Private equity tax in Singapore
This article will provide an overview of the tax considerations for private equity funds operating in Singapore.
Private equity has been an attractive investment option for many high-net-worth individuals and institutional investors due to its potential for high returns. Singapore has emerged as a hub for private equity in Southeast Asia, with a robust legal and regulatory framework, favorable business climate, and attractive tax incentives. This article will provide an overview of the tax considerations for private equity funds operating in Singapore, including the tax treatment of carried interest, capital gains, and withholding taxes.
Private equity fund taxation in Singapore
Private equity fund taxation in Singapore is subject to taxation on their income, which includes any gains from the sale of assets or investments. However, Singapore’s tax system provides various tax incentives and exemptions for private equity funds, including tax exemptions on specified income and reduced tax rates on certain types of income. Additionally, Singapore has a network of double tax treaties that can help mitigate any potential tax liabilities that may arise from investing in foreign markets.
What is a private equity fund?
Private equity funds pool money from high-net-worth individuals, institutional investors, and accredited investors to invest in privately held companies or acquire and restructure public companies. The fund has a limited lifespan of 10 years, during which the fund manager actively manages the investments to exist within a few years. Private equity investments require a high level of expertise, have a long-term investment horizon, and are only accessible to accredited investors due to high minimum investment requirements.
Types of private equity funds
As an “alternative” to traditional long-term growth investments like stocks and real estate, private equity funds have attracted investors looking for something a little different. Read on to know more about the distinct types of private equity funds.
- Buyout funds – A buyout fund acquires a controlling stake in a company or a group of companies to improve their operations and financial performance and eventually sell them for a profit.
- Venture capital funds – A venture capital fund provides financing to early-stage, high-growth companies with the potential for significant returns, usually in exchange for equity in the company.
- Real estate funds – A real estate fund invests in real estate properties, such as commercial buildings, residential properties, or land development projects, to generate returns through rental income, property appreciation, or sales.
- Infrastructure funds – An infrastructure fund invests in infrastructure assets, such as roads, airports, energy projects, and communication networks, to generate long-term stable returns through user fees or other income sources.
- Debts & special situations funds – A debt and special situations fund invests in distressed or troubled companies, as well as in high-yield debt and other credit instruments, to generate returns through capital appreciation and interest payments. These funds may also invest in companies undergoing significant operational or financial changes.
- Funds of funds – A fund of funds invests in other private equity funds rather than directly investing in companies or assets. A fund of funds aims to diversify risk and gain exposure to a range of private equity funds managed by different firms or with different strategies.
How does private equity taxation work in Singapore?
Private equity tax in Singapore depends on the legal structure of the firm and the type of transactions it undertakes. Limited Partnerships (LPs) are common structures where tax liability is passed through to partners in proportion to their partnership interest. The GP of the LP is taxed as a company, while the LPs are not taxed on their share of profits as long as they are not carrying on a trade or business in Singapore. Shares purchased by private equity firms are not taxed, but they are subject to withholding tax on dividend income received. Gains from the sale of shares are treated as capital gains and not subject to tax, except for “trading gains” which may be taxed as business income. Fund management fees are subject to a 17% tax as business income.
Private equity market trends in Singapore
The private equity market in Singapore has grown significantly in recent years, with a rise in the number of funds and deals. In 2020, despite the pandemic, Singapore-based private equity funds raised a record-breaking US$8.3 billion in capital commitments, with a focus on the technology, healthcare, and consumer sectors. The Singapore government has been actively promoting private equity investments through various initiatives, such as the Global Innovation Alliance and the MAS’s VCC framework. With a favourable regulatory framework, access to diverse investment opportunities, and a strong focus on innovation and technology, the private equity market in Singapore is expected to continue to grow.
PE Regulatory and legislative framework in Singapore
The legal and regulatory environment in Singapore is well-developed for private equity (PE) investments. The following important rules and laws apply to private equity investments in Singapore:
- Regulation of fund managers – Private equity fund managers in Singapore are regulated by the Monetary Authority of Singapore (MAS), and private equity taxation is governed by the Inland Revenue Authority of Singapore (IRAS). Compliance with the MAS regulatory framework and ongoing reporting obligations are required, and tax treatment for private equity funds depends on their legal structure and the type of transaction. The IRAS provides guidance on tax treatments, and seeking professional advice is recommended to ensure compliance with tax obligations and planning strategies.
- Regulation of funds – The tax treatment of private equity funds depends on the legal structure of the fund and the type of transaction they undertake. The IRAS provides guidance on tax treatments for various private equity transactions, including withholding tax on dividend income received, capital gains tax on the sale of shares, and fund management fees. Private equity firms are recommended to seek professional advice to ensure compliance with tax obligations and planning strategies. The regulatory framework aims to promote transparency and compliance in the private equity industry in Singapore.
- Existing legal structures – In Singapore, private equity firms are structured as Limited Partnerships (LP), where the General Partner (GP) is taxed as a company, and the Limited Partners (LPs) are not taxed on their share of the profits. Gains from the sale of shares are treated as capital gains and are not subject to tax, except for gains considered “trading gains” which may be taxed as business income. The legal structure aims to provide a transparent and fair tax system for private equity firms in Singapore.
Private equity fund tax incentives in Singapore
Private equity (PE) funds benefit from an advantageous tax climate in Singapore, which has made it a popular location for investors wishing to establish PE funds. Here are a few tax breaks Singaporean PE funds can take advantage of:
- Goods and Services Tax (GST) – Goods and Services Tax (GST) is not typically imposed on Private Equity (PE) funds in Singapore. However, PE funds that provide management services may be subject to GST on their management fees. Additionally, certain tax incentives provided to PE funds by the Singaporean government may be subject to GST. For example, the Enhanced-Tier Fund Scheme, which provides tax incentives to fund managers who establish funds in Singapore, may be subject to GST on qualifying expenses.
- Single-tier corporate tax system – Private Equity (PE) funds in Singapore benefit from the country’s single-tier corporate tax system, which provides tax incentives for funds established in Singapore. PE funds may also take advantage of other tax breaks such as the Enhanced-Tier Fund Scheme and the Global Trader Programme. These incentives aim to promote the growth of the private equity industry in Singapore and make it an attractive location for fund managers and investors.
- Non-taxation of gains on disposal of equity investments – In Singapore, gains from the sale of equity investments by Private Equity (PE) funds are generally exempt from taxation, aligning with the country’s business-friendly tax policy to attract foreign investments. This tax incentive makes Singapore an appealing destination for PE funds seeking to invest in the region. However, gains may be taxed if they are considered trading gains or if the PE fund operates a business in Singapore.
- Section 13H/Fund Management Incentive (S13H/FMI) – Singapore’s Section 13H of the Income Tax Act offers a tax incentive for fund managers to establish their operations in Singapore and manage funds within the country. Fund managers are eligible for a concessionary tax rate of 10% on income from managing qualifying funds. Additionally, Section 13F provides a tax incentive for funds managed by fund managers who qualify for the Section 13H concessionary tax rate. These incentives aim to promote the growth of Singapore’s fund management industry and make it an appealing destination for fund managers and investors.
- Financial Sector Incentive – Fund Management Scheme (FSI-FM Scheme) – The Financial Sector Incentive-Fund Management Scheme (FSI-FMS) is a Singaporean tax incentive scheme that aims to promote the growth of the fund management industry. It offers a 10% concessionary tax rate on income derived from managing qualifying funds for approved fund managers who establish their operations in Singapore. Qualifying funds include those that are constituted as companies or trusts. The FSI-FMS also offers a tax exemption on qualifying income from designated investments. Its goal is to make Singapore a leading financial hub and an attractive destination for fund managers and investors.
- Offshore Fund Incentive Scheme (OFI Scheme) – Singapore’s Offshore Fund Incentive Scheme (OFI) is a financial incentive scheme designed to promote the development of the nation’s fund management business. Fund managers that meet the requirements of the scheme and establish or relocate their offshore funds in Singapore are given tax benefits. The fund must be an offshore fund with a Singapore address that is not accessible to Singaporean investors to be eligible for the OFI. The fund must also adhere to specific investment limits and have a certain amount of assets under management. In addition, fund managers are required to have a sizable presence in Singapore, which includes employing at least two local investing experts.
- Resident Fund Incentive Scheme (RFI Scheme) – The Resident Fund Scheme (RFS) is a Singapore tax incentive for the growth of the fund management industry. Qualifying funds managed by a Singapore-based fund manager are eligible for tax exemption on specified income, including dividends, interest, and capital gains. The RFS aims to attract fund managers and investors to Singapore and promote the city-state as a location for fund management activities. Funds must meet certain criteria, including having at least 12 months’ duration and at least 50 investors and the fund manager must be licensed by the Monetary Authority of Singapore.
- Enhanced-Tier Fund Incentive Scheme (ETFI Scheme) – The Enhanced-Tier Fund Scheme (ETFI) is a Singaporean tax incentive to attract top-tier fund managers. Qualifying funds managed by eligible managers receive tax exemptions on specified income, including dividends, interest, and capital gains from designated investments. To qualify, managers must meet certain criteria, including a track record of managing funds and a minimum level of assets under management. The fund must be a closed-end fund and meet investor diversification requirements. The ETFI aims to make Singapore an attractive location for high-quality fund management activities and promote the growth of the industry.
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