Tighter tax exemption measures for new family offices in Singapore will likely attract high net worth (HNW) families with significant assets under management (AUM) and have a positive impact on local investment and jobs, industry experts believe.
The new rulings, which also set minimum requirements for capital or AUM, local business expenditure, local investments, and the hiring of investment professionals (IP), came into effect on April 18, a week after the Monetary Authority of Singapore (MAS) unveiled them.
New family offices applying under Section 13O (formerly known as 13R) – for funds of less than $50 million ($36.5 million) in AUM – must now meet a minimum capital requirement of S$10 million ($7.3 million) when they apply, rising to S$20 million within two years.
They must also hire at least two IPs, though they may get a one-year grace period to hire the second one. Section 13O previously had no minimum AUM or IP hiring requirements.
Family offices applying under Section 13U (formerly known as 13X) – for funds of more than or equal to S$50 million in AUM – must hire at least three IPs. At least one of the three cannot be a family member, which is a new requirement.
New family offices must also now comply with minimum total business spending rules subject to tiers tied to their AUM size. The minimum for Section 13U has gone up to S$500,000 from S$200,000, while the amount for Section 13O remains at S$200,000.
In addition, new family offices must now invest at least 10% of their AUM or S$10 million, whichever is lower, in local investments such as listed equities on the Singapore stock exchange, qualifying debt securities, funds distributed by Singapore-licensed fund managers, and private equity investments into non-listed local companies, including start-ups.
BOOST FOR LOCAL INVESTMENT INDUSTRY
The new minimum requirement for local investment is likely to make for a more vibrant Singapore asset management industry, said Ryan Lin, director at Singapore’s Bayfront Law, which advises foreign family office applicants.
“Singapore fund managers are celebrating the requirement of minimum local investments – which includes funds managed by Singapore-licensed fund managers – as the rule will likely culminate in attracting more funds from family offices for the Singapore fund managers to manage,” he said.
He said the measures on minimum business spending and hirings will help stimulate the Singapore economy and create new IP jobs and raise the level of professionalism in the industry.
But he noted that Singapore is short of qualified IPs for these roles because many already work for private banks and established financial institutions in the city.
To meet demand, the Wealth Management Institute in Singapore has set up training for mid-career professionals looking to switch to investment and wealth management, said Sharon Sim, board advisor at Aries Investment Management, a local multi-family office.
She said the requirement for family offices to invest a minimum sum in Singapore is an encouraging move for the local financial industry and will help the MAS to understand better the investment strategy of these entities and the assets they have invested in.
“You’d be expecting foreign family offices who want to set up bases in Singapore to have that kind of commitment to invest in Singapore talent and local investments,” she said, adding that it will open up new fundraising avenues for small companies and startups.
CHINA, INDIA, AND INDONESIA GROWTH
The number of family offices in Singapore doubled to about 400 between 2019 and 2020. Professionals expect the new minimum AUM requirement will not dampen the wave of foreign interest.
“I don’t think S$10 million in the ultra-high net worth family office space is going to be a major deterrent,” said Sim. She believes the minimum AUM can act as an effective filter to exclude those families who can't or don't want to grow their AUM.
She says her firm has received many enquiries from Indonesia, China, and, particularly in the last year, Hong Kong. Singapore’s political stability, economic progress, and health standards are major attractions for foreign wealthy families.
“In the past two years, we have seen a lot of Indonesian families moving to Singapore physically. Now that Covid is improving, they’ve decided to stay in Singapore and have their businesses based out of here,” she said.
Newer wealthy Indonesian business families are not just owning properties in Singapore, but are also seriously considering moving their business headquarters or setting up family offices here, she said.
Bayfront’s Lin says the new rules are likely to draw wealthy families from India, who can generally satisfy the higher AUM requirement, since the tax incentives continue to be attractive.
“In any case, the wealth management space has 'short-term memory' and the family office aspirants will soon acclimatise to the enhanced criteria which, in my personal view, are not overly onerous,” he said.