22 March, 2017
Background
Over the last few years, the steady development of Singapore as a global financial centre and one of Asia’s key financial hubs has undeniably positioned it to be a preferred place for wealthy families to manage their assets and investments.
The concept of “family offices” is not new and has long been entrenched in Europe and the USA. In 2016 alone, the growth of UHNWIs and HNWIs in the Asia-Pacific region has far outpaced its peers in other regions, with UNHWIs and HNWIS growing at 10.8% and 9.9% respectively, compared with the dismal growth of 0.1% for UHNWIs and 1.7% for HNWIs in the rest of the world respectively.1
Therefore, given the sheer market size of Asia and its vast potential from a wealth management
angle, it is likely that family offices will soon see a steady growth in numbers here.
This is also a time when the wealth previously built and preserved by the first and second generation of immensely wealthy Asian families is now being part of a massive intergenerational wealth transfer.
A “family office” may be defined in a myriad of ways. At its simplest, a family office may be referred to as an entity which provides services and manages large private fortunes, with the ultimate goal of preserving the wealth of the family and transferring it to the next generation.
The choice of location to set up a family office can have significant consequences. When it comes to a choice between jurisdictions, one is not simply choosing a location for wealth management, but also a place where the interests of the family can be best served and safeguarded. To this end, Singapore’s value proposition has over the last few years been very attractive to global families. Singapore continues to strengthen this value proposition to woo single family offices (“
SFO”) to set up here.
While much may already have been written on the establishment of SFOs in Singapore and topics peripheral to it such as fund management activities and tax incentives, it is timely to put together this guide for private banks and their clients who may now have a serious plan to proceed with the setting up of an SFO here.
What Singapore has to offer?
Singapore continues to be favoured as a choice jurisdiction that meets the family’sneeds of intergenerational wealth succession and legacy preservation. Two typical but important considerations by any family when setting up an SFO are: (a) the appropriate structure of the family office; and (b) the best location to implement such a structure. In this regard, Singapore is often favoured as the choice location for two main reasons:
- Pro-business Environment; and
- Competitive Tax Regime.1.
Pro-business Environment
Family offices that set up in Singapore will be operating in a clear regulatory environment and in a jurisdiction which is politically stable2 and built on excellent infrastructure. Further, Singapore – well-known for its pro-business stance – possesses a strong adherence to the rule of law, ranking first in Asia according to the World Justice Project.3
Families can be assured that the existing legal and regulatory framework is properly administered and will remain clear, certain, and transparent.
Singapore is also increasingly seen as a gateway and effective platform to make long-term investments in the emerging markets of the Southeast Asian region and greater Asia.4
In a 2016 report by a US-based research institution, Singapore is ranked as Asia’s best investment destination.5
The future growth of Singapore’s financial sector continues to look promising, despite developing political concerns in Europe and the US, as well as global economic headwinds.
At the same time, Singapore has been ranked as the most liveable city in Asia,6 and has the second most efficient healthcare system in the world.7
Its liveability is a key factor in attracting global talent, giving family offices access to some of the best minds in the world. There are also welcoming policies for members of the business families who are interested in relocating to Singapore to explore growth opportunities in Asia Pacific. In particular, the Global Investor Programme, administered by the Economic Development Board, offers a Family Office investment option which accords qualified applicants Singapore Permanent
Residence status. For more information on investing in Singapore, please visit
https://www.contactsingapore.sg.
2. Competitive Tax Regime
Singapore’s taxation regime is generally a progressive one that does not impose inheritance or capital gains tax. However, a discretionary fund manager in Singapore that manages a fund will cause the fund to be taxable in Singapore. Therefore, any income or gains derived by the fund due to the activities of the fund manager here may be taxable in Singapore even if the fund is not set up here. However, there are several tax incentives that are available for these funds that are managed by a Singapore-based fund manager. This is relevant where the family office itself is set
up as a fund manager here in Singapore. The three most relevant tax exemptions are: (
a) the Non-Resident Fund Exemption;8
(b) the Resident Corporate Fund Exemption;9 and (c) the Enhanced Tier Fund Incentive Scheme.10
The Non-Resident Fund Exemption applies to funds that are located offshore but managed by a fund manager based in Singapore. Under this scheme, the offshore fund managed by the Singapore fund manager would be exempted from Singapore income tax for income arising out of the fund if: (a) the fund is not resident in Singapore; and (b) the fund is not wholly owned by Singapore tax residents.
The Resident Corporate Fund Exemption applies to funds that are located in Singapore. Under the scheme, any dividend payments from the Singapore fund would be exempt from Singapore tax. In addition, the family offices can potentially take advantage of Singapore’s large tax treaty network which covers over 70 countries. For this exemption to apply, specific approval has to be sought from the Monetary Authority of Singapore (“MAS”).
The Enhanced Tier Fund Incentive Scheme applies to both onshore and offshore funds and provides a tax exemption for income and gains on designated investments. The scheme provides greater flexibility (eg. applies to master-feeder structure and can also include SPVs under the fund structure) but is also subject to more stringent restrictions (eg. a minimum fund size of S$50 million is required) and would require specific approval from the MAS.
Recent clarification by the MAS on regulatory exemptions relevant to SFOs As noted above, the term “family office” generally lacks a legal or widely known definition. In providing for the various needs of the family, an SFO may at times, in seeking to achieve its objectives, inadvertently engage in regulated activities such as financial advisory and fund management.
Singapore’s regulatory authorities are very progressive in this aspect. Recognising the need for SFOs to be able to meet the requirements of the families in managing their own proprietary monies, the MAS has thus far demonstrated a clear intention to exempt SFOs engaging in fund management and financial advisory activities from licensing and regulatory requirements.11
To this end, regulatory exemptions exist under the Singapore framework that serves to reduce the regulatory burden which would otherwise be placed on SFOs.
SFOs that engage in regulated activities such as financial advisory and fund management are able to take advantage of the exemptions provided. Under these exemptions, an SFO will not need to be licensed if it provides services to a related corporation.12
An example of an ownership structure for an SFO that could avail itself of this exemption is set out below (Fig. 1):
To enlarge, please click on the figure.
Due to the diverse needs of a family, arrangements involving an SFO may not fit perfectly into the scope of existing class licensing exemptions.13
In recognising the reality that there is no “one size fits all” arrangement, the MAS would also consider and grant exemptions on a case by case basis.
Where the assets managed by the SFO are held directly by natural persons of a single family (Fig. 2);
To enlarge, please click on the figure.
Due to the diverse needs of a family, arrangements involving an SFO may not fit perfectly into the scope of existing class licensing exemptions.13
In recognising the reality that there is no “one size fits all” arrangement, the MAS would also consider and grant exemptions on a case by case basis.
Where the assets managed by the SFO are held directly by natural persons of a single family (Fig. 2);
Where the assets are held under a discretionary trust and the settlor of the trust and beneficiaries are members of the same family (Fig. 3);
To enlarge, please click on the figure.
Where a family trust is set up for charitable purposes with the trust being funded exclusively by the settlors from a single family; and
Where non-family members such as key employees of the SFO are shareholders in the SFO for the purpose of alignment of economic interests and risk-sharing; however, the initial assets and additional injection of funds are funded exclusively by a single family.
In granting such exemptions, the MAS will require the following:
- Names of the shareholders and directors of the SFO;
- A chart depicting the shareholding structures of the SFO;
- A description of how the SFO is related to the investment fund vehicle and the family/beneficiaries;
- A description of the profile of the family whose assets will be managed
- by the SFO; and
- A description of the nature of activities to be carried out by the SFO.
Conclusion
Singapore’s commitment towards maintaining itself as a choice location for wealth management is part of its long term strategy to remain a global financial hub. To stay relevant and competitive, Singapore ensures that its value proposition is not compromised and continues to maintain its attractive tax regimes, political stability, excellent infrastructure and ease of setting up SFOs. Wealthy families which have already set up SFOs in Singapore over the years, continue to leverage on this excellent platform to achieve their objectives for fund management and succession planning. It is clear that what Singapore has to offer to SFOs will undoubtedly see
heightened interest in this space as the transfer of intergenerational wealth begins to take on a more sophisticated nature.
1 Asia-Pacific Now Leads the World in High Net Worth Population and Wealth, Finds the Asia-Pacific Wealth report 2016”, Capgemini Press Release, which can be downloaded here: https://
www.capgemini.com/news/asia-pacific-now-leads-the-world-in-high-net-worth-population-and-wealth-finds-the-asia-pacific.
2 In April 2016, US-based research institute Business Environment Risk Intelligence (BERI) ranked
Singapore first out of 50 investment destinations in a ranking that assesses operations, politics and
foreign exchange.
3 World Justice Project, Rule of Law Index 2016 at page 21, http://worldjusticeproject.org/sites/default/files/media/wjp_
4 “Singapore keen to bolster wealth management sector through family offices”, June 2014, Business Wire India, http://simc.com.sg/singapore-keen-bolster-wealth-management-sector-family-offices/
5 US-based research institute Business Environment Risk Intelligence Report 2016.
6 Mercer’s Quality of Living Survey 2016.
7 Bloomberg Health-Care Efficiency Index 2016.
8 Section 13CA of the Income Tax Act.
9 Section 13R of the Income Tax Act.
10 Section 13X of the Income Tax Act.
11 Frequently Asked Questions on the Licensing and Registration of Fund Management Companies, MAS, February 2017
12 Exemption for provision of financial advisory and fund management services are found under Regulation 27(1)(b) of the Financial Advisers Regulations and Paragraph 5(1)(b) of the Second Schedule to the Securities and Futures (Licensing and Conduct of Business) Regulations respectively.
13 Exemption would have to be sought from the MAS under s 99(1)(h) of the Securities and Futures Act.
14 The author would like to thank the Economic Development Board (“EDB”) of Singapore for its inputs to this article, and also the firm’s practice trainee Lim Ziwei for his assistance. Any errors remain the author’s own.
