Fund Tax incentives

As expected, the three main fund tax exemptions of Sections 13CA, 13R and 13X have been renewed. These incentives provide certainty in the Singapore taxation of investment flows and are an important part of the development of a structure which is managed out of Singapore or includes Singapore domiciled fund vehicles. A number of changes have been made as part of the renewal of these schemes.

Removal of 100% Singapore persons requirement

The requirement under the Sections 13CA and 13R schemes that a fund must not have 100% of the value of its issued securities beneficially owned, directly or indirectly, by Singapore persons has been removed. This requirement was originally introduced as an integrity measure to prevent Singapore persons using these structures to route otherwise taxable investment flows.

This change makes the Section 13CA and 13R schemes more relevant for private wealth structures which are established for Singapore families. Previously, Sections 13CA and 13R were not applicable to a fund entity which is wholly owned by Singapore persons and where a private wealth vehicle was held under a trust, it would have been necessary for at least one beneficiary of the trust to be a non-Singapore person. To qualify as a non-Singapore person, the family member would need to be both non-citizen and non-resident, and receive a meaningful distribution from the structure. Issues also arose about how interests in the fund were to be determined through a discretionary trust, given the inherent complexities of identifying beneficial owners in a discretionary trust arrangement.

While the removal of this requirement is a welcome change, one wonders whether it will increase the reliance on Section 13CA for smaller private wealth structures. It is comparatively easy to structure a fund qualifying for the Section 13CA exemption and maintain that quite cost efficiently, without having to meet the qualifying conditions and higher thresholds applicable for the Section 13X scheme.

For institutional managers, this condition was seldom an issue in practice. Its removal does however, make it clear that layers of Section 13CA funds can be managed out of Singapore. Previously, there was a question about whether the Singapore permanent establishment created by the relationship with a Singapore fund manager was disentitling offshore funds managed in Singapore lower down the structure.