This year's Budget mobilizes key sectors across Singapore, setting in place initiatives that will transform our economy to be smarter, stronger and more resilient for the years ahead.
TAKING REAL ESTATE FORWARD
The change: Extension and exclusions to the safe harbor rule
While Singapore does not have a capital gains tax, gains from the disposal of shares may still be considered as revenue gains and be subject to tax. To address this uncertainty, a safe harbor rule was introduced to provide upfront certainty of non-taxation of gains derived from the disposal of ordinary shares by companies under certain circumstances. This scheme will be extended for another five years to 31 December 2027.
Currently, the rule does not apply to gains from disposal of unlisted shares in an investee company that is in the business of trading or holding Singapore immovable properties (other than the business of property development). From 1 June 2022, the scheme will also not apply to disposals of unlisted shares in an investee company that is in the business of trading, holding or developing immovable properties in Singapore or abroad. The tax treatment of gains from such share disposals will be assessed based on the facts and circumstances of the case.
IRAS will provide further details by end June 2020.
The way forward: Time to rethink investment structures and consider exit strategies
While the extension of the safe harbor rule to 31 December 2027 is a welcome change, the expansion of the exclusion has come as a surprise.
Unless specific exemption applies, Singapore companies will no longer enjoy certainty on gains relating to the disposal of shares in a company that invests in offshore real estate.
It is not clear at this stage whether grandfathering rules will be provided for existing structures.
The lack of certainty may encourage investors with investments in offshore real estate to consider applying for Singapore fund exemption schemes. Real estate investors may need to revisit their investment structure and exit strategies in view of this change.
TAKING FINANCIAL SERVICES FORWARD
The change: Enhancement of the withholding tax exemption for interest on margin deposits
Currently, the withholding tax exemption applies to interest payments made on margin deposits by members of approved exchanges1 to non-resident persons on certain covered products2. The exemption is available till 31 December 2022.
The scope of covered entities under this exemption has now been extended to include the following:
- Members of approved clearing houses
- Approved exchanges
- Approved clearing houses
The scope of covered products has also been liberalized to include all other derivative contracts traded or cleared on approved exchanges and approved clearing houses.
The enhancements will apply to agreements entered into on or after 19 February 2020.
MAS will provide further details by May 2020 and review the extension of this exemption by 31 December 2020.
1. Approved exchanges include Singapore Exchange Securities Trading Ltd (SGX-ST) and Singapore Exchange Derivatives Trading Ltd (SGX-DT)
2. Covered products include non-Singapore dollar spot foreign exchange, financial futures and gold futures
The way forward: A strengthened position as a global financial centre
The enhancement of the end-to-end withholding tax exemption regime will further liberalize the financial services sector.
A broad-based withholding tax exemption would have further simplified the process and help Singapore-approved exchanges gain access to more diversified funding sources. This would have strengthened Singapore's position as a global and regional funding hub.
Derivatives are risk management products which are important and attractive in times of volatility in financial and commodity markets, such as economic uncertainty due to exposure to overseas markets or the COVID-19 outbreak impacting supply chains and affecting production. It is therefore opportune that the extension of the exemption to such products has been granted as it will further enhance Singapore's position as a global financial market.
TAKING ASSET MANAGEMENT FORWARD
The change: Enhanced regime for venture capital funds
Venture capital funds
Section 13H venture capital funds (S13H funds) currently enjoy tax exemption on income from qualifying investments. Budget 2020 expands the list of qualifying income and investments to include relevant items which enjoy tax exemption under other fund tax exemption schemes (e.g. Sections 13R, 13X, 13CA).
Similar to Sections 13R and 13X fund tax exemption schemes, S13H funds will now enjoy GST remission at a fixed recovery rate to claim GST incurred on their business expenses. They can also now be constituted as foreign-incorporated companies or Singapore Variable Capital Companies.
Venture capital fund management companies
Fund managers managing S13H funds currently enjoy a 5% concessionary tax rate on management fees and performance bonuses from S13H funds for up to 10 years. Going forward, the incentive tenure has been set at five years and can be renewed subject to conditions.
The S13H exemption and fund management incentive will be extended till 31 December 2025.
The way forward: A step forward for Singapore to become a regional fund hub
These announcements are a welcome step towards promoting Singapore as a regional fund hub for start-ups and aspiring entrepreneurs.
With the proposed expansion of the list of exempt income, there is a clear intent to align the benefits of this scheme with other more successful fund incentive schemes under Sections 13X and 13R. This measure addresses industry concerns about the restrictive nature of the exempt income list that was previously available for S13H funds.
While there are some enhancements to the incentive, it remains to be seen if fund managers will finally embrace S13H over other fund incentive schemes.
For example, restrictive qualifying conditions for S13H funds such as the prescribed level of investment in Singapore start-ups ought to be relaxed further. In the absence of which, it is debatable whether the revised S13H fund scheme is a game changer for the venture capital fund community.
TAKING SHIPPING FORWARD
The change: Extension and enhancements of the Maritime Sector Incentive (MSI) schemes
Budget 2020 offers key enhancements to the existing MSI schemes as follows:
a. MSI schemes will be extended till 31 December 2026.
b. Withholding tax exemptions will be extended for qualifying payments made on qualifying financing arrangements entered in to on or before 31 December 2026.
c. In-house ship management income derived on or after 19 February 2020 by an MSI-Approved International Shipping Enterprise (AIS) Sister Company and an MSI-AIS Local Subsidiary will enjoy tax exemptions under the MSI-AIS Award.
d. Income derived on or after 19 February 2020 from operating a provisionally Singapore registered ship will qualify for tax exemption under the MSI-Shipping Enterprise (Singapore Registry of Ships) scheme. Where a permanent certificate of registration is not obtained, the tax exemption is allowed for up to one year from the date of issue of the provisional certificate.
e. Stamp duty emissions will lapse for instruments executed on or after 1 June 2021.
The way forward: A strengthened position as a global maritime hub
In line with the overall theme of Budget 2020 to transform and grow Singapore's economy and enterprises, it is important to improve our market position in the wake of increasing competition from global economies.
The move to extend and enhance the MSI schemes is pivotal to deepening and strengthening Singapore's competitiveness as an international maritime hub in order to tap on the increasing trade volumes in one of the fastest growing regions in the world.
MPA will provide further details by May 2020.