21 Dec 2010, Ralph Chicktong, Custom House Fund Services (Singapore), Hedge Funds Review
Singapore is increasingly attracting interest as a fund and fund management and advisory company domicile. The reasons for this are varied and include infrastructure, soundness of the economy, maturity as a financial centre, reputation of regulation quality and adherence to the rule of law, cost competitiveness, quality of service providers, a large pool of well educated staff and favourable financial treatments such as taxation.
There are a number of highly favourable economic and infrastructure reasons favouring Singapore. Singapore is closing the gap on London and New York as a leading financial centre, according to a Straits Times poll on global financial centres published in March 2010.
The strong interest in investment in Asia from within the region as well as outside is reflected in markedly increased activity in the alternative finance sector, particularly among start-up hedge funds. This trend promises to continue into the near future.
A range of favourable double-tax treaties with countries such as India, make Singapore attractive.
Singapore is relatively low cost compared with European and US domiciles. It also is competitively priced relative to other major Asian domiciles such as Hong Kong. In addition professional advisors – attorneys and auditors – are regarded as highly efficient.
An attractive aspect of Singapore is the proactive, business-friendly attitude of the Monetary Authority of Singapore (MAS). MAS’s door is always open to anyone with a regulatory query or problem. The regulator is prepared to work with businesses to resolve problems. This is not the case with regulatory authorities in many other countries.
Singapore has a sophisticated communication and transport infrastructure as well as ancillary services that fund managers would expect from a global financial centre.
The jurisdiction’s proximity to China and emerging Asian markets is another plus point. Many professionals based in Singapore are multilingual, speaking English, Cantonese and Mandarin.
Singapore’s independence and rule of law are seen as highly favourable attributes by Western businesses and increasingly by Chinese investors and companies wanting to establish in Singapore.
Singapore offers a modern financial and banking system. For cross-border investments and businesses, financial institutions are able to support complex international transactions. The jurisdiction also enjoys a strong judicial system.
With these essential services and infrastructure in place, Singapore is seen as a regional operations centre by many financial institutions.
Education and training have always been encouraged by government policy and incentives. There is an abundance of accounting, fund administration and other investment related courses available to students. This has and will ensure in future the availability of a highly skilled workforce to service growing demand.
Finally, as well as having all of the infrastructure regulation and access to a skilled and cost-efficient workforce favouring the domicile of fund management companies and funds, Singapore is seen to offer lifestyle advantages over its major competitors, especially for families. For example, Singapore does not suffer from Hong Kong’s pollution problems.
There are a number of contributing factors that will ensure the attractiveness of Singapore as a major financial centre and increasingly as a domicile of choice for the funds business.
There is increasing interest in Singapore as a funds domicile. The unit trust is the favoured vehicle. This applies particularly to private equity and family office structures, as well as classic hedge funds.
Collective investment schemes in Singapore can be organised as an authorised scheme or as a recognised scheme. An authorised scheme is constituted in Singapore and approved by the MAS while a recognised scheme is constituted outside Singapore and approved by the MAS.
To set up an open-ended unit trust fund in Singapore, both the trustee and fund manager must be public companies incorporated in Singapore. There are minimum paid-up share capital requirements for both the trustee and fund manager. These are not prohibitive. The trustee must be independent of the fund manager. To qualify for tax incentives, the fund manager must be located in Singapore and approved by the MAS.
Under the regulation a Singapore-domiciled fund must be administered in Singapore. Such fund administration can be handled externally or in-house (with the proper segregation of duties being evidenced). Increasingly, given investor pressures for transparency and independence, the administration servicing is being placed in the hands of independent fund administration.
Singapore is also an attractive domicile for fund management and advisory companies. There were 172 fund management companies domiciled in Singapore as at September 2010, according to alternative finance data publishing company Eurekahedge.
A company intending to carry out fund management activities will be governed by the MAS and subject to regulations under the Securities and Futures Act (SFA).
The MAS undertook an audit of fund managers in 2008-09 and has since had an ongoing dialogue with a range of industry participants on draft legislation. The draft legislation published in April 2010 has been received as positive and is in line with global practice.
The new regulation for fund managers allows for three categories: notified fund management companies, licensed A1 fund management companies and licensed retail fund management companies. The criteria for each category revolve around the number and classification of investors, fund size, capital requirements and experience and domicile of the principals.
Singapore enacted a new tax regime for funds and fund managers in 2007. This has been steadily enhanced to align with international practice and to maintain competitiveness.
Specified income derived by an approved company incorporated and resident in Singapore from designated investments arising from funds managed in Singapore by a fund manager also in Singapore is exempted from Singapore income tax at the fund level, provided the company is not 100% beneficially owned, directly or indirectly, by investors in Singapore.
For fund managers, fees earned by a fund management company in Singapore are subject to Singapore income tax at the normal corporate tax rate of 17%. However, under the Financial Sector Incentive (FSI) scheme, a concessionary tax rate of 10% is applied on income derived by a company that has been granted the FSI (fund management) company award from: managing the funds of a qualifying fund for the purpose of any designated investments; or providing investment advisory services to a qualifying fund in respect of designated investments.
A number of exemptions apply for goods and services tax (GST).
Singapore is home to a large number of quality service providers, both local and international. There is significant depth and choice in respect of the ancillary services associated with the establishments of funds including administrators, lawyers, fiduciary service providers, audit firms, brokers, custodians and banks.