In recent years, there has been a significant uptick in the number of Family Offices set up in Singapore, with experts estimating that this number has multiplied by more than four times in the past few years. In this article, Saravanan Rathakrishnan from RHTLaw Asia shares about what Family Offices are and the legal frameworks that surround them.
What is a Family Office?
A family office (“FO”) manages the investments and assets of ultra-high net worth individuals/families. A FO carries out its functions to fulfil objectives such as capital preservation, capital growth, intergenerational transfer of wealth, and managing investments.
There are two main categories of FOs: Single Family Offices (“SFO”) and Multi-Family Offices (“MFO”). A SFO manages the assets and investments for one family and is wholly owned by the members of the same family.
Generally, a SFO is created for the management of wealth, succession planning, philanthropy and segregating personal assets from business ones for one family.
Conversely, a MFO is a privately-controlled organization that offers advisory and investment management services to more than one family in relation to the organization, management and maintenance of part or all of the families’ assets and investments.
This article will focus mainly on SFOs.
What important considerations need to be made before establishing a SFO?
Prior to establishing a SFO, the following factors need to be considered:
- The structure of the SFO;
- The objectives for setting up a SFO;
- Types of assets which are intended to be managed by the SFO;
- The application of tax incentives; and
- The regulatory requirements.
What tax incentives are there currently for SFOs?
Generally, when a Singapore based fund manager manages investments and assets of a fund, the activities of the fund manager creates a taxable presence in Singapore for said fund. This is regardless of the location of the fund (whether overseas or in Singapore). Therefore, income and capital gains of the fund may attract tax liability in Singapore as it may be considered as having been sourced in Singapore.
In a bid to encourage SFOs to set up their bases in Singapore, the government has introduced several tax exemption schemes.
The following schemes are designed to lower the tax liability of funds that associate themselves with Singapore:
- 13R of the Income Tax Act (“ITA”): Onshore Fund Tax Incentive Scheme;
- 13X of the ITA: Enhanced-Tier Fund Tax Incentive Scheme;
- 13CA of the ITA: Offshore Fund Tax Exemption; and
- Financial Sector Initiative – Fund Management (FSI-FM) Scheme
For the Monetary Authority of Singapore (“MAS”) to grant 13R and 13X tax incentive schemes on a case-by-case basis, MAS would require the following information to consider the eligibility of the applicant family office:
- description/information of the shareholding structure of the family office group (a chart showing the shareholding structure would be useful);
- description/information on how the family office is related to the investment fund vehicle and the beneficiaries;
- names of the shareholders and directors of the family office;
- description/information on the activities that will be carried out by the family office; and
- description/information on the family whose assets will be managed by the family office.
With respect to the 13CA tax incentive scheme, no prior approval is needed from the MAS.
Summary of Tax Incentive Schemes
Here is a summary of the ITA’s Tax Incentive Schemes:
|Fund’s Residence||Singapore Tax Resident
||No restrictions||Must not be resident in Singapore, must not have any presence in Singapore (excepting the fund management company).|
|Fund’s Legal Form||Company incorporated in Singapore||Companies, trust (certain exceptions apply here), and limited partnerships.||Companies, individuals, and trusts|
|Fund Manager||Must be based in Singapore and holding a capital market services (“CMS”) licence or expressly exempted from the same.|
|Investors||Non-qualifying investors (i.e. Singapore corporate investors who invest over a prescribed percentage) have to pay a penalty.||No restrictions||Non-qualifying investors (i.e. Singapore corporate investors who invest over a prescribed percentage) have to pay a penalty|
|Assets under Management (“AUM”)||No restrictions||Min. of S$50 million||No restrictions|
|Fund Expenditure||At least S$200,000 business spending in a year.||At least S$200,000 local business spending in a year.||No restrictions|
|Approval||MAS approval required
Changes in investment strategy are not allowed after approval from MAS has been obtained
|MAS approval not required|
|Reporting Requirements||Annual Statements to investors.||Not required||Annual Statements to investors|
|Income Tax Filing||Annual tax returns to IRAS.||Annual tax returns to IRAS||Not required|
Financial Sector Initiative- Fund Management (FSI-FM) Scheme:
The Financial Sector Incentive for Fund Management (the “FSI-FM” award) encourages and incentives the growth of fund management activities in Singapore. The award grants a reduced tax rate of 10% for investment advisory and fund management activities (instead of the current corporate income tax rate of 17%), subject to the fulfillment of certain conditions and the approval of MAS.
What criteria should applicants meet to qualify for the FSI-FM?
To qualify for the FSI-FM incentive, the applicant needs to satisfy the following:
- Fund manager must hold a CMS license, unless exempted or be otherwise approved by the Minister;
- Fund manager must employ three or more experienced investment professionals, each earning at least S$3,500/month;
- Fund manager must be managing a minimum AUM of S$250 million; and
- MAS may also consider other factors when considering the grant of the incentive such as AUM, business expenditures, projections for employment growth of professionals.
Legal & Regulatory Framework: Licensing Requirements
Beyond the consideration of tax incentives, applicants should also be aware of the regulatory regime surrounding SFOs and the exemptions that they may avail themselves of.
Briefly, the Securities and Futures Act (“SFA”) does not define the term “family office.” Likewise, no other Singapore legislation provides a definition for the same.
Generally, anyone who wishes to conduct business in regulated activities, such as dealing in capital markets products, advising on corporate finance and fund management – activities generally undertaken by SFOs – must hold a Capital Markets License (“CMS”). However, SFOs may utilize the exemption provided in the Second Schedule to the Securities and Futures (Licensing and Conduct of Business) Regulations (“SS(LCB)R”). This exemption allows a corporation to manage funds for its related corporations without the need for a CMS license.
The applicability of the exemption is illustrated in the arrangement below:
Here, the SFO is related to the investment fund by virtue of sharing a parent company with the latter. A SFO arrangement such as above may rely on the exemption under SS(LCBR) when:
- Pursuant to paragraph 5(1)(b) of the 2nd Schedule of the SS(LCBR) a corporation manages funds for its related corporations; or
- Pursuant to paragraph 5(1)(c) of the 2nd Schedule of the SS(LCBR) an individual carries on business in fund management for or on behalf of:
- his spouse, son, adopted son, stepson, daughter, adopted daughter, step -daughter, father, step-father, mother, step-mother, brother, step-brother, sister or step-sister; or
- a firm or corporation in which he or any of the persons referred to above has control of 100% of the voting power, where such control is exercised individually or jointly with any of the aforesaid persons.
In the alternative, a SFO that provides financial advisory services to its related corporations may rely on an existing exemption from licensing pursuant to regulation 27(1)(b) of the Financial Advisers Regulations. This allows the SFO to provide any type of financial advisory service to any of its related corporations without the need for a financial adviser’s license.
Can SFOs apply for case-by-case exemptions?
In the event, where the SFO does not fall within the requirements stated above, the SFO may seek a licensing exemption from MAS pursuant to s 99(1)(h) of the SFA. However, these exemptions are only granted by the MAS on a case by case basis. MAS has clarified in its FAQs on the Licensing and Registration of FMCs that in assessing whether MAS should grant the exemption, the following information needs to be provided:
- a chart showing the shareholding structure of the FO;
- names of the shareholders and directors of the FO;
- a description of how the FO is related to the family/beneficiaries and investment fund vehicle;
- a description of the nature of activities to be carried out by the FO; and
- a description of the profile of the family whose assets will be managed by the FO;
MAS may consider the following arrangement(s) as constituting a SFO arrangement:
- where there is no common holding company, but the assets managed by the SFO are held directly by natural persons of a single family;
- where assets are held under a discretionary trust, the settlor of the trust and the beneficiaries are members of the same family;
- where a family trust is set up for charitable purposes, the charitable trusts are funded exclusively by settlor(s) from a single family; or
- where non-family members such as key employees of the SFO are shareholders in the SFO for the purpose of alignment of economic interest and risk-sharing, the initial assets and additional injection of funds are funded exclusively by a single family.
The applicant should include the relevant information above in its application for exemptions. MAS may take between two to four months to review the licensing exemption application depending on the complexity of the arrangement, the quality of the information submitted, and responsiveness of the applicant.
This article is written by Saravanan Rathakrishnan from RHTLaw Asia.
This article does not constitute legal advice or a legal opinion on any matter discussed and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and practice in this area. If you require any advice or information, please speak to a practicing lawyer in your jurisdiction. No individual who is a member, partner, shareholder or consultant of, in or to any constituent part of Interstellar Group Pte. Ltd. accepts or assumes responsibility, or has any liability, to any person in respect of this article.