FAMILY OFFICES: Singapore adjusts tax incentives for family offices, which must also do more to boost local hires

Singapore’s central bank will step up incentives and requirements to encourage single family offices (SFOs) to contribute more to environmental and social causes as well as jobs here.

Some 1,100 SFOs – which each handles the assets of only one wealthy family – had been awarded tax incentives by the Monetary Authority of Singapore (MAS) as at end 2022. This figure was up from 700 at end 2021.

MAS managing director Ravi Menon said the Republic has attracted large inflows of wealth to be managed here and this must benefit Singapore and serve a larger purpose.

He noted that MAS already has tax incentives to encourage SFOs to create jobs, generate demand for domestic service providers and channel capital to enterprises here. 

Going forward, SFOs which apply for the tax incentive will need to hire at least one investment professional who is a non-family member.

Incentives will also be adjusted to deploy their capital more meaningfully to benefit Singapore and the region with enhancements in five areas.

Firstly, MAS will encourage SFOs to invest in blended finance structures, including those which support the region’s transition to net zero.  

It will broaden the scope of eligible investments to include blended finance structures in which financial institutions in Singapore have been substantially involved.  These structures combine public funds with private sector participation.

MAS will also give more recognition to concessional capital invested in these structures. Concessional capital accepts lower returns or higher risks compared with other investors, and can help to catalyse commercial investments into green and transition projects that are worthwhile, but less attractive financially.

MAS will recognise every dollar of concessional capital invested as equivalent to up to $2 of investments for the purpose of assessing if an SFO has met its investment requirement. 

It will also recognise grants given by SFOs to support blended finance structures. Grants have no expectation of income or return of principal, noted Mr Menon.

“Given their deeply concessional nature, we will recognise as $2 for every dollar of grant given to blended finance structures,” he said at a briefing on MAS’ biannual macroeconomic review on Wednesday.

The central bank will also encourage SFOs to deploy funds to climate-related projects by recognising such investments anywhere in the world, instead of limiting them to Singapore, to assess if the entity has met its investment requirements.

Mr Menon noted that climate change is a global problem that is not bounded by national borders, adding: “As a low-lying island state, Singapore is particularly vulnerable to climate change. We should thus recognise all efforts made to address climate change issues.”

Apart from incentives to encourage giving, MAS will introduce measures to get SFOs to invest more in Singapore companies and workers.

The scope of tax incentives will be expanded to recognise all investments in non-listed companies operating here. These include private credit, and not just private equity investments as is the case now.

MAS will also recognise twice the amount invested in Singapore-listed equities, eligible exchange-traded funds and unlisted funds which invest primarily in Singapore-listed equities, for the purposes of SFOs meeting their investment requirements. 

All new SFO applicants will also need to meet their business spending requirement solely from spending locally, unlike previously when they could do so overseas. SFOs applying for tax incentives are required to incur business spending of $200,000 to $1 million, depending on the size of their funds.

“This will help channel greater benefits to Singapore-based businesses and service providers,” said Mr Menon.

MAS will also encourage SFOs to conduct philanthropic activities through Singapore, both locally and overseas. 

It will recognise donations to local charities alongside normal business spending. It also introduced the Philanthropy Tax Incentive Scheme on Wednesday to encourage giving overseas using Singapore family offices as a base.

The scheme, which was announced in Budget 2023 and will go live on Jan 1, 2024, will allow qualifying donors in Singapore to claim a 100 per cent tax deduction, capped at 40 per cent of the donor’s statutory income, for overseas donations made through qualifying local intermediaries.

“We hope the introduction of (the scheme) will encourage philanthropic giving to become a regular, professional feature of family offices here,” said Mr Menon.

MAS will also take additional measures to combat money laundering in the SFO sector, which it identifies as a key risk when it comes to wealth inflows into Singapore.

It will require all SFOs to notify MAS when they commence operations and also annually, and maintain a business relationship with a MAS-regulated financial institution that would perform anti-money laundering checks on these offices.

MAS will release a public consultation paper on these proposals in July.

Mr Menon explained that while money laundering is a key risk, the wealth that technically flows into Singapore through SFOs does not impact other aspects of the market or economy.

“Wealth inflows into Singapore have little effect on the exchange rate, domestic inflation, property prices or car prices,” he added.

“The reason for this is simple: While the wealth is managed here, most of it is invested outside Singapore. This means that the wealth inflows typically remain in foreign currencies and have little or no effect on the Singapore dollar exchange rate. Singapore is just an intermediary for these flows.

“As for inflation, it has little to do with wealth inflows into Singapore, let alone the portion due to SFOs. The step-up in inflation since late 2021 was mainly due to sharp increases in global energy and food prices, and stronger domestic wage growth,” he added.