Singapore continues to place emphasis on its financial services sector. In particular, the Finance Minister proposed a top up to the Financial Sector Development Fund by $2 billion to give the Monetary Authority of Singapore (MAS) the ability to support its financial services sector and to enhance Singapore’s competitiveness as a global financial services hub.
Singapore saw the number of registered and licensed fund management companies in Singapore rise by 12% based on the MAS’ 2022 Asset Management Survey. This shows the continued interest in Singapore for asset managers to base themselves here to tap on the regional growth and opportunities.
In Budget 2024, the Finance Minister has proposed three key changes that will affect the asset and wealth management industry, with further details to be made available by the MAS by the third quarter of 2024.
Extension of the sections 13D, 13O and 13U Schemes to 31 December 2029
The Finance Minister has proposed that the sections 13D, 13O and 13U Schemes, which were due to lapse on 31 December 2024, be extended for another five years till 31 December 2029. Along with this extension, the withholding tax exemption for interest and qualifying payments and the Goods and Services Tax (GST) remission scheme for qualifying funds are also extended until 31 December 2029.
The Budget however was silent on whether the GST remission, which currently applies to section 13F, designated unit trust (DUT) funds and unit trusts included under the CPF Investment Scheme (CPFIS), will similarly be extended. We hope that the authorities will extend the benefits of these remissions to 31 December 2029 as well.
Enhancement of the section 13O Scheme
From 20 February 2018, the section 13U Scheme was expanded to apply to all fund vehicles constituted in any legal form (instead of funds set up as companies, trusts and limited partnerships prior to 20 February 2018). However, the section 13O Scheme remains applicable only to funds set up in the form of Singapore companies (private limited companies or variable capital companies) to-date.
The Finance Minister has proposed that the section 13O Scheme be made available to funds established as limited partnerships registered in Singapore. The proposed change will take effect from 1 January 2025. We believe this enhancement will be welcomed by the industry as it provides flexibility for Singapore-based fund managers in choosing the suitable legal form for the investment funds they manage especially if the fund may not meet the section 13U qualifying conditions, such as the minimum fund size. For example, in closed-end fund structures such as private equity funds, venture capital funds, it is common for the funds to be established in the form of limited partnerships due to investors’ familiarity and flexibility with partnership structures from a legal standpoint.
We also hope that the same enhancement can be mirrored in the section 13D Scheme to cater to fund structures established as limited partnerships outside Singapore. The current section 13D Scheme is limited to funds established as companies and trusts, which poses a practical limitation as there is a significant portion of the alternative fund industry globally which uses limited partnerships.
Economic conditions under the section 13D, 13O and 13U Schemes
Currently, the sections 13O and 13U Schemes impose economic conditions such as a minimum annual business expenditure and minimum fund size (in the case of section 13U Scheme) while there is no specified economic condition under the section 13D Scheme.
In Budget 2024, the Finance Minister proposed a revision to the economic conditions under the sections 13D, 13O and the 13U Schemes. The changes will take effect from 1 January 2025. The MAS will provide further details by the third quarter of 2024.
Our preliminary observations on the above budgetary changes are:
- The general expectation is that the economic conditions will be raised. Our recommendation would be that the revised conditions should apply only to new applications submitted on or after 1 January 2025. In other words, we expect the fund vehicles that have been approved or submitted the sections 13O or 13U applications, or are relying on the section 13D Scheme prior to 1 January 2025 should be grandfathered and can continue to apply the existing sections 13D, 13O or 13U Scheme conditions.
- The authorities have tightened the conditions for sections 13O and 13U Scheme for funds managed by single family offices in Singapore over the past two years. In our view, the same conditions for single family offices should not be replicated for the sections 13D, 13O and 13U funds managed by licensed fund management companies. Instead, the revised economic conditions for funds managed by licensed fund management companies should be designed to take into account commercial realities of such funds. Consider the following examples:
- There are open-end funds where the fund management companies do not charge any management fee and charge a performance fee only if a certain investment performance threshold is met. Hence, these funds may face difficulties meeting annual business spending conditions if the business spending condition is set at a high threshold.
- In the case of closed-end funds, commercially, the assets under management (AUM) of such a fund will be reduced over time as the fund exits its investments and the expenses incurred by the fund will correspondingly decrease over the life of the fund. For these funds, it would be helpful if the business spending condition can be assessed over the life of the fund instead of annually. This approach would be similar to that adopted for the section 13G Scheme.
- As mentioned above, the section 13D Scheme does not currently impose any economic conditions such as business spending or fund size. The business spending condition for section 13O Scheme can be met by way of local or overseas business spending; whereas the section 13U Scheme condition can only be met by way of local business spending. If the authorities were to impose business spending conditions for the section 13D Scheme, it would be helpful to understand whether the condition will be imposed based on local business spending or it would also take into account overseas business spending; and the threshold being set. Any condition imposed should take into account that the costs may not be borne by the fund directly as fund managers are often remunerated by a related party due to sub-advisory/management arrangements between the parties.
Also, there is no minimum fund size under the section 13O Scheme and there is a minimum fund size of $50 million for the section 13U Scheme. We hope that the section 13D Scheme will continue not to impose any minimum fund size requirement, similar to the section 13O Scheme, to provide flexibility to fund management companies. - From a timing perspective, we note that details of the changes are only expected to be released by the authorities in the third quarter of 2024. However, any changes to the conditions of the above schemes will take effect from 1 January 2025. The short lead time may pose challenges for fund managers seeking to raise new funds given the uncertainty of how the revised conditions may apply. Investors may question whether the funds are able to meet the revised conditions under sections 13D, 13O or 13U and the lack of certainty may delay the fund launch process, in turn adding more uncertainty in a difficult fundraising environment. We hope that the authorities can release details of the changes earlier to allow more time for fund managers to raise funds and conduct their business activities.
Overall, Budget 2024 has proposed positive changes for the AWM sector with the extension of the sections 13D, 13O and 13U Schemes and the extension of the section 13O Scheme to cover limited partnership funds registered in Singapore. We are optimistic that the authorities will adopt a measured approach in designing the revised conditions and take into account the feedback from various industry players in the process.
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Anuj Kagalwala
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