Introduction

To foster the growth of Singapore’s private wealth and fund management industry, Singapore introduced tax incentive schemes for funds managed by Singapore-based fund managers, which exempt “specified income” derived from “designated investments”. These incentives are set out under Sections 13O, 13U and 13D of the Income Tax Act 1947 and administered by the Monetary Authority of Singapore (MAS).

In this article, we set out an overview of Singapore’s tax regime for fund management. We will also explain how the 13O, 13U and 13D tax incentives can address potential Singapore income tax issues. Do note that the conditions listed in this article only apply to fund vehicles which hold assets for or on behalf of third parties outside of the family(ies) which own or control the fund vehicles. A different set of conditions would apply for fund vehicles which hold assets for or on behalf of family(ies) and are wholly owned or controlled by members of the same family(ies) (i.e., single family offices) applying for the Section 13O and the 13U tax incentives.

Singapore Tax Regime for Fund Management

As a general rule, only income that is sourced in or received in Singapore is subject to tax. Singapore resident individuals are subject to tax on Singapore-sourced income at progressive rates of up to 24%, while companies are subject to tax at a flat rate of 17%, subject to any applicable incentives.

On the other hand, Singapore does not impose a tax on capital gains.

Whether gains are income or capital is a factual question and requires an analysis of a range of factors, such as the frequency of similar transactions, length of holding period and the motive of the taxpayer. In general, gains from the disposal of investments may be treated as Singapore-sourced income if such gains arise from activities of a trade or business being carried on in Singapore, unless any exemption applies.

The Section 13D, 13U and 13O tax incentive schemes provide a tax exemption on “specified income” (SI) derived from “designated investments” (DI) and aims to provide certainty on the tax treatment of such gains.

Section 13O: Onshore Fund Tax Incentive Scheme

This incentive is also known as the Onshore Fund Tax Incentive Scheme. It was introduced to encourage the establishment and management of onshore funds in Singapore.

Section 13O exempts SI derived by an “approved company” from funds managed by a Singapore-based fund manager in respect of DI. The list of DI includes shares, stocks, debt securities, etc. Distributions by the fund out of SI will be similarly exempt in the hands of the fund’s investors.

Application to the MAS is required. The fund must, amongst other conditions, be tax resident in Singapore (i.e. the control and management of the business must be exercised in Singapore). The fund must also be managed by a Singapore-based fund management company who holds, or is exempted from holding, a capital markets services licence. If the fund is resident in Singapore, it must also, if necessary, be administered by a Singapore-based fund administrator.

There is no minimum fund size requirement to qualify for the Section 13O exemption. However, the fund must incur at least S$200,000 in expenses in each financial year.

Certain categories of investors who are not “qualifying” investors of the fund may also be subject to a financial penalty. In general, “qualifying” investors are limited to individual investors and foreign tax resident entities not operating in Singapore or whose investment capital is not derived from Singapore operations. This therefore rules out most Singapore companies as “qualifying” investors and is intended to ensure that the tax exemption is not used by Singapore companies as a means for tax avoidance.

Section 13U: Enhanced Tier Tax Incentive Scheme

This incentive is also known as the Enhanced Tier Tax Incentive Scheme, which is the broadest in scope, as it applies to both onshore and offshore fund and accommodates the widest range of fund structures.

Section 13U exempts SI derived by an “approved person” from funds managed by a Singapore-based fund manager in respect of DI. Distributions by the fund out of SI will be similarly exempt in the hands of the fund’s investors.

Application to the MAS is required. Unlike Section 13O, a Section 13U fund must have a minimum fund size of S$50 million at the point of application. It must also incur a minimum of S$200,000 annually in local business spending. In addition, the fund must employ a minimum of 3 investment professionals. If the fund is resident in Singapore, it must be administered by a Singapore-based fund administrator.

Unlike Section 13O and 13D, Section 13U does not impose any financial penalties on non-“qualifying” investors. Therefore, it generally allows for the broadest range of investors.

Section 13D: Offshore Fund Tax Incentive Scheme

This incentive is also known as the Offshore Fund Tax Incentive Scheme. It is designed to attract foreign investors to use Singapore-based fund managers to manage their offshore fund vehicles.

Section 13D exempts SI derived by a “prescribed person” from funds managed by a Singapore-based fund manager in respect of DI. Distributions by the fund out of SI will be similarly exempt in the hands of the fund’s investors.

No application to the MAS is required. Section 13D is also attractive as it does not impose a minimum fund size requirement nor a minimum local expenditure requirement, as compared to the 13O and 13U incentives. To qualify for this exemption, the fund must, amongst other conditions, not be resident in Singapore (apart from the Singapore-based fund manager) and must be managed by a Singapore-based fund manager who holds, or is exempted from holding, a capital markets services licence in Singapore.

Previously, for a fund to qualify as a “prescribed person”, less than 100% of the aggregate value of the fund must be beneficially held by “Singapore persons” (generally, Singapore citizens or residents). This condition has been removed effective from YA 2020, allowing for local investors to benefit from the 13D incentive. However, financial penalties will apply to non- “qualifying” investors, as set out under the 13O incentive above.