Monetary Authority of Singapore (MAS) Circular: FDD Cir 04/2024

Guidance for funds on the tax treatment of gains or losses from the sale of foreign assets

MAS Circular: FDD Cir 04/2024 (Circular) was issued on 4 April 2024.

The MAS has issued the above-mentioned circular which clarifies how funds and managed accounts managed by Singapore-based fund managers (SG FM) can meet the economic substance requirements to comply with Singapore's new tax regime on foreign-sourced disposal gains under Section 10L of the Singapore Income Tax Act 1947 (ITA).

Economic substance requirements for compliance

To briefly recapitulate, Section 10L stipulates that gains from the sale or disposal of a foreign asset that is received in Singapore from outside Singapore by an entity of a relevant group will be chargeable to tax if:

  • The gains are derived by an entity lacking adequate economic substance within Singapore; or
  • The gains arise from the disposal of foreign intellectual property rights.

For more detailed commentary on Section 10L provisions and e-Tax Guide, please refer to:

Establishing economic substance within Singapore involves demonstrating that the operations of the entity are managed and performed in Singapore, whether by its employees or outsourced to persons that are subject to the direct and effective control of the entity.

In this regard, funds that enjoy a tax incentive under Section 13O, 13U, or 13V of the ITA are deemed to have met the economic substance requirements upon providing annual declarations to MAS confirming compliance with the tax incentive conditions.

However, funds under the Section 13D tax incentive scheme, as well as those under the Section 13O, 13U, or 13V schemes that did not meet all tax incentive conditions, are required to demonstrate economic substance within Singapore. Typically, these funds operate without a significant physical presence or direct employees, instead relying on fund managers or other third-party service providers to manage their day-to-day operations and investment activities. Given that outsourced economic activities must remain under the direct and effective control of the fund, MAS has provided the following rules (referred to as “outsourcing rules”) on how funds can prove direct and effective control over the outsourced services:

  • The investment activity of the fund has been outsourced to a SG FM;
  • The investment strategy is documented;
  • The investment service agreement sets out the duties and responsibilities of the SG FM and includes terms for the termination of services of the SG FM;
  • The SG FM has allocated dedicated resources to perform its functions and responsibilities based on the investment service agreement; and
  • The SG FM charges an arm’s length fee for its services rendered.

Additionally, an entity with a managed account that is managed by a SG FM may apply the same guidelines for establishing economic substance and, if necessary, demonstrating control over outsourced activities if the disposed assets relate to investments within the scope of the managed account.

Clarifications on compliance and scope under the new tax regime for foreign-sourced disposal gains

The circular also clarifies several key issues regarding the tax treatment of gains or losses arising from the sale of foreign assets, specifically for funds and managed accounts overseen by SG FM, including:

1.  Scope of Section

1.1  Consolidation of financial statements

Most funds and Singapore Special Purpose Vehicles (SPVs), being categorized as investment entities, typically do not consolidate their investee companies in their financial statements. Therefore, these entities generally fall outside the scope of Section 10L. This clarification is crucial in understanding that the applicability of Section 10L to fund and their SPVs may be limited and primarily affects entities that engage in consolidation.

1.2  Application to foreign funds managed by multiple managers

Only gains from the sale or disposal of foreign assets that are from the portion of a foreign fund managed by a SG FM fall within the scope of Section 10L and are assessed for economic substance under this section.

Portions managed by non-Singapore based managers are outside the purview of this regulation.

2.  Compliance with Economic Substance Requirements 

2.1  Management and oversight

Funds and managed accounts must demonstrate that their management and oversight occur within Singapore. Specifically, the investment manager must have sufficient staff and facilities in Singapore to perform its duties effectively. The criterion for "adequate premises" should be satisfied if the fund or its service provider maintains an office in Singapore that is utilized by its employees.

2.2  Delegation of fund management activities by SG FM

Where the outsourcing rules are met, a fund is considered to have met its economic substance requirements if its investment activities are managed by a SG FM who retains overall responsibility, even if part of the management functions is delegated to non-SG FMs.

2.3  SPVs

The economic substance test can be applied at the immediate holding entity level if this entity controls the SPV, derives economic benefits from its activities, and defines its core investment strategies.

These clarifications provide helpful guidance to funds and managed accounts on operational scenarios and their tax implications under the new regulatory framework, ensuring that entities understand how to align their business practices with the stipulated economic substance requirements.

For further information, please contact Daniel Ho, Michael Velten, and Chua Kong Ping.

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