Singapore: Changes To The Section 13O And 13U Tax Incentive Schemes For Family Offices 2023

Introduction

Singapore has witnessed, over the past few years, a rapid growth in the number of family offices based within its shores, a trend precipitated by Singapore's attractiveness as a global financial hub, its political stability, as well as its commitment towards upholding the rule of law.

To attract high-net-worth individuals and/or their families to set up their family offices in Singapore, the Singapore government has created a number of schemes and incentives including two tax incentive schemes (the Section 13O and 13U schemes) which are available to family offices in Singapore.

On 5 July 2023, the Monetary Authority of Singapore ("MAS") has updated the requirements for these tax incentive schemes ("New Criteria"). Under the New Criteria, family offices will now have to meet more stringent requirements before they can avail themselves to the tax incentives available under the Section 13O and 13U schemes.

Comparison of New Criteria to Previous Conditions Under the Section 13O & 13U Schemes

Asset Under Management

A key change under the New Criteria relates to the threshold for the criteria in relation to assets under management ("AUM"). Previously, the section 13O scheme required an applicant fund to have a minimum fund size of S$10 million at the point of application alongside a commitment to increasing the AUM to S$20 million within a 2-year grace period, while the section 13U scheme required funds to have a minimum fund size of S$50 million at the point of application.

Under the New Criteria, the section 13O and 13U schemes require an applicant fund to meet the minimum AUM requirement of S$20 million/ S$50 million respectively at the point of application and throughout the incentive period. In addition, this revised minimum AUM requirement can only be met by taking into account "Designated Investments" (which include most types of financial assets, non-Singapore real estate and certain commodities). The implication of this is that the funds managed by the applicant family offices will need to be invested in their entirety into Designated Investments at the point of application, rather than remaining in cash.

Investment Professionals

Previously, the section 13O scheme required an applicant fund to employ at least 2 Investment Professionals ("IP"), whereby at least 1 IP was to have been employed at the point of application while the second IP was permitted to be employed within a 1-year grace period after application. In addition, section 13O scheme did not require any IP to be a non-family member. As for the section 13U scheme, at least 3 IPs were to be employed with at least 1 IP being a non-family member – there was however a 1-year grace period given for the fund to employ a non-family member IP.

Under the New Criteria, the section 13O and 13U schemes require an applicant fund to employ a minimum of 2 and 3 IPs respectively, of whom at least 1 IP must not be a family member of the beneficial owners, at the point of application and throughout the incentive period. The MAS will expect the IPs to have relevant formal work experience or academic qualifications, and these IPs must also be Singapore tax residents throughout the incentive period.

Spending Requirements

Previously, funds under the section 13O scheme were required to incur at least S$200,000 in total business spending annually, while funds under the section 13U scheme were required to incur at least S$500,000 in local business spending annually. This minimum spending requirement may increase depending on the size of the fund ("Tiered Spending Requirement").

Under the New Criteria, the Tiered Spending Requirement is the same for both the section 13O and 13U schemes insofar as their minimum local business spending requirement is concerned. Funds under these schemes must incur at least S$200,000 in local business spending (e.g., salaries, management fees, tax advisory fees, legal fees etc.).

In respect of funds with AUM of at least S$50 million, for the purpose of determining whether the Tiered Spending Requirement is met, the following can now be recognised as eligible spending:

1. donations to Singapore charities; and
2. grants to blended finance structures with substantial involvement of financial institutions in Singapore.

Blended finance is a funding structure, which synergises public and private capital to mobilise financing for projects such as those involving clean energy access, sustainable transport, and nature-based solutions. Blended finance is not new – the use of public funds and development guarantees to reduce risks and encourage participation by private capital has been around for some time. However, such programmes are not common. The changes to the Tiered Spending Requirement can be seen as an attempt to promote blended finance structures, with a view towards promoting socially desirable outcomes such as combating climate change.

Also, for the purpose of computing the Tiered Spending Requirement for eligible funds, the MAS will treat every $1 of grant given to eligible blended finance structures as the equivalent of $2 of business spending.

Capital Deployment Requirements

Previously, funds under the section 13O and 13U schemes were required to invest at least 10% of their AUM or S$10 million, whichever is lower, into local investments, being:

1. equities, REITS, or business trusts listed on approved exchanges;
2. qualifying debt securities;
3. funds distributed by Singapore-licensed/registered fund managers or financial institutions; or
4. private equity investments into non-listed Singapore-incorporated companies with operating business(es) and with substantive presence in Singapore.

Now the New Criteria replaces the abovementioned local investment requirement with a minimum Capital Deployment Requirement ("CDR") whereby funds under the section 13O and 13U schemes are required to invest at least 10% of their AUM or S$10 million, whichever is lower, into:

1. equities, REITS, business trusts, or ETFs listed on MAS-approved exchanges;
2. qualifying debt securities;
3. non-listed funds distributed by licensed financial institutions in Singapore;
4. investments into non-listed Singapore operating companies;
5. climate-related investments; or
6. blended finance structures with substantial involvement of financial institutions in Singapore.

For the purpose of determining whether the CDR is met, the MAS will apply either a 2x multiplier, or a 1.5x multiplier, for every $1 invested into certain types of eligible investments.

Summary of Updated Conditions for the Section 13O & 13U Tax Incentive Schemes

The New Criteria took effect from 5 July 2023 onwards. All applications where the "preliminary submission" or "Annex A submission" is made from 5 July 2023 onwards will be affected by the New Criteria. However, the revised requirements under the New Criteria will not apply to:

1. funds which are in the process of applying for the tax incentives and for which the "preliminary submission" had been made before 5 July 2023; and
2. funds which had already been granted the section 13O or 13U tax incentive schemes.

However, the abovementioned funds can still elect to fulfil certain conditions under the New Criteria in relation to minimum business spending and capital deployment requirements.