT every settlor had to be either a foreign company or an individual who was neither a citizen nor resident of Singapore. In addition, every beneficiary must also have been either a foreign company or an individual neither a citizen or resident of Singapore. However, the rules have changed to include various other forms of foreign entities.
These changes will make qualifying foreign trusts much more attractive as it provides greater flexibility in relation to who can be both settlors and beneficiaries of such trusts.
A domestic trust is a trust that does not qualify as a QFT. Currently Singapore individuals are exempt when they bring foreign sourced income into Singapore as well as certain Singapore sourced income. An example of Singapore source income that would be exempt in Singapore is interest earned from deposits with approved Singapore banks.
However, a Singapore domestic trust has not enjoyed the same tax exemptions as Singapore individuals. For example, a Singapore trust would have been taxed at the trust level on all income regardless of the source of that income. In addition a beneficiary of a Singapore domestic trust would have also been taxed on all distributions he receives regardless of the source of the income. This would be taxed at his marginal tax rate with a rebate for any tax paid at trust level.
However, the rules have been changed. Both locally sourced investment income and foreign source income of a qualifying domestic trust (and its underlying companies) are now exempt from taxation in Singapore. In addition, when the beneficiaries of the trust receive this income distribution they are also exempt from taxation in Singapore.
Singaporeans can now obtain both the flexibility offered by the trust structure along with the taxation exemptions currently afforded to individuals.
An extended exemption
Singapore has proven to be a popular jurisdiction for holding companies partly due to the more than 50 double tax treaties it has with other countries. Singapore companies also receive concessional treatment for various types of income, for example, Singapore does not tax capital gains. In addition, Singapore will also not tax foreign dividends received in Singapore by a resident company as long as the foreign income from which the dividend has been paid has been subjected to tax, and the ‘headline tax rate’ of the foreign country is at least 15 per cent.
When calculating the ‘headline tax rate’ underlying corporate tax and withholding tax must be included.
However, even if these conditions are not satisfied the dividend may still be exempt. In a Circular issued on 31 May 2006 by the Inland Revenue Authority of Singapore (IRAS) specific examples were provided as to when foreign dividends remitted into Singapore will still be exempt from tax. The company must apply to IRAS to be granted one of the ‘further’ exemptions and some substantial business activities must be carried on outside of Singapore.
Specific scenarios listed include dividends received in Singapore paid from exempt capital gains or the set-off of unutilised losses or capital allowances.
Other specific examples include where dividends have flowed through from a company other than the company that has actually paid the dividend to the Singapore resident company. An example would be where Company C pays tax a dividend to Company B who then pays a dividend to the Singapore resident company (Company A). Company C meets the headline rate of tax of 15 per cent rule but Company B does not. Without this specific exemption it is likely that the Singapore resident company would have to pay taxation on the dividend when it is remitted to Singapore.
Also of importance is that Singapore does not impose withholding tax on dividends paid from a Singapore companyto a foreign entity.
With increased certainty in relation to when dividends will be exempt from taxation the Singapore Company is even more effective as an international tax planning tool.
Corporate law reform
Major changes were made to the Singapore Companies Act which came into effect 30 January 2006.
The abolition of the concepts of par value and authorised capital
This amendment is retrospective so that all Singapore companies will no longer define their shares by par value nor will they have any authorised capital. These new provisions provide much greater flexibility, for example, the number of shares issued does not have to be limited to the level of authorised capital. In addition shares no longer have to be issued above the company’s selected par value amount.
The concept of treasury stock
Singapore companies are now allowed to hold up to 10 per cent of its shares as treasury shares – but they will not have any voting rights.
Other amendments made to the corporate law of Singapore companies includes making it easier for two Singapore companies to amalgamate , have capital reductions and buy back its own shares. All these measures have been introduced to modernise Singapore company legislation.
Limited liability partnerships
The Limited Liability Partnership Act (the Act) was passed in mid April 2005. The Act provides for the formation and registration of limited liability partnerships (LLPs) in Singapore.
A Singapore LLP is regarded as a body corporate with a separate legal entity and has perpetual succession. It must have two or more partners and any individual or body corporate can be a partner. There is no restriction on foreigners or foreign entities being partners in a LLP.
A Singapore LLP must have at least one manager who is ordinarily resident in Singapore and the registered office must be maintained in Singapore.
For income tax purposes a LLP is treated as a partnership and will not be taxed at entity level – ie, it will be treated as a ‘pass through’ entity. The standard provisions in relation to taxation will apply to LLPs – ie, foreign source income that is not remitted to Singapore will not be subject to Singapore income tax.
Although the Singapore LLP is still a relatively new type of entity it is proving a popular vehicle.
The above changes highlight how Singapore has made itself the private wealth planning centre in the Asia Pacific region. In particular, the new licensing framework for Singapore Trust Companies can only further enhance Singapore’s reputation as a reliable well regulated yet flexible jurisdiction
It is pleasing to note that MAS has actively sought the views of the trust industry, especially through the Singapore Trustees Association. This is especially true in relation to the regulations, notices and guidelines that have been issued to provide guidance in interpreting the new Trust Companies Act. This way the trust industry in Singapore can play an active role in the development of the new regime.
It is anticipated that with the introduction of this new regime along with taxation enhancements to Singapore trusts that there will be a signifi cant increase in the number of Singapore trusts being established.
The changes to the Trustees Act that took effect in 2005 have replaced the common law rule against perpetuity and replaced it with a statutory maximum period of 100 years. Other changes include a new statutory duty of care for trustees as well as abolishing the principle against excessive accumulation.
Angela Nicolson, General Manager, Asiaciti Trust, Singapore