The widespread anger against income-inequality, rise of populist nationalist leaders, growing clout of anti-immigration parties, instability in the global economic system, and a backlash against globalism in general are just some of the factors that have increased the risk to owning international investments. This article discusses how asset holders whose investments are spread across the globe can insulate themselves from some of these risks by leveraging Singapore as a safe haven.
A Changing Regulatory Landscape
The landscape for world's financial centers is changing fast. In the past, many of them have been used by the global elite to circumvent tax laws of their home country. Nations who have been losing tax revenue as a direct consequence of offshore jurisdictions such as Bermuda, British Virgin Islands (BVI) are now confronting growing budget deficits, rising sovereign debt, and populist anger against their financial elite. The Panama Papers and the Paradise Papers exposé highlighted the scale of the problem and focused the attention of policy-makers on this issue. As a result, many countries have mounted a concerted effort to plug holes in the international financial and regulatory system that enables leakage of their tax revenue. This bodes ill for poorly administered offshore jurisdictions and augurs a very bright future for Singapore.
EU Code of Conduct Group for Business Taxation (COCG) has been leading this charge. In 2017, it evaluated the tax policies of several international financial centers. The resulting report identified a group of countries as "non-cooperative jurisdictions". According to COCG, these countries lacked economic substance requirements for their companies. In lay person's terms, companies in one of these jurisdictions could carry on the bulk of their business activities in a different country yet take advantage of its zero-tax regime. EU put this group on its blacklist.
Several countries in the group (including British Virgin Islands or BVI, the Cayman Islands, Bermuda, United Arab Emirates, Jersey, Guernsey and the Isle of Man) responded by enacting new Economic Substance Legislation (ESL). Most of these new ESL came into effect at the beginning of 2019.
The new legislation will have a dramatic impact on every offshore structure that includes companies domiciled in any of the affected countries. Such structures have been widely used for personal holdings, family offices, and well as corporate needs across the globe. They must all undergo a fundamental reevaluation to determine if they still serve their intended purpose after the new legislation.
Who May be Affected
ESL is designed to apply only to companies that conduct "Relevant Activity". Relevant Activity is defined very broadly and includes the following businesses:
- Distribution of products
- Service centre business;
- Financing and leasing;
- Fund management;
- Company headquarters;
- Holding company structure;
- Intellectual property management; or
According to the new ESL rules, companies conducting any of the above businesses must meet the "Economic Substance" test in the jurisdiction of their incorporation. The Economic Substance test is deemed to be met if the company:
- Conducts its Core Income Generating Activity (CIGA) in the jurisdiction;
- Is directed and managed in the jurisdiction;
- Has an adequate number of employees in the jurisdiction;
- Has significant expenditure in the jurisdiction; and
- Has physical premises in the jurisdiction.
Clearly, many of the extant companies in these jurisdictions will not meet this test. In particular the requirement of physical activity or presence in the jurisdiction may be a very high bar to cross since most of these jurisdictions do not have the necessary physical infrastructure, skilled labor force, or political stability. To compound the problem, due to the broad definition of "Relevant Activity", this impact will be very widespread.
"If you are associated with a company that conducts a business covered by the definition of Relevant Activity and the company does not meet the Economic Substance test, you must act quickly."
Entities that do not meet the Economic Substance requirements face substantial penalties that escalate if the non-compliance continues over a period of time.
Individuals and businesses that rely on offshore structures now face some tough decisions. Should they try to meet the Economic Substance Test or should they restructure their holdings altogether?
Is Singapore the Answer?
If you thinking about changing your existing structure or considering a new one, you should carefully evaluate Singapore as one of the destinations for holding your assets and investments. A number of factors make it a very suitable choice.
Singapore is a well-run, stable, fiscally strong, first world economy. It boasts a market-based political system, democratic elections, a corruption-free polity, and a fair judicial system that enforces the rule of law. Its banking system and banks are ranked as one of the best in the world.
But most importantly, the country's regulatory environment is exceptionally supportive of offshore wealth and foreign investment. In particular, it provides excellent individual and corporate tax regimes that undergird its attraction as a preferred destination for holding investments and assets.
Managing Private Wealth in Singapore
As a well-respected jurisdiction with a strong reputational advantage, Singapore has attracted a large number of high and ultra-high net worth individuals and families in the last 5 years and the number is growing fast. Key drivers of this growth are Singapore's world-class wealth management industry, its generous tax incentives to foreign investors, and its support of global tax transparency. Following are some of the structures that have been used by individuals and families.
The Single Family Office
A “family office” is a structure used to manage the assets and wealth of high net worth families or individuals. Intergenerational wealth transfer, risk-mitigation of intra-family disputes, rigorous governance structure, interest alignment between family members, higher returns, centralization of risks, and succession planning are some of the objectives that a Family Office can fulfill.
Singapore's Monetary Authority of Singapore (MAS) has clarified that Single Family Office (SFO) “typically refers to an entity which manages assets for or on behalf of only one family and is wholly owned or controlled by members of the same family”. MAS has explicitly stated that it does not intend to license or regulate SFOs thus reducing the compliance and regulatory burden for such structures. MAS has stated a strong commitment to "raise the level of sophistication and professionalism of family wealth professionals" in Singapore.
Furthermore, Singapore has instituted the Global Investor Programme (GIP). Under this scheme, individuals, their spouses, and unmarried children below the age of 21 can obtain Singapore Permanent Residence (PR) status if they invest more than S$2.5 million in Singapore.
Singapore provides two significant tax incentives (discussed below) to trusts administered by a Singapore-based trustee. A local trustee can either be a licensed trustee, or a Private Trust Company (PTC). A PTC is a Singapore-based company incorporated to act as trustee of a trust and can be exempted from obtaining a trust business license. A family can retain more control over its trust through a PTC than appointing an independent trustee. If you are interested in learning more about PTC or incorporating one, please contact us.
Foreign Trust (FT) Exemption
The Foreign Trust (FT) exemption is a very significant benefit of Singapore. It grants tax exemption to an FT and its holding companies. Any income received from the FT by a beneficiary is also not taxed. The FT must be administered by a Singapore incorporated trustee company. The settlor(s) and the beneficiaries must not be citizens or residents of Singapore; if they are entities then they must not be incorporated in Singapore.
Locally Administered Trust (LAT) Exemption
The LAT exemption is useful if a family member is resident in Singapore. LATs and their underlying holding companies receive tax exemption on Singapore-sourced investment income derived and any foreign income received in Singapore. Exempted income received by a beneficiary is also tax exempt. A Singapore incorporated trustee company must administer the LAT and every beneficiary must be an individual or charitable institution, trust, or body of persons established for charitable purposes. The settlor cannot be the sole beneficiary of the LAT.
Fund Management Structures
Several tax exemption are available to funds managed by a Singapore fund manager or family office. These are as follows:
- Generally, funds are subject to tax in Singapore only on their income sourced in Singapore and derived from the trading of investments. Income derived by the fund from certain investments (including stocks, shares, bonds, notes and derivatives) can be tax exempt through (A) Onshore Fund Exemption; (B) Offshore Fund Exemption; and (C) Enhanced-Tier Fund Exemption
- The Financial Sector Incentive – Fund Management Award (FSI-FM), which grants a concessionary tax rate of 10% on qualifying income, can also be used.
Singapore Holding Company
Multi-national corporations have significant incentives to set up a Singapore domiciled holding company. Singapore's Economic Development Board (EDB) and the Monetary Authority of Singapore (MAS) provide several incentives for corporate structuring in Singapore as described below.
Corporate Tax Incentive Schemes
Following tax incentive schemes from EDB and MAS are available to companies that perform new or expanded business activities in Singapore. These include (1) the Pioneer Certificate Incentive and Development and Expansion Incentive (Parts II, III and IIIB of the Economic Expansion Incentives (Relief from Income Tax) Act); (2) the Finance & Treasury Centre Incentive (Section 43G of the ITA); and (3) the Financial Sector Incentive scheme (Section 43Q of the ITA).
Pioneer Certificate Incentive (PC) and the Development and Expansion Incentive (DEI)
A corporate tax exemption or a reduced tax rate of 5% or 10% on qualified activities can be available. This incentive is designed to encourage - and is hence available upon demonstrated evidence of - (A) employment creation, (B) spin-off growth to economy, and (C) demonstration of skillset, knowhow or technology growth in Singapore.
Finance & Treasury Centre (FTC) Incentive
If the company grows its treasury management capabilities and uses Singapore as a base for conducting treasury management activities for the region, a concessionary tax rate of 8% on income derived from qualifying services is available.
Financial Sector Incentive (FSI) Scheme
MAS's FSI Scheme is for licensed financial institutions such as banks, fund managers and capital market participants. Reduced tax rates of 5%, 10%, and 13.5% are available for 5 to 10 years on a range of qualifying activities including lending, debt and equity capital markets, fund management, trust administration, and FSI-Headquarters Services.
Options for Corporate Vehicle Structure
Singapore is an exceptional country for starting a new venture, with low corporate and personal tax rates, no tax on capital gains or dividends, and many other benefits that are well described in our 2019 survey findings.
Incorporating a Singapore company is straightforward. The following links will answer most of your questions:
There are no restrictions on foreign shareholding in Singapore companies and they can be fully foreign-owned. Ongoing annual compliance requirements for such companies are also simple and straightforward.
Inward Re-domiciliation to Singapore
Singapore introduced the inward re-domiciliation regime in October 2017 under which foreign corporate entities may transfer their registration to Singapore. In other words, the Companies Law of Singapore recognises the transfer of incorporations from a foreign jurisdiction to Singapore. For individuals or businesses that are looking for alternatives to their current offshore structures based in BVI, Cayman, and - due to the recent turmoil - Hong Kong this can be a very attractive option. Only 2 of the following requirements need to be satisfied by the company:
- Its total assets exceed $10 million;
- Its annual revenue exceeds S$10 million;
- It has more than 50 employees.
Variable Capital Company
As part of a general movement to encourage more fund managers to domicile their funds in Singapore, Singapore intends to launch a new corporate structure.
This new structure is planned to be launched in 2019 and is specifically targetted to attract investment funds. A new type of corporate entity will be introduced called the Variable Capital Company (VCC). It will allow for shared holdings as in the case of mutual funds, open-end, closed-end funds, traditional funds, and alternative funds. A VCC can be a stand-alone entity or an umbrella entity with sub-funds. VCC will offer many advantages:
- The VCC will be a single legal entity, with its sub-funds without a legal personality;
- Directors of a VCC do not have to hold an annual general meeting (AGM) as long as they provide at least 60 days’ written notice to the members;
- Shareholders’ approval is not required to redeem VCC shares, thus enabling easy distributions and return of capital; and
- VCC’s does not have to maintain a public shareholder register, thus offering privacy to its member investors.
As the international regulatory framework changes in order to promote greater transparency and stringent scrutiny of offshore structures, countries that have historically benefited from the offshore industry face a crisis. The new regulations will make it very difficult for companies domiciled in these countries to remain compliant. Owners of such companies should consider Singapore as an alternative. It is an internationally-respected country that rolls out a very impressive welcome mat for foreigner investors. In particular, it has created several incentive schemes to provide extremely attractive environment for investment and asset-holding vehicles of foreign investors as well as foreign companies. Therefore, those who are concerned about safeguarding their assets amidst the current regulatory, political and financial turmoil owe it to themselves to give Singapore a serious look.
Headquartered in Singapore, CorporateServices.com, empowers global entrepreneurs with information and tools necessary to discover Singapore as a destination for launching or relocating their startup venture and offers a complete range of company incorporation, immigration, accounting, tax filing, and compliance services in Singapore. The company combines a cutting-edge online platform with an experienced team of industry veterans to offer high-quality and affordable services to its customers. Contact Us if you need assistance with setting up a new Singapore company or if you would like to transfer the administration of your existing company to us.
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