Sovereign Wealth Funds in Singapore: Section 13V - Tax Exemption

During the last decade, in support of the asset and wealth management industry’s growth, Singapore has fostered a favorable tax environment for local funds and establishing platforms. In 2010, Singapore introduced the “Exemption of certain income of prescribed sovereign fund entity and approved foreign government owned entity” pursuant to Section 13V (previously Section 13Y) which was introduced in the Singapore Income Tax Act 1947 (ITA). The Singapore Budget 2024 extended the tax treatment under Section 13V to "international organizations". Section 13V encourages Sovereign Wealth Funds (SWFs) and "international organizations" to establish their regional offices and investment platforms in Singapore.

In this article we will describe the scope of the 13V tax exemption, the benefits, the conditions, and the application process.

 

13V TAX EXEMPTION

Section 13V provides for tax exemption of certain income of an “approved foreign government-owned entity” and a "prescribed or approved international organization", as well as the income of a “prescribed sovereign fund entity”, arising from funds managed in Singapore. Pursuant Section 13V, tax exemption applies to “specified income” (SI) from “designated investments” (DIs).

For Section 13V purposes, SI and DIs have the same meaning as per the Income Tax (Exemption of Income of Prescribed Persons Arising from Funds Managed by Fund Manager in Singapore) Regulations 2010, i.e. the Regulations applicable to funds that benefit from the Offshore Fund Tax Incentive Scheme (Section 13D of the ITA). In general, the list of DIs encompasses a wide range of investments, including stocks, shares, bonds, notes, foreign real estate properties, interest rate or currency contracts, securities, derivatives, structured products, and others. However, it is important to note that Singapore fixed property is a significant exclusion from this list.

The tax exemption covers the income derived by the “approved foreign government-owned entity” and a "prescribed international organization" from the activities related to the management and advisory in Singapore of the “prescribed sovereign fund entity" or a "prescribed international organization" (respectively). In other words, where the relevant conditions are met, Section 13V grants tax exemption on both the (i) income received by the Singapore investment vehicles as well as (ii) the income related to the advisory and management activities (such as management fees) received by the Singapore investment management and advisory office of the SWF or international organization.

 

ENTITIES COVERED: FOREIGN GOVERNMENT-OWNED ENTITIES, SOVEREIGN FUND ENTITIES AND INTERNATIONAL ORGANIZATIONS

Pursuant Section 13V, “foreign government owned entity” means:

• an entity wholly and beneficially owned (whether directly or indirectly) by the government or other public authority of one or more foreign countries;
• an entity that is incorporated, formed or established by the government or other public authority of one ore more foreign countries, either directly or indirectly through one or more intermediate entities;
• an entity that is incorporated, formed or established by the law of a foreign country and that is not a public authority of that foreign country;
• an entity that is incorporated, formed or established by an entity mentioned in paragraph (c) either directly or indirectly through one or more intermediate entities;
• an entity in which the government or other public authority of one or more foreign countries beneficially own (directly or indirectly) a percentage of the issued securities of the entity

In addition, the principal activity of a “foreign government owned entity” must be the management of the entity’s own funds or the funds of a “prescribed sovereign fund entity” or  a "prescribed international organization". As discussed, the “approved foreign government owned entity”, as well as an "approved international organization", will act as the investment management and advisory office of the SWF in Singapore or the "international organization".

On the other hand, “sovereign fund entity” means:

• the government or other public authority of a foreign country;
• an entity wholly and beneficially owned by the government or other public authority of one or more foreign countries;
• an entity that is incorporated, formed or established by the government or other public authority of one or more  foreign countries either directly or indirectly through one or more intermediate entities;
• an entity that is incorporated, formed or established by the law of a foreign country and that is not a public authority of that foreign country; or
• an entity that is incorporated, formed or established by an entity mentioned in paragraph (d) either directly or indirectly through one or more intermediate entities.

The funds of the “sovereign fund entity” (which may include government reserves and any pension or provident fund of that country or those countries) should be managed by an “approved foreign government owned entity” or an "approved international organization". In addition, the “sovereign fund entity” or "international organization" is prohibited from engaging in any other commercial activity in Singapore.

As incorporated by the Singapore Budget 2024, "international organization" means an organization:

• of which two or more countries, or the government of two or more countries, are members; or
• that is constituted by persons representing two or more countries, or the government of two or more countries:

and includes:

• an entity that is incorporated, formed or established by an international organization, either directly or indirectly through one or more intermediate entities: and
• an entity in which an international organization beneficially owns (directly or indirectly) a percentage of the issued securities of the entity.

Once the Singapore structure of the SWF or the "international organization" are granted Section 13V status, its’ wholly owned subsidiaries and sub-funds may automatically benefit from the advantages of Section 13V, provided these entities meet specific conditions (please refer to the next section) and the Monetary Authority of Singapore (MAS) is duly notified. This is highly beneficial as it eliminates the need for the SWF or "international organizations" structure to apply for a specific tax incentive each time a new wholly owned subsidiary or sub-fund is incorporated.

There is ongoing debate as to whether non-wholly owned but majority owned subsidiaries or sub-funds (i.e., joint ventures with minority investors which are not SWFs or "international organizations") of a Section 13V structure could also benefit from Section 13V. In practice, discussions have been centered around certain aspects of the definitions of “approved foreign government owned entity” or “prescribed sovereign fund entity” that do not explicitly require the entities to be “wholly-owned”. This interpretation could be used to sustain that certain majority-owned subsidiaries or sub-funds of a Section 13V structure should also benefit from this tax incentive scheme. However, we are not currently aware of any further developments on this front.

 

INTEREST WITHHOLDING TAX EXEMPTION (WHT)

Singapore has an extensive Double Tax Agreement (DTA) network with more than 90 applicable tax treaties. In the absence of Section 13V, certain SWFs or "international organizations" may be regarded as “Government” or “State-owned entities” under some DTAs, allowing them to benefit from tax exemption on the income derived in Singapore, such as business profits or interest income. Typically, these DTAs may also provide for WHT exemption on certain income, notably interest, paid to a non-resident “Government” or “State-owned entity”.

In the absence of an applicable DTA, interest payments to non-residents, sourced or deemed sourced in Singapore, will be subject to 15% Singapore WHT. However, subject to conditions, interest payments made by a “foreign government-owned entity”,a “sovereign fund entity”, or an "approved international organization" – entities approved under Section 13V - to a person who is not resident in Singapore and does not have a permanent establishment in Singapore, should be exempt from Singapore WHT.

 

CONDITIONS

Section 13V is subject to the approval of the MAS and compliance of the conditions outlined in the incentive award letter. Unlike other Singapore tax incentives, the qualifying conditions for Section 13V are not publicly available, and are subject to case-by-case negotiations with the MAS. The agreed conditions are later reflected in the incentive award letter. For example, such conditions could include:

• Approval of the business plan, investment strategy and expansion plan (including assets under management) submitted by the SWF or "international organization" structure. Although there is no specific preference in terms of investment strategy, the MAS is interested in promoting ESG and impact investments.
• Confirmation that the “foreign government owned entity” or "international organization" will exclusively engage in activities pertained to the management of its country’s reserves or government funds. Consequently, the investment management and advisory office cannot manage third-party funds; and
• Maintaining a substantial team in Singapore, with a minimum headcount that should include a specific number of Singaporeans. In practice, the MAS and the SWF or "international organization" agree on a specific number of investment professionals (i.e., traders, portfolio managers and research analysts) to be achieved within a certain time-period, typically within three to five years or sometimes even longer. From previous experience, the MAS usually ask for a minimum of eight-nine investment professionals to be reached within an agreed period.

 

APPLICATION AND RENEWAL PROCESS

In practice, the entire process typically takes between four and six months from the submission of the business plan, investment strategy and expansion plan. Once the MAS and the SWF or "international organization" agree on the terms and conditions of Section 13V, the application form can be submitted. Normally, the application form is approved within one month.

Upon approval, the exemption can last for a maximum of ten years. After this time period, the “approved foreign government owned entity” or "international organization" may apply for the renewal of Section 13V (subject to the sunset clause) for another maximum period of ten years. Alternatively, the SWF or "international organization" could start the entire process and apply for Section 13V again. However, it is worth noting that this new application process usually takes longer than the renewal of Section 13V.

Applications (or renewals) for Section 13V must be submitted before or on 31 December 2029 (i.e. the sunset clause), unless the incentive is extended.

 

CONCLUSION

Singapore has already established itself as a hub for family offices, asset managers and funds, but with the 13V tax incentive it has created an even more favorable tax environment for local investment platforms incorporated by SWFs and "international organizations".

We will closely monitor any potential updates related to Section 13V as the regulatory landscape continues to evolve. For further information on or assistance with Section 13V, please contact the authors of this alert.