Funds management is big business in Asia. Cerulli & Associates notes that the total assets under management (AUM) in Singapore as at the end of 2007 hit a five-year high coming in at just over US$800bn, a figure which represents a 30% increase on the corresponding period in 2006. Of this total figure, net inflows accounted for 62% of the growth while the rising stock market accounted for the rest. Hong Kong had US$1.2trn in AUM in 2007, a 49% increase on 2006, Cerulli says.
This increase is largely due to the special administrative region’s unprecedented access to China’s wealth of affluent investors. Somewhat predictably, however, the forecasts for the remainder of this year and into 2010 are glum, with AUM expected to plummet in both countries as wary investors choose to hold on to their cash rather than throw it to the mercy of wounded markets. Enter the guiding hand of the regulator which, in Singapore, has launched a new line of tax incentives designed to both encourage funds to return and new fund houses to set up in the Lion nation. But will it work?
Positive signs
Lawyers ALB spoke to were understandably excited by the Singapore Government’s announcement that it would add an enhanced tier to existing fund management incentives, saying that the move was both overdue and a step in the right direction. “The enhanced tier status and the proposed amendments in the recent budget announcement is definitely a step – or two – in the right direction,” says Ho Han Ming, a counsel with Clifford Chance in Singapore.
“The amendments announced in the Budget clarify and refine the existing tax scheme announced in August 2007, which had unintentionally imposed additional operational difficulties on managers and administrators when ensuring compliance with its requirements,” he says.
Under the current tax incentives, specified income derived by qualifying funds from designated investments is generally exempt from Singapore income tax. Qualifying funds can only be in the form of companies, trusts or individual accounts. Where a qualifying fund is in the form of a company or a trust, the qualifying fund must not be 100% beneficially owned by resident investors. Resident nonindividual investors of a qualifying fund are subject to a 30–50% investment limit, depending on the number of investors in the fund. If that limit is breached, the resident non-individual investors would have to pay a financial penalty.
“It is clear that compliance with the new scheme will no longer be contingent on the fund domicile nor residency of the investors into the fund – the latter of which proved to the sticking point in the old days – the ‘80/20’ rule and more recently ‘30/50’ days of the ‘qualifying fund’ scheme,” Ho says.
Singapore’s ‘new’ tax incentive scheme
The Singapore Government, in line with its initiatives included in the 2009 budget, has announced a new tax incentive for certain investment funds managed from Singapore that has no restrictions on the residency status of fund vehicles or investors.
- The government will add a new enhanced tier to the existing fund management incentives for funds with a minimum size of S$50m at the point of application
- The 30–50% investment limit on resident non-individual investors will be lifted for funds so that resident companies are able to enjoy the full benefits of tax exemption for qualifying income derived by funds without any worries about being subject to financial penalties
- Enhanced tier will be open to fund vehicles in the form of companies, trusts and limited partnerships
- Enhanced tier will be effective from 1 April 2009 to 31 March 2014
- Funds that are in the scheme on or before 31 March 2014 will continue to enjoy the tax exemption if they continue to meet the scheme’s conditions
Further steps needed
However, despite the fact that the amendments are considered to be long overdue, there have been some suggestions that the bar may have been set a little too high and smaller sized funds are set to miss out.
“The current rules discriminate against Singapore-resident funds and Singapore-resident corporate investors. The enhanced tier would appear to remove the restrictions on the residency status of both the fund and the investors,” says Yang Eu Jin, a partner with KhattarWong in Singapore.
“If the proposed minimum fund size at the inception of the fund must be at least S$50m for the enhanced tier to be applicable, then it would appear that smaller funds would not be able to avail themselves of the benefits.”
The problem, Yang says, is that it is not uncommon to see the starting size of such funds at around the S$20m mark or less.
Another problem, albeit one largely beyond the control of the regulators, is – given the current economic climate – just whether these measures will fulfil their stated objectives and lure new, and old funds back into the country. For although Singapore has been relatively successful in attracting fund managers to set up operations in the country, it remains to be seen whether there will be a flurry of activity in this regard given the current economic situation. But while decreased activity on this front is expected in the short to medium term, lawyers ALB spoke to expect that the proposed amendments will help set up the fund management industry in Singapore for sound long-term growth enabling it to, inter alia, be in a better position to compete with Hong Kong.
“The incentives of the Singapore Government over the last few years have generally been quite successful in attracting fund managers to set up operations here,” Yang says. “I think the tide of fund managers setting up operations in Asia is an irreversible one and that jurisdictions have a favorable environment, which comprises many factors, of which tax incentives are a major but not the only consideration, given that corporate vehicles can set up easily in a number of jurisdictions. The single most important factor may perhaps be the jurisdiction which is the most convenient platform from which fund managers can access the increasing wealthy Asians who are often the target audience for such funds.”
“The incentives of the Singapore Government over the last few years have generally been quite successful in attracting fund managers”Yang Eu Jin, KhattarWong
Playing catch up
Nevertheless, all agree that Singapore still has a lot of ground to make up if it is to pip Hong Kong in the race to become Asia’s pre-eminent funds centre.
“It appears that Hong Kong’s being part of China is a double-edged sword. Some foreigners they perceive it as a window to the mainland, but to others Singapore is preferred as it is perceived to be a more neutral and independent jurisdiction. There is no denying, however, that Hong Kong is still a more mature market when it comes to the fund management industry,” says Yang – and this is something evidenced perfectly by Cerulli’s statistics.
It’s this race between funds centres in Asia that is set to keep lawyers extremely busy in the short to midterm as clients seek out both new and distressed opportunities.
“There is certainly a market for legal services in the area although the volume does not appear yet to be sufficient to sustain the type of highly specialised practices that you might find in the large UK firms,” says Yang, noting that the bulk of his firm’s instructions come from fund managers who are starting up their own unregulated funds.
Similarly, Ho’s clients are also actively on the look out for new opportunities. “We continue to see interest from managers who are keen to establish alternative investment funds, with a recent focus on distressed opportunities. Interestingly, we also see interest from Asian equities-focused managers, as well as private equity managers who see opportunities in the short to medium term space.”