May 31, 2016
The mergers and acquisitions (M&A) allowance and stamp duty relief schemes together form the M&A Scheme. This scheme was first introduced in Budget 2010 to encourage companies in Singapore to grow their businesses through M&A. The scheme has since undergone several enhancements in the recent Budgets 2015 and 2016.
Enhancements to the M&A Scheme in Budget 2016
Under the M&A Scheme, subject to the qualifying conditions, a company (acquiring company) that acquires the ordinary shares of another company (target company) during the period between 1 April 2016 to 31 March 2020 (both dates inclusive) is granted an M&A allowance equivalent to 25% of the value of the acquisition for each year of assessment (YA), capped at S$40 million for each YA. The cap was previously S$20 million in Budget 2015. As a result of the increase in the cap, the claimable amount is now doubled from S$5 million in Budget 2015 to S$10 million in Budget 2016. This translates into a significant amount of S$1.7 million of tax savings for the company (S$10 million x 17% corporate tax rate).
|M&A allowance of 25% of the value of acquisition capped at the respective amount
|Tax savings (Corporate tax rate of 17%)
Stamp duty relief
As a result of the increase in the cap on the M&A allowance to S$40 million, the amount of stamp duty relief which is granted to the acquiring company will now be capped at S$80,000 for each financial year (FY). This relates to the same basis period for the YA for which the M&A allowance is granted for income tax purposes. For stamp duty purpose, where there is a change in accounting period, the Commissioner of Stamp Duties may also, at his discretion, use any other period as reference in applying the cap.
Where both stamp duty relief and M&A allowance are claimed on the same qualifying share transaction, the FY or elected 12-month period for the purpose of stamp duty relief must be identical to the basis period or elected 12-month period for the purpose of claiming M&A allowance.
Transaction costs include legal fees, accounting or tax advisor’s fees, valuation fees and such other professional fees that are necessarily incurred in a qualifying share transaction but do not cover professional and incidental fees in respect of a loan arrangement. Double tax deduction (DTD) will be granted on transaction costs incurred on qualifying share acquisitions completed during the period 17 February 2012 to 31 March 2020, subject to an expenditure cap of S$100,000. The cap of S$100,000 applies to all transaction costs incurred in relation to qualifying share acquisitions made in all target companies for which the claims for M&A allowance are first made in the same YA. This is regardless of when the transaction costs are incurred.
The M&A allowance, stamp duty relief and DTD for qualifying transaction costs are given only if the following conditions are met:
1. the acquiring company:-
(a) is incorporated and is a tax resident in Singapore. Where the acquiring company belongs to a corporate group, its ultimate holding company must also be incorporated and be a tax resident in Singapore. For companies under the Headquarters Tax Incentive Programme (HQ Programme) and Maritime Sector Incentive-Shipping-related Supporting Services Scheme (MSI-SSS Scheme), the Economic Development Board (EDB), the Monetary Authority of Singapore (MAS) or the Maritime and Port Authority of Singapore (MPA) may waive the requirement that the ultimate holding company must be incorporated and is a tax resident in Singapore on a case-by-case basis for share acquisitions completed from 17 February 2012 to 31 March 2020;
(b) is carrying on a trade or business in Singapore on the date of the acquisition of the ordinary shares of a target company;
(c) has in its employment at least three local employees (i.e. Singapore citizens or Singapore permanent residents who and whose employer make CPF contributions), excluding company directors, throughout the period of 12 months prior to the date of acquisition of the ordinary shares of the target company; and
(d) is not connected to the target company for at least two years prior to the date of acquisition of the ordinary shares;
2. where the acquisition is made through an acquiring subsidiary, the acquiring subsidiary:-
(a) does not carry on a trade or business in Singapore or elsewhere on the date of the share acquisition;
(b) is directly or indirectly wholly-owned by the acquiring company;
(c) does not claim any tax benefits under the M&A Scheme, as the deduction will be granted to the acquiring company who must meet the conditions in (1) above; and
(d) the acquiring subsidiary and each intermediate company above it must be set up primarily to hold shares in other companies.
3. the target company or a subsidiary directly or indirectly wholly-owned by the target company (operating subsidiary):-
(a) carries on a trade or business in Singapore or elsewhere on the date of share acquisition; and
(b) has at least three employees working for the company throughout the period of 12 months prior to the date of the share acquisition.
A target company may be incorporated in Singapore or elsewhere. Where it is not able to meet the conditions in (3), the conditions may be satisfied by a subsidiary directly or indirectly wholly-owned by the target company.
4. In addition, the share acquisition must result in the acquiring company owning:-
(a) at least 20% of the ordinary shares of the target company if it owned less than 20% before the date of the share acquisition; or
(b) more than 50% of the ordinary shares of a target company if it owned 50% or less of the ordinary shares of the target company before the date of the share acquisition.
5. Acquiring companies seeking to claim M&A allowance based on the 20% shareholding threshold must, besides meeting the conditions in (1), must also meet two additional conditions:
(a) the target company is considered an associate of the acquiring company under the Singapore FRS 28 or Singapore FRS for Small Companies; and
(b) the acquiring company must have at least one director represented on the board of directors of the target company.
Eligibility conditions during the 5–year write-down period
To remain eligible for M&A allowance for each of the YA during the 5-year write-down period, the acquiring company and its ultimate holding company must meet all the conditions under (1) and (4), and where applicable, the conditions under (5) above. If the acquisition is made through an acquiring subsidiary, the acquiring subsidiary and each intermediate company above it must meet all the conditions under (2) above. If any of the eligibility conditions is not met for any YA during the 5-year write-down period, the M&A allowance ceases to apply from that YA onwards.
The enhancements to the M&A scheme are in line with the continued efforts of the government to encourage local SMEs to expand and grow through acquisitions. In particular, the increase in the cap of the M&A allowance from S$5 million to S$10 million would allow larger SMEs to potentially partake in more ambitious acquisitions. SMEs that have the ambition and are prepared to take charge of their future should look to fully capitalise on the M&A allowance sooner rather than later.
Dentons Rodyk acknowledges and thanks Sarah Choong for her contribution in the writing of this article.