Stricter Conditions For Family Office Structures Seeking Tax Exemptions In Singapore

Its value proposition is built on having political and economic stability, strong rule of law and access to both local and international talent[i]. The small island state has also long been attractive for high-net worth individuals and families looking to set up family offices to manage or grow their wealth.

In addition to being a leading wealth management centre, Singapore has continually built a conducive environment for fund managers, including very established players as well as single and multi-family offices. To this end, the Monetary Authority of Singapore (MAS) has in place several tax exemption schemes for fund vehicles that are managed by Singapore-based fund managers.

While there are a number of tax exemption schemes available, we will consider in this article two such schemes under the Income Tax Act 1947 (ITA) that can benefit fund vehicles which hold assets for members of the same family managed by Singapore-based family offices. It is useful to note that many of these tax exemption schemes were originally calibrated to promote fund management activities in Singapore and were not particularly meant to benefit single family office structures. However, with the recent increase in the number of family offices being set up in Singapore, the applications for such tax exemptions have also gone up. To this end, the MAS, which is the gatekeeper for such tax exemptions, have tightened some of the conditions for these incentives fund vehicles which hold assets for members of the same family managed by Singapore-based family offices.

Section 13U ITA Tax Exemption (13U tax exemption)

The key conditions for the 13U tax exemption are set out below:

Fund Vehicle: There is no restriction on the form of the fund vehicle. Besides companies, trusts and limited partnerships, all fund vehicles will be able to qualify for the 13U tax exemption if it meets all qualifying conditions.

AUM: There a requirement of a minimum fund size of S$50,000,000 at the point of application for the 13U tax exemption.

Fund Management Company: The fund vehicle must be advised by a Singapore-based fund management company holding a capital markets services licence for fund management (CMS licence), expressly exempted from holding a CMS licence or as otherwise exempted by MAS under section 99(1)(h) of the Securities and Futures Act 2001. For structures that involve a Singapore based family office, the said family office may also be considered to be a Singapore-based fund management company and will be required to either be a CMS licence holder or expressly exempted from such requirement (SFO).

Investment Professionals*: For the purposes of the 13U tax exemption, there is a requirement for the SFO to hire a minimum of three investment professionals, each with a salary of more than S$3,500 per month and engaging substantially in the qualifying activity (i.e. investment management activities). At least one of the investment professionals must also be a non-family member (being an individual who is not a family member of the beneficial owner(s) of the fund vehicle). If the SFO is unable to employ one non-family member at the point of application for the 13U tax exemption, a one-year grace period is given for this condition to be complied with.

Minimum Local Business Spending*: The fund vehicle must incur at least S$500,000 in local business spending for each basis period (i.e. in each financial year). This may include fees paid to the SFO, local lawyers, local accountants etc. In the event the fund vehicle has an AUM of more than or equal to S$100,000,000, the minimum local business spending of the fund vehicle is increased to S$1,000,000.

Investment Objective Strategy: The fund vehicle must not change its investment strategy or objective after being approved by MAS. If it does, it will have to get prior approval from MAS before doing so.

Local Investment*: The fund vehicle must invest at least 10 per cent of its AUM or S$10 million, whichever is lower, in local investment at any one point in time. Local investments include investments in equities listed on Singapore exchanges; qualifying debt securities; units of funds distributed by fund managers licensed or registered by MAS; and private equity investments in Singapore incorporated companies operating in Singapore. If the fund vehicle is unable to meet this condition at the point of application for the 13U tax exemption, the fund vehicle is given a one-year grace period to comply.

*These enhanced conditions have come into effect from 18 April 2022 and have become more stringent compared to those before 18 April 2022.

Section 13O ITA Tax Exemption (13O tax exemption)

The key conditions for the 13O tax exemption are set out below:

Fund Vehicle: Only fund vehicles incorporated as a company in Singapore will be able to qualify for the 13O tax exemption if they meet all qualifying conditions.

AUM*: There is a requirement of a minimum fund size of S$10,000,000 at the point of application for the 13O tax exemption. The fund vehicle has to increase its AUM to S$20,000,000 within a two-year grace period.

Fund Management Company: The fund vehicle must be advised by a Singapore-based fund management company/SFO holding a CMS licence, expressly exempted from holding a CMS licence or as otherwise exempted by MAS under section 99(1)(h) of the Securities and Futures Act 2001.

Investment Professionals:* For the purposes of the 13O tax exemption, there a requirement for the SFO to hire a minimum of two investment professionals, each with a salary of more than S$3,500 per month and engaging substantially in the qualifying activity (i.e. investment management activities). If the SFO is unable to employ two investment professionals at the point of application for the 13O tax exemption, a one-year grace period is given to employ the second investment professional.

Business Spending*: The total business spending of the fund vehicle is at least S$200,000 for each basis period (i.e. in each financial year) if its AUM is below S$50,000,000. If the fund vehicle’s AUM is equal to S$50,000,000 but less than S$100,000,000, the minimum total business spending of the fund vehicle is increased to S$500,000 for each basis period. If the fund vehicle’s AUM is more than or equal to S$100,000,000, the minimum total business spending of the fund vehicle is further increased to S$1,000,000 for each basis period. 

Investment Objective Strategy: The fund vehicle must not change its investment strategy or objective after being approved by MAS. If it does, it will have to get prior approval from MAS.

Local Investment*: The fund vehicle must invest at least 10 per cent of its AUM or S$10 million, whichever is lower, in local investment at any one point in time. Local investments include investments in equities listed on Singapore exchanges; qualifying debt securities; units of funds distributed by fund managers licensed or registered by MAS; and private equity investments in Singapore incorporated companies operating in Singapore. If the fund vehicle is unable to meet this condition at the point of application for the 13O tax exemption, the fund vehicle is given a one-year grace period to comply.

*These enhanced conditions have come into effect from 18 April 2022 and the conditions have become more stringent.

Common Structures Used By Families

One commonly used structure by families when setting up a family office is as follows:

Company A will be legally and beneficially owned by members of the same lineal family. In the above scenario, as Company A and B would be deemed "related corporations" under the Companies Act 1967, the SFO would also be exempted pursuant to certain provisions under the Securities & Futures (Licensing and Conduct of Business) Regulations and will not require a CMS licence to carry out its intended fund management activities (related corporation exemption).

There may be other more complicated structures that families adopt and in some cases, trusts (which are legal arrangements) may also be involved. In cases where the structures are more complicated, the related corporation exemption may not be applicable and other exemptions may need to be relied on.

Conclusion

While Singapore continues to be a leading wealth management centre globally and in Asia, the enhanced conditions applicable to the 13O and 13U tax exemptions indicate that MAS would like to ensure that Singapore attracts quality investors that can contribute to the wealth management eco-system in Singapore.

 

Footnotes:

[i] https://www.mas.gov.sg/development/wealth-management