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Singapore – Rolling Out The Red Carpet For Family Offices.

14 April, 2014

 

Legal News & Analysis – Asia Pacific – Singapore – Asset Finance

 

Introduction

 
Singapore has long been an established financial and business hub and has a vibrant wealth management sector. Two recent developments in Singapore’s legal and tax landscape would help further promote Singapore as an attractive destination for family offices serving wealthy families in the region.

 
Although family offices are still a relatively new phenomenon in Asia as compared to Europe and North America, Asian families may increasingly feel the need to establish such structures as the management of their wealth becomes more complex and they start to pay attention to both wealth creation as well as inter-generation wealth transfer. A family office which is managed by both family members and external investment professionals may offer a compelling solution for some of these needs.

 
This article discusses how a Singapore-based family office could take advantage of certain tax incentive schemes in Singapore (whose scope has been recently expanded) for the management of funds in Singapore. It also looks at a recent development concerning the proposed establishment of the Singapore International Commercial Court and explores how it might provide a better international forum to resolve disputes involving family offices and their stakeholders compared to international arbitration.

 
Why Singapore?

 
In a nutshell, for a family office Singapore can provide:

 

  • Tax neutrality: Qualifying funds managed out of Singapore by a family office would not be subject more taxation had such funds been managed or administered in a traditional offshore jurisdiction.
  • Fiscal advantages: Qualifying funds can take advantage of Singapore’s double taxation treaties with countries like China, India, and Indonesia, and may pay less withholding tax on certain categories of income and capital gains.
  • Confidential, world-class dispute resolution: When established, the Singapore International Commercial Court could offer a binding curial forum with world-renowned ad hoc sitting judges that hear cases in camera, i.e., closed-doors and away from prying eyes.

 

The Analysis

 
Tax Neutrality

 
Many family offices are traditionally domiciled in an offshore jurisdiction such as Cayman Islands or British Virgin Islands where there is zero incidence of income taxes, capital gains taxes, stamp duty, and estate duty or wealth transfer taxes.

 
Since 2008, Singapore has repealed estate duty on both domiciled and non-domiciled persons. Singapore does not tax capital gains and stamp duty is leviable only on transfers of Singapore immoveable properties and Singapore securities, but with the important exemption for listed book-entry Singapore securities.

 
There is an income tax regime in Singapore and in the past, this has deterred fund sponsors from domiciling their funds in Singapore as it would have led to taxation on the investment gains made by the funds, unless there are exemption schemes which exempt the funds from paying the income taxes. Since 2006, the Singapore government has progressively liberalised and simplified the tax exemption schemes for funds domiciled in Singapore with the objective of fostering growth in the Singapore asset management industry. The last three years or so has seen many funds qualifying under such tax exemption schemes and anecdotally, assets under management (“AUM”) of such qualifying funds are comfortably in the billion dollars range.

 
The various tax exemption schemes for qualifying funds are discussed below in the section “Extension of Tax Incentives for Management of Funds”. Provided that certain fund management functions and value-adding functions for a family office are performed out of Singapore, it would not be difficult for a family office fund to be a qualifying fund.

 
Fiscal Advantages

 
If a choice is to be made between a tax haven and Singapore, family offices should note that unlike traditional offshore jurisdictions Singapore has a network of over 70 comprehensive double taxation treaties (“DTAs”) and should take into account the very tangible benefits afforded by such DTAs. Further, given the current political climate in the developed world with respect to how their wealthy citizens organise their tax affairs and increased scrutiny of tax havens, family offices may feel that their interests are better served by locating the fund in an international financial centre where substantive economic activities are carried out.

 
It is beyond the scope of this article to discuss comprehensively the fiscal advantages offered by Singapore’s DTAs. Suffice to mention here is the ‘popular’ DTA between Singapore and Indonesia which would allow a family office domiciled in Singapore to pay a lower withholding tax of 10% on interest payments from an Indonesian payer, compared to the default 20% withholding tax rate if no DTA applies.

 
World Class Dispute Resolution

 
With time, investors and participants in the wealth management industry should also see the emergence of a first-class dispute resolution forum in the form of the Singapore International Commercial Court. Market participants should then have access to a body of international experts in commercial disputes and trusts in Singapore. The merits of resolving disputes in court as opposed to arbitration is described below in the section “Proposed Establishment of the Singapore International Commercial Court”. With the Singapore International Commercial Court, Asian-centric market participants will be able resolve disputes in a court of law within Asia instead of being subject to the court system of offshore tax havens and the United Kingdom.

 
Extension Of Tax Incentives For Management Of Funds

 
As many had expected, the 2014 Singapore Budget which was delivered by the Minister of Finance in February this year had extended the tax incentive schemes for funds up to 31 March 2019. Specifically, the following sections of the Income Tax Act will continue to apply for funds which are managed in Singapore:

 

  • Section 13CA (non-resident fund exemption);
  • Section 13R (resident corporate fund exemption); and
  • Section 13X (enhanced tier fund incentive schemes).

 

In the context of the still growing wealth management industry in Singapore, the question is to what extent that such incentives will persuade wealthy families in the region to establish family offices in Singapore.

 

Given Singapore’s status as a financial hub in the region, local and international fund managers are well represented in this city state. As such, even where the actual managed assets owned by regional wealthy families are located outside Singapore, many of these families could well be served by fund managers based in Singapore.

 
In the absence of any tax incentives, any income or capital gains arising from funds managed by a Singapore-based fund manager may attract Singapore tax. This may be the case even where the fund is located outside Singapore. As such, the current tax incentives will play a critical role in encouraging the management of regional private wealth assets by Singapore fund managers.

 
If a family office fund can take advantage of any of the tax incentives described below, a fund managed by a Singaporebased family office fund manager will be exempt from Singapore income tax on certain designated investments if various criteria are met. Designated investments will include listed securities, derivatives, and immovable property, but clearly excludes Singapore real estate.

 
Section 13CA (Non-Resident Fund Exemption)

 
This scheme applies to funds that are located offshore but managed by a Singapore-based fund manager. The main criteria to take advantage of this scheme includes the following:

 

  • The fund is not resident in Singapore.
  • The fund is not 100% owned by Singapore tax residents.

Foreign investors in the offshore fund are exempt from Singapore income tax for income arising from the fund.

 
For Singapore investors which hold more than a prescribed percentage in the fund, such investors will be liable to pay a financial penalty to the Inland Revenue Authority of Singapore since section 13CA is not intended to allow Singapore tax residents to avoid Singapore tax.

 
Trustees which are based in Singapore but hold offshore funds will also qualify for the exemption under section 13CA. Singapore resident trustees previously could take advantage of an incentive afforded by another section in the Income Tax Act which will now be discontinued.

 

Section 13R (Resident Corporate Fund Exemption)

 
The incentives that are given to offshore funds through section 13CA are also given where the fund vehicle is incorporated in Singapore. Specific approval from the Monetary Authority of Singapore (“MAS”) is required to enjoy incentives under this scheme.

 
Singapore investors which hold more than a prescribed percentage in the fund are still required to pay a financial penalty.

 
As a Singapore vehicle, it will enjoy various features of Singapore as a tax jurisdiction which an offshore fund may not. Singapore’s network of over 70 comprehensive DTAs could be put to good use. For example, if a fund is domiciled in a jurisdiction with no treaty with China, any investment by the fund in a Chinese company will be subject to withholding tax of 10% on dividend payments to the fund. If the fund is domiciled in Singapore, owns at least 25% of the equity interests in the Chinese company, and submits a confirmation of tax residence issued by the Inland Revenue Authority of Singapore to the Chinese tax authorities, the withholding tax rate will be reduced to 5% under the PRC-Singapore DTA. In addition, any dividends payable by the fund to individuals are exempt from tax under the Singapore tax regime.

 
Section 13X (Enhanced Tier Fund Incentive Schemes)

 
This incentive encompasses both offshore and onshore funds. There is no restriction on the ownership of the funds by Singapore investors and no financial penalty is payable. Specific MAS approval is required to enjoy incentives under this scheme.

 
In exchange of such flexibility, more stringent requirements are put in place. For example, the fund must have a minimum fund size of SGD 50m at the time of application to the MAS.

 
Proposed Establishment Of The Singapore International Commercial Court

 
In 2013, the Ministry of Law in Singapore published a report on a study of the creation of a Singapore International Commercial Court (“SICC”). The driver for such a court was to offer a dispute resolution framework for cross-border and international commercial disputes which serves as an alternative to the international arbitration process.

 

In assessing the attractiveness of such a framework afforded by the SICC, one can look at some of the perceived weaknesses of the arbitration process. Disputes arising from intellectual property and trusts may be more appropriate tried before a court given that it may involve non-contracting parties. This is a very significant advantage over the arbitration process since the latter can only bind parties to the arbitration agreement. This advantage will be felt acutely in trust disputes which should be an area of law which is very relevant to the wealth management industry. As many trust disputes will involve or affect beneficiaries, or classes of beneficiaries (including possibly unborn future generations), which have no contractual nexus with the settlor, the trustee, trust protector or enforcer, and other parties in a trust structure, an arbitral forum may lack, or been seen to lack, the coercive jurisdiction that a curial forum has.

 
We set out some of the main proposals surrounding the establishment of the SICC below.

 
The SICC will be a division of the Singapore High Court and part of the Supreme Court of Singapore. A panel of SICC Judges consisting of existing Supreme Court Judges and Associate Judges (intended to be drawn from key jurisdictions around the world) will be appointed. These judges are expected to be specialists in commercial disputes.

 
Disputing parties can contract to submit to the jurisdiction of the SICC or agree to use the SICC after the dispute has arisen. 

 

As the SICC is designed to be a forum for international commercial disputes, it has the ability to apply foreign law in determining the issues in dispute. This is in contrast with a local Singapore court where, should foreign law issues arise, such foreign law will have to be specifically pleaded and proved as a fact in court proceedings.

 
The proceedings of the SICC will generally be held in open court. However, where the subject matter of the dispute has no real connection to Singapore, special rules may apply and confidentiality can be preserved. In the context of trust disputes involving mainly non-Singapore resident beneficiaries where there is no public interest element in Singapore for an open court hearing, in camera proceedings should be the norm. This would mean that parties bringing their case to the SICC will have the assurance that the litigation will not be conducted under the full glare of the media.

 

What Does It Mean For Family Offices?

 
The continuity of the tax incentives described above may encourage more family offices to be established in Singapore. The choice of tax scheme (be it section 13CA, section 13R, or section 13X) will depend partly on the asset-holding structure.

 
For high-net worth families which engage Singapore fund managers but are based outside Singapore and whose assets are also largely located outside Singapore, section 13CA is still the obvious scheme to rely on. However, serious thought should perhaps be given to setting up a family office in Singapore. As mentioned above, Singapore’s network of double taxation treaties is a compelling factor for funds that hold investments in many parts of the world. As Singapore is not a traditional offshore tax haven, Singapore fund managers may also be may find it easier to deploy the funds from a Singapore vehicle to invest in quoted securities where the trading counterparties need to perform “know your client” due diligence on their counterpart. Given Singapore’s financial hub status and investor-friendly stance and policies, it will be relatively easy to establish such an office in Singapore and to staff it with suitably qualified professionals. Singapore’s world-class legal system should also provide assurance to wealth owners that governance structures and succession planning surrounding the establishment of family office will be robustly enforced.

 
Should the SICC be established and fulfil the objectives of the Singapore authorities to become a popular and widely accepted dispute resolution forum, Singapore will be further enhanced as a dispute resolution hub. For a family office which oversees investments and holds assets in many jurisdictions, having the services of the SICC and the Singapore International Arbitration Centre (SIAC) at its doorstep to resolve multi-jurisdictional commercial disputes should only make the establishment of such a family office in Singapore more compelling.

 

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For further information, please contact:

 

Choon Yuen Hui , Partner, WongPartnership

choonyuen.hui@wongpartnership.com


Kah Keong Low, Partner, WongPartnership
kahkeong.low@wongpartnership.com


Elaine Chan, Partner, WongPartnership
elaine.chan@wongpartnership.com

 

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