Singapore has become, over the past decade, a jurisdiction of choice for wealthy families wishing to set up family offices for estate planning and the professional management of their private wealth. This trend is undoubtedly the product of Singapore’s position as a global financial hub, its strategic location and connectivity, its political stability, and clear tax and trust laws and regulations. Riding the wave of rapid wealth creation in Asia, Singapore saw the number of family offices based here quintuple from 2017 to 2019, with the result that there are currently over 400 single family offices in Singapore.
In an effort to enhance Singapore’s attractiveness as a jurisdiction for wealthy families to set up their family offices, the Singapore government had made available two tax incentive schemes (Section 13R and 13X schemes) under income tax law. where the income exemption would apply to the following:
- Income of a company incorporated and resident in Singapore from funds managed by a fund manager in Singapore (the Section 13R regime); and
- Income from funds managed by a fund manager in Singapore (the Section 13X regime).
Through the publication of a new set of guidelines entitled “S13O & S13U Application Process for Family Offices – Guidelines for Advisors” (the “New guidelines”) on April 11, 2022, the Monetary Authority of Singapore (“SAM”) updated the conditions and procedural requirements of the aforementioned tax incentive schemes. More importantly, the new guidelines established stricter criteria for family offices seeking to take advantage of the tax incentives available under what were previously called the Section 13R and 13X regimes (and which are currently called the section 13O and 13U regimes).
Applicability of new guidelines and criteria
The new guidelines will only apply to funds managed or advised directly by a family office that:
- Is an exempt fund management company that manages assets for or on behalf of the family(s); and
- Is wholly owned or controlled by members of the same family or families.
The term “family” used in this context has been defined by MAS to refer to persons who are direct lineal descendants of the same ancestor, as well as spouses, ex-spouses, adopted children and stepchildren of These persons.
For clarity, these new guidelines do not apply to fund vehicles that hold assets for or on behalf of third parties outside of the family or families that own or control the fund vehicles. This would include fund vehicles managed by licensed fund managers such as multi-family offices and institutional fund managers and funds managed by other license-exempt managers for real estate assets.
Summary of Updated Terms for Section 13O and 13U Regimes
Comparison of updated conditions with previous conditions under Schemes S13R and S13X
A. Minimum assets under management
The most obvious and perhaps most significant change to the terms of the Section 13O tax incentive scheme (“Diagram S13O”) relates to the minimum assets under management to benefit from tax incentives. Where the S13O regime did not previously specify a minimum sum for assets under management, the updated terms currently provide that:
- The fund has a minimum fund size of 10 million Singapore dollars at the point of application; and,
- That the fund undertakes to increase its AUM to 20 million Singapore dollars within a grace period of 2 years.
While the updated terms further clarify the threshold amount of assets under management that must be met to qualify for the S13O regime, they also raise the bar on the amount of assets under management previously deemed necessary to qualify for the S13O regime.
B. Investment Professionals
The updated terms specify the minimum number of investment professionals an applicant must have advising and managing to qualify for incentives under the S13O and S13U programs. The updated terms also clarify the qualifications required of investment professionals engaged by family offices managing the funds.
Under the S13O Scheme, the fund must now be directly managed or advised throughout each valuation year by a family office in Singapore, where the family office employs at least two investment professionals. In this regard, investment professionals should be either portfolio managers, research analysts or traders who:
- Earn more than S$3,500 per month; and,
- must substantially engage in the qualifying activity.
If the family office is unable to employ two investment professionals at the time of application for the S13O regime, the fund may be granted one year grace period to employ the second investment professional.
Under the S13U Scheme, the fund must also be managed or advised directly throughout the year by a family office in Singapore, albeit by a family office that employs at least three investment professionals (with requirements qualifications identical to those specified under the S13O Scheme) in which at least one of the three investment professionals must be a not family member of the beneficial owner(s).
If the family office is unable to employ a non-family member as an investment professional at the time of the S13U application, the fund may be granted a one year grace period to fulfill this role.
C. Commercial expenses
Prior to the entry into force of the updated terms, funds under the S13O scheme had to incur at least S$200,000 in business expenses in each financial year, while funds under the S13U scheme had to incur at least S$200,000 in local business expenses in each financial year. year.
Under the updated terms of the S13O scheme, funds will now have to commit at least
S$200,000 in total business spend each financial year, subject to the tiered business spending framework (indicated in the table below).
Under the updated terms of the S13U scheme, funds will now have to be committed to the less S$500,000 in local business expenses each financial year, subject to the tiered business spending framework (indicated in the table below).
With regard to the terms “total company expenditure” and “local company expenditure”, the MAS also clarified that these expenditures must relate to the activities of the operation of the fund and do not include financing activities.
D. Local investment
Where the S13O and S13U schemes previously had no restrictions on the geographic locations or jurisdictions in which the assets under management of the funds had to be invested, the updated terms now require that the funds must invest at least 10% of its assets under management or S$10,000,000, whichever is lower, in local investments at any given time. In this regard, MAS clarified that local investments will include:
- Shares listed on Singapore’s licensed stock exchanges;
- Eligible debt securities;
- Funds distributed by licensed/registered fund managers in Singapore; or
- Private equity investments in unlisted companies incorporated in Singapore (e.g. start-ups) with operational activities in Singapore.
Entry into force of new directives
The new guidelines will come into effect for S13O and S13U program applications submitted on or after April 18, 2022. The following applications/candidates are not subject to the new requirements:
- Applications having submitted preliminary information before April 18, 2022 and with correspondence with the MAS in the last six months; or
- Applications for which the MAS had received a formal MASNET application before April 18, 2022, but which was approved after April 18, 2022; or
- Applications that have been formally approved, with the issuance of a formal letter of offer from MAS, by April 18, 2022.