Singapore: Recent legislative changes affecting the private wealth planning industry

The combination of Singapore’s strong banking secrecy rules, generous tax incentives, as well as its highly regarded international reputation, continues to attract many high net worth individuals to Singapore. Singapore is now being increasingly referred to as ‘Asia’s Switzerland’.

There have not been as many legislative changes in the Singapore jurisdiction relating to the private wealth planning industry as there were in 2006. However, the impact of the many changes made in 2006 are still being felt.

Singapore now has around 40 private banks catering to the needs of the wealthy, and this number is likely to grow as the country continues to strive to become the international finance centre of choice for the region.

Some of the more important developments during the year include:

Trust Licensing Regime

During the 2006 year, the Monetary Authority of Singapore (MAS) required all companies offering trust services to apply for a trust licence. MAS has now nearly completed its review of the application from existing Trust Companies.

As at 25 September 2007, 35 companies were granted licences to carry on trust business. It is expected that this number will increase as new applicants are attracted to the jurisdiction. As at the same date, 31 companies were granted exemptions for obtaining the licence. These were primarily granted to banks, merchant banks, advocates and solicitors. Of note is that licensed trustee companies are only charged tax on their income at the rate of 10 per cent, instead of the normal corporate rate of 18 per cent; a further incentive to encourage companies to set up trust businesses in Singapore.

The only major development in relation to the licensing regime is that the “Notice to Trust Companies on Prevention of Money Laundering and Countering of Financing of Terrorism (MAS Notice TCA-NO 3)” was re-issued on 2 July 2007, with the original notice being cancelled. The Notice has been further enhanced to assist trust companies in augmenting their internal policies and procedures to ensure compliance with various legislation, guidelines and notifications. MAS also regularly conducts “Outreach Sessions” on “The Prevention of Money Laundering and Countering of the Financing of Terrorism”, organised in conjunction with The Singapore Trustee Association. Again, this highlights MAS’ consultative approach.

As expected, the Singapore trust has proved to be a popular structure for high net worth individuals. During the last year, there has been a dramatic increase in the number being established.

Taxation

Companies

The major change announced in Singapore’s budget in February 2007 is the decrease in the corporate tax rate from 20 per cent to 18 per cent. The corporate tax rate in Singapore has been steadily decreasing in the last 1ten years from a rate of 27 per cent. This takes effect for the year of assessment 2008. This reduction is seen by many as a direct attempt to have a more competitive tax rate compared to Hong Kong.

The current Hong Kong tax rate is 17.5 per cent. However, Singapore companies enjoy various concessions which actually decrease the average rate to below 18 per cent. Some of these concessions include increasing the corporate tax exemption threshold from $SGD 100,000 to $SGD 300,000 (effective from the year of assessment 2008). These exemption rates are as follows:

• 75 per cent exemption for the first $SGD 10,000 of chargeable income.
• 50 per cent exemption for the next $SGD 290,000 of chargeable income.

This changes the effective tax rate to:

• First $SGD 10,000 4.5%
• Next $SGD 290,000 9.0%
• In excess of $SGD 300,000 18%

For a company that earns $SGD 300,000, the amount of tax payable will be $SGD 26,550. The equivalent amount payable in Hong Kong on the same income would be $SGD 52,500.

There are also specific exemptions for start-up companies and SMEs. The main change announced during the year is that there is no longer an expiry date for certain concessions. Previously, there was an expiry date of the year of assessment 2009.

As with the concession for licensed trust companies, other types of companies involved in the private wealth planning industry also receive concessions. These include fund management companies and insurance companies. To gain access to the different concessions, there are various conditions that must be satisfied, including the company’s being a tax resident in Singapore.

Individuals

It was anticipated that the individual tax rate would be reduced in line with the reduction in the corporate tax rate. However, no change was announced in the budget this year to reduce the individual tax rate from the current top rate of 20 per cent.

The tax rates for resident individuals remain at:

Rate

First 20,000 Nil

20,001 to 30,000 3.5%

30,001 to 40,000 5.5%

40,001 to 80,000 8.5%

80,001 to 160,000 14%

160,001 to 320,000 17%

320,001 and above 20%

Compared with many other jurisdictions, these rates are quite low. In addition, the tax system for resident individuals in Singapore is on a remittance basis - i.e. only Singapore-sourced income is taxable in Singapore. Even if the income is remitted to Singapore, it remains exempt from tax.

However, with effect from the year of assessment 2008, a non-resident individual is subject to tax on Singapore sourced income at the rate of 18 per cent (previously it was 20 per cent). Notably, Singapore employment income is taxed at the lower flat rate of 15 per cent. Also important to note is that non-resident individuals have always been granted tax exemption for any foreign-sourced income, regardless of whether it has been remitted to Singapore.

Goods and Services Tax (GST)

Singapore levies GST on all goods and services other than financial services, and the sale and lease of residential properties. With effect from 1 July 2007, GST has increased from 5 per cent to 7 per cent.

Double Tax Treaties

One of the main advantages of the Singapore jurisdiction is its extensive double tax treaty network. Currently, Singapore has 57 double tax treaties, with eight treaties signed but not ratified. Of note during the 2007 year is that a new double tax treaty was signed between China and Singapore (it is yet to be ratified). Singapore currently has a double tax treaty with China, but this new one has lowered withholding tax rates for dividends and royalties. Singapore also signed new double tax treaties with The Ukraine and Morocco, although both are still awaiting ratification.

Corporate Reform

A practical directive was issued on 2 April, 2007 in relation to the manner in which financial statements for Singapore companies are lodged with the Accounting and Corporate Regulatory Authority (ACRA ).

From 1 November, 2007, companies must lodge their financial statements with ACRA in “Extensible Business Reporting Language”, instead of the current PDF format. This is to bring Singapore in line with the best practice regime of various other regulators worldwide. Its introduction is designed to provide greater access to corporate financial data, facilitate one-stop filing, and strengthen regulatory vigilance.

Limited Partnerships

Limited Liability Partnerships were introduced in Singapore in April 2005. They have proved to be a highly effective tool for international tax-planning and wealth management structuring. It is now likely that Limited Partnerships (LPs) will be introduced as law by the end of 2007. Although they are not likely to be as popular as either Singapore companies or Limited Liability Partnerships, they will increase the options available. In particular, it is envisaged that LPs will be suitable for private equity and fund investment business. A LP will have at least one partner whose liability will be unlimited (referred to as ‘the general partner’). A LP can also have one or more partners who will not be personally liable for the debts, obligations and liabilities of the LP (called ‘limited partners’). Limited partners will not be allowed to take part in the management of the LP. A LP will also be tax-transparent, and all the partners will be taxed on their share of the income or gains of the LP.

The above changes again highlight how Singapore is proactively developing the Singapore jurisdiction as a Centre of Excellence. It is envisaged that the private wealth planning industry will continue to grow strongly in Singapore due to the various legislative changes specifically targeted to attract this industry.