Monetary Authority of Singapore (MAS) Circular: FDD Cir 05/2022

MAS Circular: FDD Cir 05/2022 (Circular) was issued on 19 September 2022.

The MAS has enhanced the list of “Designated Investments” (DI) under the Resident Tax Exemption Schemes retrospectively to (i) clarify the tax treatment of income derived from interests held in non-publicly traded partnerships; and (ii) refine of the conditions relating to the investment in physical Investment Precious Metals (IPM). The retrospective effect of the amendments for item (i) and (ii) commences from 15 February 2007 and 19 February 2022, respectively.

Tax treatment of income derived from interests held in non-publicly traded partnerships

In 2007, the MAS clarified that fund vehicles with tax incentive status under the Section 13D, 13O and 13U exemption schemes (collectively, the Tax Exemption Schemes) (Incentivised Funds) deriving income from a partnership (either publicly traded or non-publicly traded) would be viewed as receiving income on its share of specified income derived by the partnership from the underlying designated investments. In effect, the partnership was intended to be viewed as a tax transparent vehicle from a Singapore perspective and for the purposes of determining if an income of the fund vehicle derived from its partnership interest is a “Specified Income” from “Designated Investments”, the partnership will be looked through to the underlying investments of the partnership.

To ensure clarity on the position that income arising from interests in partnerships held by Incentivised Funds would be exempted from tax, the list of “Designated Investments” under the relevant regulations will be updated to specifically include “non-publicly traded partnerships that do not carry on a trade, business, profession or vocation in Singapore and that wholly invest in designated investments” (under Item [y))—per the list of DI on or after 19 December 2022. This legislative change will have retrospective effect from 15 February 2007.

One of the most important clarifications provided in this MAS circular is the confirmation that tax exemption accorded to income derived from the holding non-publicly traded partnerships includes any unrealised gains recognised via mark-to-market accounting treatment in respect of the partnership interests. Prior to this clarification being provided, where an Incentivised Fund held a partnership interest on revenue account and an accounting mark-to-market gain was required with respect to such interest in accordance with FRS 109 or SFRS(I) 9, there had seemingly been some ambiguity as regards whether such unrealised gain should be taxable by virtue of the operation of Section 34AA of the Income Tax Act 1947, and on account of such gain not being Specified Income from a Designated Investment. In fact, over the past year or two, the IRAS had issued several enquiries that had asserted that mark-to-market adjustments arising on the foregoing basis had been subject to tax, and a few affected taxpayers had been challenging that position. The enhancement to the list of Designated Investments and the MAS’s clarification are welcomed authoritative confirmations that address the IRAS’s challenges and realign the scope of the exemptions with what stakeholders had previously understood (based on the MAS’s 2007 guidance) as regards their scope vis-a-vis partnership interests and investments held via partnerships.

For further information, please contact Matthew Lovatt and Joyce Khoo.