The Tax Benefits of Establishing a Family Office: What You Need to Know

For Ultra-High Net Worth Individuals (UHNWIs), deploying sound strategies to preserve their legacy is often an important priority, and setting up a family office is one of the ways in which they do so.

Family offices help to streamline multiple diverse portfolios for better wealth management and consolidation, while having dedicated professionals protect their assets for generations to come. On top of regular financial services, family offices also offer the luxury of optimised and customised strategies to align with the vision of the individual and their family, and reinforces confidentiality.

For this, Singapore has often stood out as an ideal destination. Renowned as a leading global financial hub, Singapore offers a combination of factors – such as its reliable financial systems and stable governance – that makes it a preferred place for starting a family office for the long term. This is why the country has seen the numbers increase significantly over the last few years, and why more are approaching local partners to expedite the process.

Perhaps most importantly, the tax benefits of Singapore are especially welcoming, in a bid to woo foreign investments into the country. But before one commits to the decision, here are some tax benefits and their updates you should know.

Tax exemptions for Single Family Office

The Monetary Authority of Singapore (MAS) has been providing tax exemption for single family offices for a while now, but some of the naming conventions and terms have been adjusted over the years. There are primarily four tax exemption schemes that one must be aware of. They are:-

Enhanced-Tier Fund Tax Incentive Scheme (Section 13U of ITA)
Onshore Fund Tax Incentive Scheme (Section 13O of ITA)
Offshore Fund Tax Incentive Scheme (Section 13D of ITA)
Global Investor Program Family Office Option (GIP)

These schemes help to define the taxable gains. While Singapore residents are subject to a scaled tax of up to 24% on Singapore-sourced income, and companies are subject to a flat rate of 17%, the country does not impose a tax on capital gains. The above three helps to define the parameters of the gain and taxable amount to provide the right tax exemptions. Family offices engaged in fund management activities can benefit from tax incentives offered by Singapore. Any income earned from “designated investments” (DI) for a fund with approved Section 13U/13O exemptions would enjoy it for the life of the fund until 31 December 2024.

We will talk about each in more detail.

Enhanced-Tier Fund Tax Incentive Scheme (Section 13U of ITA)

Overseen and approved by the MAS, this was formerly known as 13X (with the same naming convention), until it was replaced in December 2021 by 13U. This exemption is the broadest in scope, as it applies to both onshore and offshore funds.

13U also offers tax exemption for income from funds managed by a fund manager in Singapore, without needing to have the company incorporated there. This opens up more options for those with foreign businesses.

Because of its proximity to growing Asian markets, this can be especially useful if one is looking into the economic growth, investment opportunities, and wealth creation potential of countries like China, India, Indonesia, Vietnam and others. On top of that, Singapore’s extensive network of tax treaties means one can benefit more from the Double Taxation Avoidance Agreements (DTAs) with numerous countries, enhancing tax efficiency and simplifying cross-border operations.

Here are some requirements, including updated terms effective from 18 April 2022:-

The fund manager must have a CMS licence and be based in Singapore.
It must be managed by at least three investment professionals (IPs), one of which must be a non-family member.
Must invest at least 10% of its AUM or $10 million.
Not required to be a resident fund.
Must have annual local business spending of at least $500,000 for funds up to $100M. Above that, S$1M is required.
Business annual spending must be a minimum of $50 million for AUM.
Business is not mandated to submit annual financial reporting.

Onshore Fund Tax Incentive Scheme (Section 13O of ITA)

Overseen and approved by the MAS, this was formerly known as 13R (with the same naming convention), until it was replaced in December 2021 by 13O.

Established to attract foreign capital investors to Singapore, 13O offers tax exemption to those who establish and manage onshore funds locally. It would give tax exemption to companies incorporated and based in the country, and income would have to come from investment funds managed by a fund manager residing in Singapore.

Those who enjoy Singapore’s robust financial infrastructure featuring world-class banking institutions, asset management firms, and a thriving capital market can also enjoy longevity with the stable political environment that is long known to be pro-business and have investor-friendly policies.

Here are some requirements, including updated terms effective from 18 April 2022:-

The fund manager must have a CMS licence and be based in Singapore.
Must hire at least two investment professionals (IP), which should include research analysts, traders, and portfolio managers, with salaries not under $3,500 a month.
Must invest at least 10% of its assets under management (AUM) or $10 million locally.
The fund’s resident manager should be a Singapore Tax Resident.
Must not be fully-owned by a Singapore citizen or PR.
Yearly spending must be a minimum of $200,000 for the AUM.
Must file annual tax returns with the Inland Revenue Authority of Singapore (IRAS).
Must provide annual financial reporting to investors.
Minimum fund size of $10 million, with AUM increased to $20 million within two years.

Global Investor Program Family Office Option (GIP)

Overseen and approved by the Economic Development Board (EDB), this scheme is best for those wishing to obtain Permanent Residency (PR) within Singapore.

Here are some of the basic requirements:-

Make an investment with a minimum of $2.5 million in a Singapore-based family office having an AUM of at least $200 million.
Individual or direct family net worth of a minimum of $400 million.
Minimum of 5 years experience with a track record as an entrepreneur, manager, or investor.
A comprehensive 5-year business plan.

Which scheme is best for you?

While establishing their single family office, one should also consider how they can transfer family wealth to the next generation in an organised and structured manner, while maintaining their existing systems. A large part of the schemes are subject to the nature of geographical investments and the nature of its mobility must be considered to decide a fit – or the manner of its transition if need be.

Furthermore, Singapore continues to evolve its laws to attract investors. One scheme recently reported offers to boost philanthropy, and is a relaxed donation scheme to provide added tax exemption. With it, investors with family offices receive a 100 per cent tax deduction for overseas donations (with a certain cap) as long as they are made through qualifying local intermediaries.

With the above schemes, establishing a family office in Singapore has shown its potential for UHNWIs to benefit from significant tax exemption. For one to optimise their assets with these schemes will require detailed discussion with a trusted fund manager or a local agency, but is one that can offer an extremely lucrative future.

Seeking a future in Singapore with your own family office? Let the experienced experts at Go Global Gem help you take care of those needs.