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Singapore: Fiscal Incentives

Financial Services Industry

Introduction

The Government of Singapore provides a comprehensive package of tax concessions and incentives to businesses, whose very nature reflects the direction in which the state is trying to steer economic development. Singapore is a densely populated country with a high standard of living, a shortage of land and a high cost, highly skilled labor force and accordingly the country comparative advantage lies in the development of high value, export orientated service industries.

In Malaysia by contrast a surplus of land, a large labor pool and low labor costs have resulted in the development of a low value, labor intensive, export orientated manufacturing economy. The result has been that labor-intensive components industries have moved to Malaysia, whereas Singapore has seen the growth of industries engaged in financial services, research & development, the production of computers & robots and computer aided design & manufacturing.

The government plays a key role in driving Singapore's economic development through the granting of fiscal incentives. The allocation of an incentive depends primarily on such considerations as the amount of investment involved, the technical output, the export potential, the employment opportunities and the general conduciveness to Singapore economic activity.

In the 2002 budget, it was announced that:

"Several of the eleven existing incentives will be merged into a single umbrella Financial Sector Incentive (FSI) scheme, which offers simpler administrative procedures and more flexible qualifying criteria. The FSI scheme will offer a concessionary tax rate of 5% for qualifying high growth and high value-added activities and 10% for mature but tax-sensitive activities. As this involves a major revamp of the many existing incentives, the FSI scheme will only be implemented from YA 2004."

In the 2008 budget, the FSI scheme was extended for a period of five years from January 1, 2009 to December 31, 2013 (both dates inclusive)

The FSI scheme is, at the time of writing, open ended and currently continues to offer a 5% tax rate for qualifying high growth and high value-added activities (so called enhanced tier or ET) including: bond, derivatives and equity markets, project and islamic finance, and credit facilities syndication. The standard tier (ST) includes other financial activities such as lending, fund management, trust administration and other financial activities. For the ST a tax rate of 12% applies for qualifying income derived from January 1, 2011, onwards. Prior to that the rate was 10%.

Singapore is emerging as the most popular Asian location amongst hedge fund managers for fund start ups, and in June 2006, Singapore Exchange Ltd (SGX) announced that it would accept listings of hedge funds from the end of that month.

Although eligible hedge funds were listed, however, there was to be no trading in their units on SGX. Typically, issue and redemption takes place in the over-the-counter market.

The new listing rules for hedge funds had the following key features:

A hedge fund must:

  • Be authorised or recognised under section 286 or 287 of the Securities and Futures Act; or be offered only to institutions and/or accredited investors.
  • Have a minimum asset size of at least SGD20 million (at the time the new rules were introduced) or US$20 million for Singapore and foreign currency denominated funds respectively.

Under additional rules:

Fund managers are required to have in place an independent risk management function.

The investment management team of a hedge fund is expected to have at least one principal with a minimum of five years relevant investment management experience.

A hedge fund will announce its net asset value per unit, as soon as practicable after each month end, but in any event no later than seven business days.

In addition, a fund must immediately announce any material change relating to its operations, including but not limited to, any change in its investment manager, custodian, administrator or independent auditor. 

The factor that has appeared to spur hedge fund growth in Singapore is the relatively short time taken to register a fund in the city-state, an issue identified by hedge fund managers as the most crucial.

In his 2006 budget, Lee Hsien Loong announced a range of tax and other initiatives aimed at spurring growth in the financial services and asset management industry. Among the measures designed to promote the development of Singapore as a financial centre were enhanced tax incentives for asset and wealth management, capital and treasury markets, and captive insurance.

With a view to encouraging the growth of financial services companies the Government grants the following categories of fiscal incentives:

  • Trading Income: Capital gains and income made by financial service companies trading investments for and on behalf of their non-resident clients are often tax exempt both in the hands of the financial services company and in the hands of the non-resident client. The effect of this incentive is to make Singapore an attractive location for foreigners to base their investments.
  • Fee Income: Concessionary tax rates are levied on profits earned by financial services companies in respect of income earned billing clients for investment services rendered. Profits distributed as dividends are also granted a concessionary tax status.

 

Fund Management

Fund management companies have traditionally been entitled to the following fiscal concessions:

  • Fee income received by fund management companies in respect of services rendered are exempt from corporate income tax for a period of 5 years provided the fund management company manages an asset portfolio with a value in excess of SGD5m (at the time of writing). The exemption period can be 10 years if the fund managers can make suitably strong commitments to significantly increase their level of fund management activities in Singapore. The exemption is granted by the monetary authority of Singapore on a case by case basis.
  • Dividends: In Singapore there are no withholding taxes levied on dividends. Instead dividends are taxed at the standard rate, with a tax credit being given for any corporate tax levied on the profits out of which dividends are paid. Where there is a shortfall between the tax credit and the standard rate charge levied on dividends the shortfall must be made up by the company paying the dividend and not by the shareholder receiving it. Companies engaged in fund management are exempt from any further taxation on the shortfall in so far as that shortfall is caused by the concessionary fiscal status granted to the company.

Regulatory changes introduced in 2004 meant that international fund managers are no longer required to maintain a physical presence in the territory, and are permitted to make their funds available via private banks.

The number of hedge funds in Singapore grew from just eight in 2001 to more than 50 in 2004. However, accounting firm PricewaterhouseCoopers warned that future growth in the industry would be stifled unless the government made key changes to tax legislation.

The firm called on the government to address the rule requiring at least 80% of investments in foreign hedge funds to have originated from overseas in order for them to qualify for tax exemption.

"They probably have to relook at the 80-20 rule,” observed Deepak Kaul, Manager, Corporate Tax Services, PwC. He added: “I think the easiest thing is to do is to relax the imposition of the 80-20 rule, maybe make it applicable over a period of time. In which case then, even fund managers who are not meeting the 80-20 rule initially will be incentivised to actually start up in Singapore."

Singapore's Prime Minister Lee Hsien Loong responded by announcing in his 2005 budget that start-up fund managers would be given a 12-month grace period to meet the requirement that 80% of share capital must come from foreign investors to qualify for a 10% tax rate on fee income.

The 80-20 rule was rescinded by the Monetary Authority of Singapore (MAS) in August 2007, and the requirements for benefiting from the aforementioned tax exemption were significantly loosened.

The other aspect of hedge fund taxation that industry participants called for to be changed was the level of the 10% tax, considered somewhat high by many. By cutting this levy to 5%, observers believed that Singapore would be able to continue to carve out a niche as a centre for the management of Indian, Japanese and Korean-based funds, in addition to capturing some of the growing interest in specialist Islamic hedge funds.

In his 2005 budget speech, Lee Hsien Loong announced that foreign non-individual investors would be encouraged to invest in the Singapore property market with a proposed reduction in the withholding tax on REIT distributions to 10% from 20%, for a period of five years. Additionally, to attract more REIT listings, the government wants to waive stamp duty on the instruments of transfer of Singapore properties into REITs to be listed, or already listed on the SGX, for a five-year period.

In his Budget Speech for the Financial Year 2009, which was delivered in Parliament on Thursday, January 22, 2009, Minister for Finance, Tharman Shanmugaratnam announced that the tax exemption schemes for foreign investors and qualifying resident funds, and tax incentive schemes for approved trustee companies and financial sector incentive companies would be enhanced by expanding the list of specified income and designated investment.

 

Bond Market

Debt market tax concessions have traditionally included:

  • A concessionary tax rate of 10% on interest income from holding qualifying debt securities arranged in Singapore.
  • Withholding tax exemption on interest from qualifying debt securities arranged in Singapore payable to non-residents.
  • Withholding tax exemption on swaps in relation to SGD bond issues. Issuers are automatically waived from the requirement under S45 of the Income Tax Act to withhold tax on interest paid on qualifying debt securities.

 

Foreign Securities Companies

Companies which deal in foreign securities have traditionally been entitled to various fiscal concessions. The rate of corporate income tax payable depends on the nature of the activity. For example:

  • A corporate income tax rate of 10% is payable on income earned from providing advice to and buying and selling foreign securities on behalf of non-residents.
  • Income earned from arranging and underwriting initial public offerings of foreign currency denominated shares on the Singapore stock exchange and from transactions in respect of the same are exempt from corporate income tax.
  • Dividends: In Singapore there are no withholding taxes levied on dividends. Instead dividends are taxed at the standard rate, with a tax credit being given for any corporate tax levied on the profits out of which dividends are paid. Where there is a shortfall between the tax credit and the charge levied on dividends the shortfall must be made up by the company paying the dividend and not by the shareholder receiving it. Companies which deal in foreign securities on behalf of non-residents are exempt from any further taxation on the shortfall in so far as that shortfall is caused by the concessionary fiscal status granted to the company.
  • Commodity derivatives: Under this scheme, a concessionary tax rate of 5% will be granted for income derived from qualifying activities undertaken by a financial institution granted Commodity Derivatives Traders (CDT) status.

 

Financial Services Processing Companies

To promote Singapore as the hub for high value-add processing activities, a tax incentive scheme for Qualifying Processing Services Company ("QPC") was introduced in 2004.

This scheme aimed at encouraging companies which undertake high value-added processing services supporting financial institutions to set up their operations in Singapore. Under this scheme, a QPC would be granted concessionary tax rate of 5% on income derived from the provision of the prescribed processing services, which are in support of financial activities such as Treasury and Securities, Asset Management, Private Banking, Wholesale Banking and Retail Banking.

Examples of core processing services which are eligible under the scheme are settlement and reconciliation, cash management, product control, securities borrowing/lending processing, portfolio valuation, etc. In addition, ancillary services such as risk management, IT processing, financial control, compliance and legal, and management information and reporting, which are in support of the core processing services, may also be eligible under the incentive.

 

Credit Rating Agencies

With a view to encouraging the growth of companies which provide credit rating services on foreign securities such companies have traditionally been entitled to the following fiscal concessions:

  • Profits are subject to an indefinite 10% concessionary tax rate.
  • Dividends: In Singapore there are no withholding taxes levied on dividends. Instead dividends are taxed at the standard rate, with a tax credit being given for any corporate tax levied on the profits out of which dividends are paid. Where there is a shortfall between the tax credit and the charge levied on dividends the shortfall must be made up by the company paying the dividend and not by the shareholder receiving it. Companies which deal in foreign securities on behalf of non-residents are exempt from any further taxation on the shortfall in so far as that shortfall is caused by the concessionary fiscal status granted to the company.

 

R&D Expenses (Financial Products Research)

This incentive, which was designed to encourage financial institutions in Singapore to develop new and innovative financial products, has traditionally allowed double tax deduction for expenses such as the cost of R& D personnel, legal expenses, training costs and consultancy fees. The Innovation in Financial Technology & Infrastructure Grant (ITIG) Scheme, introduced in 2004 (now named the Further Deduction for R&D Expenses Scheme), was launched to encourage innovation in technology and/or infrastructure in financial services. The scheme was designed to target Singapore-registered companies, and offer grants for qualifying expenses with respect to innovation in financial technology and/or infrastructure activity in Singapore.

 

Approved Trustee & Custodian Companies

The Tax Incentive Scheme for Approved Trustee Companies has traditionally been aimed at encouraging the development of reputable trustee companies and banks to offer international trust administration and custodian services in Singapore, as well as to complement the growth of the fund management industry in Singapore. Under the scheme, an Approved Trustee Companies (ATC) would be granted a 10% concessionary rate on income derived from the following:

  • Trustee or custodian services in respect of a foreign trust created in writing, i.e. where both the settlor and beneficiaries of the trust are not residents or citizens of Singapore (and, if a company, not incorporated in Singapore or controlled by persons who are residents or citizens of Singapore);
  • Trustee or custodian services for or on behalf of a unit trust which is not owned or controlled by Singapore residents or citizens, and whose funds are invested in "designated investments";
  • Trustee or custodian services in respect of foreign bond or loan stock issues (e.g., monitoring loan covenants, administering loan repayments);
  • Custodian services for foreign currency denominated stocks and shares issued by companies not incorporated and not resident in Singapore; and
  • Provision of trust management or administration services to foreign trusts of which it is not the trustee, including the setting up and administration of eligible investment holding companies for such trusts.

 

Offshore Insurance Business

To encourage insurance companies, in particular professional reinsurers and captives to set up operations in Singapore to write offshore business, a concessionary tax rate of 10 per cent has traditionally been granted to insurance companies on income derived from:

  • Underwriting profits of offshore insurance business; and
  • Non-Singapore sourced dividends, realised capital gains and interest including interest on Asian Currency Unit (ACU) deposits, derived from investing offshore premium income and shareholders' funds used to support the offshore insurance business.

The Tax Exemption Scheme for Marine Hull & Liability Insurance Business aims to encourage all general direct insurance and reinsurance companies (including P&I clubs) in Singapore to tap the insurance potential of the shipping communities in the Asia Pacific region. It provides tax exemptions for income derived from underwriting profits of marine hull and liability business, as well as non-Singapore dividends, realised capital gains and interest, including Asian Currency Unit (ACU) deposits, derived from investing premium income from offshore marine hull & liability insurance business and shareholders' funds used to support the marine hull & liability insurance business.

Singapore's 2006 budget gave tax exemption to captive insurance companies for a period of 10 years on specified types of income; the exemption will be available until 2011.

 

 

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