26 February 2019
Singapore Minister for Finance Mr Heng Swee Keat delivered the Budget Statement for the Financial Year (“FY”) 2019 on 18 February 2019. This article highlights the key tax changes impacting businesses announced in the Budget. Among other initiatives, tax changes were announced for the financial industry, including extending and refining certain schemes and incentives to encourage growth and development in certain sectors.
Extending and refining the tax incentive schemes for funds managed by Singapore-based fund managers
With the aim of further growing Singapore’s asset management industry, the applicable tax exemptions and concessions for qualifying or approved fund vehicles under section 13CA, 13R or 13X of the Income Tax Act (“ITA”) will be extended till 31 December 2024. These schemes were originally scheduled to lapse after 31 March 2019.
To keep the schemes relevant and ease the compliance burden under such schemes, the following enhancements will be made to the sections 13CA, 13R and 13X schemes:
- Removing the condition that a fund intending to qualify or be approved under the section 13CA or 13R scheme must not have 100% of the value of its issued securities beneficially owned, directly or indirectly, by Singapore persons. This change will take effect from the Year of Assessment (“YA”) 2020.
- Enhancing the scheme under section 13X to (i) include co-investments, non-company special purpose vehicles (“SPVs”) and more than two tiers of SPVs in master-feeder SPV structures, (ii) allow debt and credit funds to avail themselves of the “committed capital concession” when computing the minimum fund size requirement to be met (which was previously only available to real estate, infrastructure and private equity funds), and (iii) include managed accounts, i.e. dedicated investment accounts where investors place funds directly with a fund manager without using a separate fund vehicle. These enhancements apply on and after 19 February 2019.
- Expanding the list of designated investments under such schemes by removing the counter-party and currency restrictions, and including investments such as credit facilities and advances, and Islamic financial products that are commercial equivalents of designated investments. The condition for unit trusts to wholly invest in designated investments will be removed. These enhancements apply to income derived on and after
19 February 2019.
- Enhancing the list of specified income under such schemes to include income in the form of payments that fall within the ambit of section 12(6) of the ITA, i.e. essentially interest and similar payments deemed to be derived in Singapore. These enhancements will apply to income derived on and after 19 February 2019.
- Allowing qualifying non-resident funds under sections 13CA and 13X to obtain a 10% concessionary tax rate on distributions received from Singapore-listed real estate investment trusts (“S-REITs”) and real estate investment trusts exchange-traded funds (“REITs ETFs”) made during the period 1 July 2019 to 31 December 2025.
With the aim of further growing Singapore as a centre for fund management and administration, the current concession that allows qualifying or approved funds under one of the fund management tax incentive schemes to claim, by way of remission, goods and services tax (“GST”) incurred on expenses at a fixed recovery rate will likewise be extended till 31 December 2024.
Further details will be released by the Monetary Authority of Singapore (“MAS”) by May 2019.
The above enhancements made to the tax incentive schemes for funds build up on the momentum from Budget 2018’s announcement on the Singapore Variable Capital Company framework to further strengthen Singapore’s position internationally as a hub for funds and fund management activities, by allowing for greater flexibility in the regulatory, legal and tax frameworks and simplifying compliance requirements for fund vehicles. The above enhancements announced to the fund management exemption schemes is thus a further significant boost by the authorities to the attractiveness of such schemes, and will no doubt be warmly welcomed by the fund management industry.
Extending the income tax concessions for S-REITs
To further promote the listing of REITs in Singapore and to strengthen Singapore’s position as a REITs hub in Asia, the following existing tax concessions for S-REITs will be extended till 31 December 2025 (originally scheduled to lapse after
31 March 2020):
- Concessionary income tax rate of 10% for S-REITs distributions received by non-resident non-individual investors; and
- Tax exemption on qualifying foreign-sourced income (i.e. foreign-sourced dividend income, interest income, trust distributions and branch profits) received by S-REITs and wholly-owned Singapore resident subsidiary companies of S-REITs, that is paid out of qualifying income or gains in respect of overseas property acquired on or before 31 March 2020 by the trustee of the S-REITs or its wholly-owned Singapore resident subsidiary company.
In addition, the tax exemption on S-REIT distributions received by individuals, excluding such distributions derived through a partnership in Singapore or derived from the carrying on of a trade, business or profession, will not be subject to any sunset clause. Hence, such exemption on S-REIT distributions received by individuals would be granted on a permanent basis going forward.
The extension of tax concessions for S-REITs further strengthens Singapore as a leading hub in the region for the establishment and listing of S-REITs.
Further details will be released by MAS by May 2019.
In addition, the availability of the following income tax concessions accorded to REITs ETFs will be extended to 31 December 2025 (originally scheduled to lapse after 31 March 2020):
- Tax transparency treatment on the distributions received by REITs ETFs from S-REITs, which are made out of such S-REIT’s specified income; and
- 10% concessionary tax rate on such REITs ETFs distributions received by qualifying non-resident non-individuals.
Correspondingly, the tax exemption on REITs ETFs distributions received by individuals, excluding individuals who derive any distribution through a partnership in Singapore or from the carrying on of a trade, business or profession, will not be subject to a sunset clause.
Extending the GST remission for S-REITs and RBTs in the infrastructure business, ship leasing and aircraft leasing sectors
To carry on facilitating the listing of S-REITs and Singapore-listed registered business trusts (“RBTs”) in the infrastructure business, ship leasing and aircraft leasing sectors, S-REITs and RBTs will continue to be allowed to claim GST by way of remission on the following expenses till 31 December 2025 (originally scheduled to lapse after 31 March 2020):
- business expenses, regardless of whether they hold underlying assets directly or indirectly through multi-tiered structures such as special purpose vehicles (“SPVs”) or sub-trusts;
- business expenses incurred to set up SPVs that are used solely to raise funds for the S-REITs or RBTs, and that do not directly or indirectly hold qualifying assets of the S-REITs or RBTs; and
- business expenses of financing SPVs mentioned in 2.
Further details will be released by MAS by May 2019.
Tax changes to encourage innovation and scaling up of businesses
Extend writing down allowance for acquisition of qualifying IPRs
In recognition that intellectual property rights (“IPRs”) are important creators of value in a knowledge-based economy, the writing down allowance under section 19B of the ITA on capital expenditure for the acquisition of qualifying IPRs by companies for use in their trade or business has been extended by five years to cover capital expenditure incurred in respect of qualifying IPRs acquired on or before the last day of the basis period for YA 2025.
Extend 100% investment allowance under Automation Support Package
To continue to support companies in their automation, productivity and scale-up efforts, the 100% investment allowance under the Automation Support Package will be extended by two years for projects approved by Enterprise Singapore from 1 April 2019 to 31 March 2021. The approved capital expenditure will remain capped at S$10 million per project.
Lapsing of existing schemes
The following schemes and tax exemptions will be allowed to lapse as they have been assessed to be no longer relevant:
- The Designated Unit trust (“DUT”) scheme under which specified income derived by a unit trust given DUT status is only taxable upon distribution in the hands of investors (and not taxed at the trustee level) and distributions made by a DUT to qualifying foreign investors and individuals are exempt from tax, will lapse after 31 March 2019.
- The Approved Unit Trust (“AUT”) scheme under which the trustee is taxed on its investment income and 10% of the gains derived from the disposal of securities, with the remaining 90% of such gains taxed in the hands of the unit holders upon distribution, and under which qualifying unitholders enjoy tax exemption on such distributions, lapsed after 18 February 2019.
- The Property Tax (Tourist Projects) Order under which the Minister for Finance may grant approval for new tourist projects to have their annual value computed based on 6% of the preceding year’s gross receipts for the first five years from the completion of the buildings, lapsed after 18 February 2019.
- The Not Ordinarily Resident (“NOR”) scheme under which an eligible individual granted NOR status is not subject to tax on the portion of his Singapore employment income that corresponds to the number of days he has spent outside Singapore for business reasons pursuant to his/her Singapore employment, will lapse after YA 2020. The last such NOR status will be granted for YA 2020 and expire in YA 2024.
The Budget Speech for FY 2019 is available from the Budget 2019 website www.singaporebudget.gov.sg. Further information is available from the Inland Revenue Authority of Singapore website www.iras.gov.sg.