On 31 August 2007, the Monetary Authority of Singapore (MAS) issued a circular which removed the so-called 80/20 rule. The 80/20 rule was one of the conditions for a non-resident fund to qualify for tax exemption under section 13C of the Singapore Income Tax Act.
The new scheme, set out in the MAS circular dated 1 November 2006, grants tax exemptions to funds approved by the MAS between 17 February 2006 to 16 February 2011, for specified income from any designated investments for the life of the fund. The 80/20 rule required that to be approved for exemption, a fund must undertake not to have more than 20% of its issued shares beneficially owned, directly or indirectly, by persons who are citizens of Singapore or resident in Singapore.
The recent circular introduces two new concepts:
(a) Qualifying Fund
As long as a fund is not 100% beneficially owned by Singapore investors, it will be treated as a Qualifying Fund for the purposes of the scheme. Thus, for example, if 99% of interests in the fund are owned by Singapore investors and only 1% of the fund is owned by foreign investors, it would still be a Qualifying Fund.
(b) Qualifying Investors
There are various rules concerning whether an investor may be regarded as a non- Singapore investor (a Qualifying Investor). For non-resident corporate investors to be treated as Qualifying Investors, they should not have a permanent establishment ("PE") in Singapore or if they do, the investments into the Qualifying Fund must not be made out of funds from the PE. They must carry out substantial business activities for genuine commercial reasons and not have as their sole purpose the avoidance or reduction of tax.
Singapore corporate investors and other non-resident corporates who do not fulfil the above conditions will still be regarded as Qualifying Investors if they do not breach the following limits:
(i) where there are less than 10 investors in the Qualifying Fund, such a corporate investor (together with its associates) should not beneficially own more than 30% of the total interests in the Fund; and
(ii) where there are 10 or more investors in the Qualifying Fund, the threshold goes up to 50%.
The percentage interest is determined as at the last day of the financial year of the Qualifying Fund. A grace period of one month may be granted to non-Qualifying Investors in order to meet the threshold tests if such investors can prove that the limits are exceeded due to reasons beyond their reasonable control.
An investor who is not a Qualifying Investor in a Qualifying Fund will have to pay a "financial amount" to the tax authorities. This is essentially an amount based on the corporate tax rate applied on the percentage of profits of the Qualifying Fund for the financial year corresponding to such investor's percentage interest in the Qualifying Fund. Such an investor may be taxed again on its remittance into Singapore of distributions from the Qualifying Fund.
Thus, the new scheme shifts the fiscal burden, if any, from the fund to the investors who are not Qualifying Investors.
The new scheme also imposes new reporting requirements on the Singapore fund manager. The fund manager will have to issue an annual statement to each investor, reporting various details relevant to the above tests. If the Qualifying Fund has any non-Qualifying Investors, the fund manager needs to submit a declaration form to the tax authorities. Certain details of such investors are required to be included in the form. In addition, the Singapore fund manager would not be able to enjoy the 10% concessionary tax rate under the Financial Sector Incentive for Fund Managers incentive scheme if there are non-Qualifying Investors.
The new scheme became effective from 1 September 2007. New funds set up on or after that date will come under the new scheme. For existing funds, they may choose to come under the new rules with effect from the same date, or from their next financial year.
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