MAS has announced significantly enhanced criteria for Section 13O/U fund management tax incentive schemes for fund vehicles managed by family offices.
The changes come into effect for new requests made on or after April 18, 2022.
This update urgently alerts our customers and contacts to the new stricter criteria announced by the Monetary Authority of Singapore today, April 11, 2022, which will come into effect one week from now (i.e. April 18, 2022).
Given the very short time before implementation, potential applicants for an incentive under Section 13O/U should consider whether it is possible for them to make “preliminary submissions” this week.
More generally, we would be available to talk further should you wish to discuss anything related to the changes.
Which cases are covered by the new stricter criteria?
Case where the first “preliminary submission” is made from April 18, 2022will be covered by the new criteria.
Cases where DSS has already granted Section 13O or 13U scholarships, or is in the process of processing an application, will generally not be affected.
However, if a pending request with MAS is “stale” (i.e. there has been no communication with MAS for 6 months), MAS may require the request to be restarted as per the new criteria.
How have the S13O/U award criteria become stricter?
For Section 13O (formerly known as Section 13R) cases only:
1. the fund must now have a minimum fund size of S$10 million at the time of application and must commit to increasing its assets under management (‘AT M’) to 20 million Singapore dollars in 2 years. Currently, there is no minimum AUM for Section 13O cases.
2. the family office must have at least 2 investment professionals (‘IP’), but can benefit from a grace period of one year to use the second IP. Currently, there is no prescribed minimum number of employees for the OFS. Although not expressly stated in the guidelines, it is entirely possible that the MAS will be stricter in evaluating the academic and professional experience of proposed IPs – whether they are family members or unrelated people.
3. The absolute minimum total annual business spend remains at S$200,000, but is subject to a new “tiered business spend framework” linked to the size of assets under management (see below) .
A footnote to the new MAS guidelines also mentions that assets under management should be determined using “net asset value based on accounting policy”. This suggests that capital injected into the fund as a shareholder loan will no longer count towards AUM. The fund entity will therefore need to be sufficiently capitalized (whether through common stock or preferred stock).
For Section 13U (formerly known as Section 13X) cases only:
1. The current minimum fund size of S$50 million at the time of application is unchanged.
2. The family office must have at least 3 IP addresses, including at least one non-family IP address. A one-year grace period may be granted for non-family member intellectual property. The requirement that at least one non-family member must be an IP is new.
3. Local business minimum annual spend is increased to S$500,000 (from S$200,000) for any base period, and is also subject to a new “tiered business spend framework” linked to the size of the AUM (see below).
For the cases of sections 13O and 13U:
1. There is a new requirement for the fund to make local investments. This must comprise at least 10% of the fund’s assets under management or S$10 million, depending on the value lower, ‘at any time’. This appears to be an ongoing requirement, but if it cannot be met at the time of application, a one year grace period may be granted.
Local investments include (i) shares listed on Singapore’s licensed stock exchanges; (ii) eligible debt securities; (iii) funds distributed by licensed/registered fund managers in Singapore; (iv) private equity investments in unlisted companies incorporated in Singapore (eg start-ups) with operational activities in Singapore.
We note from this definition that the funds referred to in point (iii) do not necessarily designate funds managed or constituted locally, but only those “distributed” by the managers here. Under the Securities and Futures Act 2001, a licensed/registered fund manager may distribute funds managed by its related companies overseas. We also note that the current definition does not cover banks that are neither licensed nor registered under the SFA, but are “exempt” from holding a capital markets services license for fund management. We are seeking clarification from DSS on the scope of point (iii).
2. The new tiered spending framework for businesses is as follows. Under this framework, the minimum required business expenses will depend on the fund’s assets under management at the end of each reporting period.
A point to note is that for Section 13U cases, the minimum company expenses must be incurred locally (i.e. in Singapore), whereas this is not a strict requirement for Section 13O cases. We observe that with the substantial increase in minimum business expenditures for Section 13U cases, the distinction between the minimum expenditure requirements for Section 13O and Section 13U cases has sharpened considerably.
If a fund is managed by a licensed fund manager and it already has or is seeking Section 13O or Section 13U approval and wishes to transition to a family office managed structure, it will need to a new application and will possibly be subject to the new criteria (if the new application is submitted on or after April 18, 2022).
Finally, for a variable capital company (‘VDC’) (who can apply for, has already applied for, or has obtained Section 13U or Section 13O tax incentive status, and is managed by a licensed/registered FMC as required by VCC legislation), which has l intend to replace the manager license with a single family office where permitted by VCC legislation (which will hopefully be a matter of time), we note that the tax incentive terms of Section 13O/U for the VCC after the takeover of the family office, would likely be based on the stricter conditions for family offices.