Amendments to the Singapore Fund Tax Incentive Schemes – Is it all about regular funds or also single family offices?

On 1 October 2024, in line with the announcements made in the Singapore Budget 2024, the Monetary Authority of Singapore (MAS) issued a long-awaited Circular on Singapore’s fund tax incentive schemes, specifically Sections 13O, 13U, and 13D of the Singapore Income Tax Act 1947 (ITA). Additionally, the Circular provided details of a new tax incentive scheme under Section 13OA of the ITA, applicable to Singapore Limited Partnerships (LP).

The aim of these amendments is to further support the growth of Singapore’s asset and wealth management industry and to ensure economic substance in Singapore for incentivized fund structures. The key highlights of the circular are outlined below.

The amendments will be effective as from 1 January 2025.

 

Extension of the Tax Incentive Schemes for Funds

The tax incentive schemes under Sections 13O, 13U, and 13D have been extended until December 31, 2029. Additionally, the MAS has confirmed that the Goods and Services Tax (GST) remission and the withholding tax (WHT) exemption on interest and other qualifying payments made to non-residents by incentivized funds will continue to apply and remain unchanged.

 

Section 13O and 13U

The common amendments applicable to both Section 13O and 13U are as follows:

Revision of Economic Criteria for New and Existing Section 13O and Section 13U Funds:

1. The incentivized funds must have a minimum Assets Under Management (AUM) comprising investments in “Designated Investments” (DI) as at the end of each financial year (FY) as follows:

• Section 13O: SGD5 million in DI (previously there was no minimum fund size); and
• Section 13U: SGD50 million in DI.

The AUM in DI refers to the net amount of DI recognized as assets in the statement of financial position in accordance with relevant accounting standards. The net amount of DI means the amount of DI recognized as assets net of DI recognized as liabilities. Additionally, the MAS has clarified that loans (including shareholder loans) taken to finance DI need not be considered as liabilities when calculating the gross asset value of the fund in DI.

These amendments are welcome, as the industry expected a higher minimum AUM for Section 13O. The clarification on how AUM is calculated, excluding loans and shareholder loans, is also welcomed, as certain highly leveraged funds financed by intra-group loans often struggled to meet the minimum fund size required under Section 13U and were forced to apply for Section 13O, dealing with the additional “non-qualifying investors” requirements.

2. Local business spending (LBS) requirement: A new tiered LBS requirement is introduced to replace the existing annual total business spending (TBS) of SGD200,000, as follows:

AUM in DI as at the end of the FY (SGD)	Minimum LBS for the FY (SGD)
AUM < 250 million	200,000
250 million ≤ AUM < 2 billion	300,000
AUM ≥ 2 billion	500,000

 

The updated LBS requirement is also welcome, as the current minimum LBS for funds with an AUM in DI lower than SGD250 million remains unchanged. Overall, the new LBS remains lower than the ones applicable to Single Family Office (SFO) Funds, and the increase is lower than what the industry expected.

Removal of the Requirement that an Approved Fund May Only Serve the Investment Strategy / Objective Approved by MAS:

The condition that the approved fund must serve only the investment strategy / objective approved by the MAS in the Letter of Award will be removed. Despite this, the investment strategy / objective should still be within the scope of what the fund is mandated to do via its offering document or investment management agreement, or its equivalent. Approved funds should still update the MAS of any change in investment strategy for information purposes only.

Introduction of a New “Closed-End Fund” Treatment for Sections 13O, 13OA, and 13U:

In recognition that closed-ended funds may have declining LBS and AUM in the later part of their fixed lifespan, a new treatment for these kinds of funds is being introduced to provide greater tax certainty. New and existing funds may irrevocably and voluntarily opt for the “closed-end fund” treatment, which has the following key features:

• The annual AUM requirement will have to be met from the fund's first incentive year to the fifth incentive year (inclusive), and will be waived from the sixth incentive year onward;
• The annual LBS requirement will have to be met on a cumulative basis up to the tenth incentive year (inclusive) and will be waived from the eleventh investment year onwards; and
• The fund is required to its fund tax incentive award revoked with effect from the end of its divestment phase, or the day immediately after its 20^th incentive year, which ever is earlier.

The introduction of this new treatment for “closed-end funds” is also welcome, as it helps promote these kinds of funds in Singapore by providing tax certainty. This new treatment recognizes that both the AUM and the management fees, which are calculated based on the AUM and constitute a significant part of the minimum LBS required, decrease towards the end of the life of the "closed-end funds".

 

Section 13O specifics

Regarding Section 13O only, the highlights are as follows:

Revised Economic Conditions:

The new economic conditions must be met as follows:

1. New Section 13O funds with awards commencing in the period between 1 January 2025 (inclusive) and FY ending in 2026 (YA 2027) are required to fulfil the:
   • AUM in DI requirement by the end of the third year of the incentive and maintain it in every FY thereafter to avail of the tax exemption for the corresponding YAs; and
   • Investment Professional (IP) and tiered LBS requirement from FYs ending in 2027 (YA 2028) (inclusive) to avail of the tax exemption in the corresponding YAs.
2. New Section 13O funds with awards commencing in FY ending in 2027 (YA 2028) onwards are required to fulfil the:
   • AUM requirement by the end of the third year of the incentive and maintain it in every FY thereafter to avail of the tax exemption for the corresponding YAs; and
   • IPs and tiered LBS requirements from the first year of the incentive.
3. Existing Section 13O funds with awards commencing prior to 1 January 2025 are given a grace period to fulfil the updated economic criteria. Specifically, such funds are required to fulfil all the IPs, AUM and LBS requirements from FY ending in 2027 (YA 2028) (inclusive) to avail of the tax exemption in the corresponding YA.
   Such existing funds must continue to fulfil the SGD200,000 TBS requirement (in lieu of the tiered LBS requirement) in FYs prior to FY 2027 to avail of the tax exemption for YA 2027 and prior YAs.

Investment Professional (IP) Requirement:

The Singapore FMC managing the Section 13O fund must employ at least 2 IPs. Previously, there were no specific requirements.

Despite this, in practice, the Singapore FMC would probably already have 2 IPs, so this amendment is not expected to affect many Singapore FMCs.

Removal of the Condition that the Fund Must Be a Newly Set Up Company:

Section 13O (and Section 13OA) funds will be able to acquire investments prior to applying for the fund tax incentive. Despite this, all investments should be acquired on market terms and conditions.

This amendment is welcome as certain Section 13O funds face operational delays while waiting for the tax incentive to be submitted to the MAS.

"Non-Qualifying Investor" Rules:

To ensure that Section 13D funds and unit trusts are not discouraged from investing in Section 13O funds, a waiver of the “non-qualifying” investors rules is incorporated for trusts and unit trusts incentivized under Section 13D.

Section 13OA:

Under the new Section 13OA, the Section 13O tax incentive scheme is extended to Singapore LPs registered under the Limited Partnership Act 2008. The MAS has explained that the scheme is aimed at small private equity and venture capital funds.

The partners of an LP under Section 13OA will be able to avail of tax exemption on their share of “Specified Income” from DI derived by the approved LP, subject to meeting the relevant conditions. The incentive conditions will be applied at the LP level, and hence, no look-through approach will apply.

This amendment is welcome as it helps strengthen the Singapore toolbox and allows smaller or nascent players to use a Singapore LP, which provides more flexibility than a Singapore company.

 

Section 13U specifics

Regarding Section 13U only, the highlights are as follows:

New Economic Conditions:

• The minimum fund size must be met at the point of application and maintained at the end of each financial year (FY). Previously, the minimum fund size requirement only applied at the point of application.
• From 1 January 2025, new Section 13U funds will need to meet the updated economic conditions.
• Existing Section 13U funds or structures with awards commencing prior to 1 January 2025, will only need to fulfill the SGD50 million annual AUM in DI requirements at the end of each FY and incur the tiered LBS requirements in each FY starting from FY ending in 2027 (YA 2028). However, such funds must continue to fulfill the minimum LBS requirement of SGD200,000 and the 3 IP requirements in FYs prior to FY 2027.

Economic Requirements for Various Section 13U Structures:

Master-feeder fund, master-feeder fund-SPV, and master fund-SPV structures can submit a consolidated tax incentive application. From 1 January 2025, the AUM and LBS requirements will apply at the level of the structure as a single fund entity, without the need to multiply the AUM and LBS for each of the entities being added to the structure.

This amendment is welcome as there is not always a correlation between the fund’s AUM or LBS and its number of SPVs or trading feeder funds.

 

Section 13D

The Circular has also provided the following updates:

1. Self-Administrated Scheme: The Circular has confirmed that the scheme will remain self-administrated.
2. New Economic Criteria: Section 13D funds will need to be managed by a Singapore FMC with at least one IP. Previously, there was no specific requirement. It is worth noting that there is no specific salary requirement for the IP.
   In practice, the inclusion of only one IP is welcome, as the industry initially thought that the economic criteria for Section 13D funds would be increased substantially.
3. "Non-Qualifying investor" Rules: To ensure that Section 13D funds and unite trust are not discouraged from investing in other Section 13D funds, a waiver of the "non-qualifying" investors rules is incorporated for trusts and united trusts incentivized under Section 13D.

 

DI list

The DI list will be updated to clarify that real estate investment funds constituted in any form are within the DI list. This is because the policy intent is to incentivize income arising from real estate collective investment schemes, regardless of their form. Under the current list, there have been cases where real estate investment vehicles are constituted using other foreign structures.

Additionally, and following the policy intent, real estate investment funds that (a) invest in Singapore immovable property or (b) hold stock, shares, debt, or any other securities issued by any unlisted company that is in the business of trading or holding Singapore immovable property (other than one that is in the business of property development) are excluded from the DI list.

Separately, the MAS has clarified that carbon credits will qualify as DI, as they are considered to fall within the item “Emission derivatives and emission allowances” in the DI list.

 

Single Family Offices

With respect to the SFO Funds, the Circular has clarified that the amendments to the minimum economic commitments mentioned above will not apply to this type of funds as their economic commitments were reviewed previously in July 2023.

An SFO Fund refers to a Section 13O or Section 13U fund vehicle which consists of assets primarily contributed, owned, or controlled by one family or member(s) of the same family, and is managed by a fund manager, which in this case is a family FMC that is exempted from licensing requirements under the Securities and Futures Act 2021.

Despite this, it is important to note that a Single Family Office may engage a third-party licensed Singapore FMC to manage their family-only funds. If this is the case, the tax incentive conditions applicable to such funds will be the ones explained above, instead of the more stringent conditions applicable to SFO Funds managed by a family exempt FMC. Hence, the amended Section 13O and Section 13U conditions explained above are also relevant for these structures.

Additionally, Annex 12 of the Circular provides a list of Frequently Asked Questions for SFO Funds. Although the vast majority of the answers remain unchanged, we have observed minor refinements for a few of them, such as the examples of what is considered to be relevant formal work experience or academic qualifications for qualifying IPs.

It is also important to note that certain amendments announced for the Section 13O and Section 13U tax incentive schemes will probably also apply to SFO funds managed by an exempt family FMC, except for the economic criteria. Subject to final confirmation from the MAS, it is possible to assume that the following updates, explained above, will equally apply to SFO Funds:

1. New interpretation / definition of AUM;
2. Removal of the condition that the fund must be a newly set up company in order to apply for Section 13O; and
3. Economic requirements for master-feeder fund, master-feeder fund-SPV, and master fund-SPV structures under Section 13U.

These updates are welcome, as SFO structures would not need to wait until the Section 13O tax incentive is approved to acquire investments, or rely on the current exception of investments made within three calendar months prior to the date of submitting the application. The economic conditions applicable to the Section 13U structures is also extremely important because the previous additional LBS and AUM for each additional entity left SFOs with a lack of options, given the considerable amount of cumulative LBS and AUM, and the fact that these structures cannot use a VCC fund, in which only one tax incentive (and economic conditions) applies to all the sub-funds.

Despite this, it is worth noting that the economic requirements for SFO Funds managed by a family exempted FMC, updated in July 2023, are higher than those for regular funds or family funds managed by a Singapore-licensed third-party FMC.

 

Conclusion

The proposed amendments to the fund tax incentive demonstrate Singapore’s commitment to remaining competitive in the asset and wealth management space amid increased competition from other regional hubs. These amendments are also a positive development for the SFO industry.

Stay tuned for more updates on the Singapore Asset and Wealth Management space. For more information, please contact Barbara Voskamp or Victor Sanlorien Cobo.