Salient factors and cardinal considerations when setting up a Single Family Office in Singapore | Legal Chat with Robson Lee
There is an increasing number of single family offices (SFOs) in Singapore. Senior Minister and Chairman of the Monetary Authority of Singapore (MAS) Tharman Shanmugaratnam informed parliament on 5 October 2020 that the number of SFOs in Singapore has grown to about 200 over the past few years. Citing recent industry research, he highlighted that each SFO typically manages assets in excess of US$100 million. That translates to over US$20 billion in assets under management (AUM), held by SFOs in Singapore.
What is a Single Family Office?
The term ‘single family office’ is not defined in the Securities and Futures Act (Chapter 289 of Singapore) (SFA).
MAS’ position (as stated on the MAS website under FAQs on Licensing and Registration of Fund Management Companies, last updated on 6 April 2020) on the term ‘single family office’ is that it typically refers to an entity that manages assets for or on behalf of a family, and which is also wholly owned or controlled by the members of that same family.
The term ‘family’ is used in a broader context, and could refer to individuals who are the descendants of a single ancestor. The family could also include these individuals’ spouses, ex-spouses, adopted children and step children.
Why are more wealthy families setting up their Single Family Offices in Singapore?
“It is easy to see why Singapore has become a favoured destination for high net worth individuals (HNWI) and their families to set up SFOs, given its reputation as a well governed and well-regulated regional financial centre, its political stability, and its extensive network of local and global financial institutions based here,” says Robson Lee Teck Leng, Partner, Gibson Dunn & Crutcher LLP.
“Furthermore, the government has established attractive tax incentives to encourage funds to be situated and managed by family offices in Singapore.”
To mitigate the potential tax exposure on income and capital gains derived through fund management activities conducted in Singapore, Lee explains that the tax exemption schemes set out under Sections 13CA, 13R and 13X of the Income Tax Act (Chapter 134 of Singapore) (ITA) ensure that “specified income” (including gains) derived by a fund from “designated investments” is exempt from tax.
The list of designated investments covers a wide range (including stocks, shares, bonds, securities etc.), and is constantly revised to account for market developments and new financial instruments.
In addition to the tax incentives, MAS also allows SFOs to qualify for exemptions in relation to licensing and regulatory requirements.
As a general rule, a company that wishes to conduct regulated fund management activities in Singapore would need to be registered with, or licensed by, MAS. However, a SFO may rely on the exemption provided for a corporation which manages funds for its related corporations, under paragraph 5(1)(b) of the Second Schedule to the Securities and Futures (Licensing and Conduct of Business) Regulations.
Alternatively, a SFO that provides financial advisory services to its related corporations may rely on an existing exemption under regulation 27(1)(b) of the Financial Advisers Regulations.
In sum, Singapore’s stable government, progressive legal and regulatory framework, and conducive pro-business environment have contributed to its attractiveness as a wealth management hub for HNWIs. The SFO structure also paves a way for HNWIs and their families to obtain permanent residency (PR) status in Singapore under the Global Investor Program Family Office Option.
Are Single Family Offices regulated in Singapore?
MAS has no intention to license or regulate SFOs. As mentioned above, SFOs are able to rely on the existing class licensing exemptions under the SFA and the Financial Advisers Act (Chapter 110 of Singapore) (FAA) for the provision of fund management and financial advisory services to related corporations.
Entities that manage funds for a single family but which do not fall neatly within the scope of the existing licensing exemptions, can also seek a licensing exemption from MAS on a case-by-case basis.
5 Key Considerations when setting up a Single Family Office in Singapore
If you are planning to set up a SFO in Singapore, here are 5 things you should take note of.
1. What are the family’s objectives for the SFO?
Before you establish a SFO, it is essential to consider all of the family’s objectives in setting up the SFO. Does the family need fund management services or financial advisory services? Is the family looking to emigrate or seek tax residency status? Which family members are you looking to involve in the operation of the SFO?
2. What assets will the SFO manage?
Once the family’s objectives have been established, the next key consideration involves the assets that will need to be injected into and managed by the SFO.
These assets can include anything from financial investments, privately held or publicly listed entities, properties, private planes, and even family heirlooms.
The assets involved will affect the tax and legal structures and the investment holding structure of the SFO, so it is important to be very clear and focused on the assets to be managed by the SFO at the outset.
3. What will the management structure look like?
Another key component in the setup of a SFO is establishing the management structure.
It is important to objectively assess potential candidates with the right professional qualifications and experience, before appointing persons to form the management team of the SFO. During this process, the SFO will need to consider its business plan, investment mandates, budget planning, tax reporting, and other operational needs. The management team must have the requisite qualifications and experience to ensure the proper governance and smooth operations of the fund.
4. Tax structure
As mentioned above, a number of tax incentive schemes are made available to SFOs in Singapore. These schemes may exempt SFOs from most, if not all, tax on investment income and gains. The main tax exemption schemes currently applicable to SFOs are as follow:
- Offshore Fund Tax Exemption Scheme (Section 13CA ITA)
- Onshore Fund Tax Exemption Scheme (Section 13R ITA)
- Enhanced Tier Fund Tax Incentive Scheme (Section 13X ITA)
Whether or not the SFO qualifies for a tax exemption scheme would depend on whether the fund meets the relevant conditions of such scheme. For example, a Section 13CA fund has to be tax resident and incorporated outside of Singapore, whereas a Section 13R fund has to be a Singapore tax resident and incorporated in Singapore.
The Section 13X scheme requires, inter alia, that the applicant fund has a minimum fund size of S$50 million. Such requirement is absent from Sections 13CA and 13R ITA. It is important to know and plan which tax incentives the SFO could qualify for, as each scheme comes with its own set of requirements.
5. Legal structure
“Singapore offers a range of legal structures to set up a SFO. One key consideration for the choice of legal structure would be whether it falls within the scope of existing class licensing exemptions,” explains Lee, who has advised many in setting up their SFO.
“Often, the principal applicant would set up two entities in Singapore that are wholly owned by a common holding company: one is a family fund which holds the family’s assets, and the other is a family office. Under this legal structure, the family office acts on behalf of family members to provide management and advisory services to the family fund. A SFO that manages funds for, or provides financial advisory services to, its related corporations may automatically rely on existing MAS exemptions.”
Nonetheless, there is no “one size fits all” legal structure, adds Lee. MAS takes the position that the following structures are broadly typical of SFO arrangements, which are relevant to MAS’ assessment when it reviews any application for licensing exemption:
- 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.
MAS may take between two to four months to review an application for licensing exemption, depending on, inter alia, the complexity of the arrangement, the quality of the information submitted, and the responsiveness of the applicant.
This write-up is a primer on the salient features and factors to consider before setting up a SFO. Setting up a SFO in Singapore should involve professional advice on the legal, accounting, and tax aspects of such an investment holding depending on the type of family assets involved and the family’s needs.
There may be a need to consider a succession plan or philanthropy strategy, if this is envisaged to be a future milestone of the family wealth management blue print. You and your family should seek professional advice to walk you through every step of the way.
Disclaimer: This article and the quotes cited should not be taken as any form of legal, tax or financial advice. Anyone intending to set up a single family office should seek the appropriate professional advice.