It has been a volatile 2007 for the stock markets, and perhaps not a good start to 2008. But one certainly can’t say the same of Singapore’s policies towards the fund management industry. The policy has been stable and consistent in wooing fund managers to set up shop here. The government has adopted a proactive approach in building its position as a key fund management centre in Asia.
Singapore's pro-business regulations, mature infrastructure and government support for the wealth management sector continue to be draw cards for fund managers. These factors, coupled with an attractive tax environment have reinforced Singapore’s strong foothold in the region. One of the common tools used by the government to further stimulate growth in this industry is tax incentives. The government has continued to fine-tune tax incentives in the fund management industry to keep Singapore a step ahead of other financial centres.
Singapore’s initiatives have reaped rewards, and there is an increasing number of fund managers from leading financial centres such as Tokyo, New York and London, setting up shop in Singapore.
So what has Singapore to offer from a tax perspective that makes it attractive for fund managers to set up shop here?
Three key tax incentives, which are noteworthy, have been put in place. These are:
- Tax exemption for offshore funds
- Tax rate of 10% for the fund manager
- Tax exemption for Singapore resident funds
Tax Exemption for Offshore Funds
To encourage fund managers to set up shop here, Singapore has in place a tax incentive scheme, which exempts offshore funds from tax. Under this scheme, broadly speaking, a qualifying fund will be granted tax exemption, provided it is not 100% owned by Singapore investors. Tax, if any, will be collected from the investor depending on his specific profile.
Some key elements of the scheme are as follows:
- A qualifying fund, in the context of a company, is a company that is not resident in Singapore, and where the value of its issued securities is not 100% beneficially-owned by investors in Singapore (which includes resident individuals, resident non-individuals and Singapore-based permanent establishments of non-residents) and the company does not have a Singapore presence or business activity (other than a fund manager).
- A qualifying investor is:
- An individual investor
- A “bona fide non-resident non-individual investor” that:
- does not have a Singapore presence or business activity (other than a fund manager), or
- has a permanent establishment in Singapore but does not use funds from its operation in Singapore to invest in the qualifying fund.
- Certain specified Singapore Government entities
- An investor other than those listed in (i), (ii) and (iii), where the investor owns not more than 30% (50% where there are ten investors or more in the fund) of the qualifying fund.
The definition for “bona fide non-resident non-individual investor” is “one which carries out substantial business activities for genuine commercial reasons and has not as its sole purpose – the avoidance or reduction of tax”.
- An investor that does not come within the definition of a qualifying investor is a non-qualifying investor. Non-qualifying investors will have to pay the financial amount (ie a quasi-tax or penalty) to the Inland Revenue Authority of Singapore (IRAS). This is calculated by attributing a percentage of the income figure in the qualifying fund’s audited accounts to that non-qualifying investor, based on his interest in the fund on the last day of the financial year.
- To implement the collection of the financial amount, certain reporting requirements are imposed on the fund manager and non-qualifying investors.
This scheme is attractive since it offers the fund manager certainty that his offshore funds as well as the investors in these funds are tax exempt, as long as the specified conditions are satisfied.
Tax Rate of 10% for the Fund Manager
In addition, to the exemption granted to the offshore funds, Singapore incentivises the fund manager by offering a tax incentive scheme which reduces his tax rate on fee income to 10%. This scheme, which requires pre-approval from the authorities, applies to fund managers who employ at least three investment management professionals. Most of the other conditions that apply to the 10% rate on fee income are aligned to the scheme for offshore fund exemption.
This scheme coupled with the fact that Singapore dividends are tax free, is attractive, since the 10% tax paid on the fee income at the level of the fund manager (company) will be the final tax paid by the shareholders of the fund manager.
Tax Exemption for Singapore Resident Funds
As mentioned above, to encourage fund managers to set up shop here, Singapore has in place a tax incentive scheme, which exempts offshore funds from tax. Previously, the fund had to reside outside of Singapore in order for it to be eligible for this exemption. In 2006, the Singapore resident fund scheme was introduced to allow funds set up as companies in Singapore to claim the same benefits as offshore funds. The government recognised that the non-residency condition was hindering the development of the asset servicing sector in Singapore because even though fund management operations were taking place in Singapore, the actual funds had to be set up and serviced outside of the country.
Apart from the obvious appeal to the Singapore fund manager of having a fund in the location where he himself resides, Singapore’s wide treaty network is an added advantage because it reduces taxes in the countries that the fund invests in.
The Singapore resident fund scheme requires pre-approval from the authorities and although to some extent it is aligned to the offshore fund exemption scheme, some additional conditions have been imposed.
Conclusion
The investment management industry in Asia is experiencing tremendous growth, and hedge funds are contributing significantly to this uptrend. According to a report published in October 2007 by McKinsey & Company, hedge fund assets under management were estimated to be worth US$1.7 trillion in mid-2007. This was projected to reach US$3.5 trillion by 2012.
Singapore is well-positioned to capitalise on the enormous potential this industry offers.