Singapore As An Asian Fund Hub: The Growing Trend Of ‘Onshoring’

Increased Scrutiny Of Offshore Funds And Opportunities In Asia

In February 2020, the Cayman Islands was placed on the European Union’s non-cooperative tax jurisdictions blacklist , raising concerns in the asset management industry as to the potential ramifications on Cayman Islands-domiciled funds, such as increased monitoring and audits, additional reporting obligations, and the imposition of additional withholding taxes by European Union countries. The Cayman Islands was also listed on the Financial Action Task Force’s ‘grey list’ in February 2021 as a jurisdiction under increased monitoring for having strategic deficiencies in its regime to counter money laundering, terrorist financing and proliferation financing, and then placed on the European Union’s anti-money laundering blacklist in February 2022 .

It had been suggested by some industry commentators that these blacklisting issues were mainly due to technical matters, and the Cayman Islands has since been removed from these blacklists . Removal from the blacklists occurred only after the Cayman Islands Monetary Authority (CIMA) introduced a slew of regulatory reforms and additional requirements, including the Cayman Islands Private Funds Law 2020, which requires most closed-end private funds to be registered with CIMA and to be subject to additional compliance obligations. The Cayman Islands remains an important and popular fund domicile. However, we have observed that the increased regulatory burden, scrutiny and negative perception have contributed to fund managers progressively exploring alternative fund jurisdictions in Asia. In particular, Singapore’s status as a financial hub where many fund managers already have operations, makes it a natural choice.

The Asia-Pacific fund market saw positive growth in the region despite turbulent market conditions, reaching a total assets under management (AUM) of US$27.2 trillion in 2022 and having the highest 10-year compound annual growth rate (compared to all other regions) of 14 per cent, while the global average remained at nine per cent. Singapore stands out as a leading onshore jurisdiction, largely stemming from its favourable laws and regimes, well-developed financial services industry, and strong asset management know-how and talent pool.

Singapore has also positioned itself as a developed pan-Asian asset management centre and an attractive location for global public investors and asset owners to access public and private market opportunities across Asia and the ASEAN. The Monetary Authority of Singapore (MAS), Singapore’s central bank and financial regulatory authority, has said it will continue to develop Singapore as a fund domiciliation centre of choice, mapping its strategy to enhance the various fund structures available, develop the private capital markets, and position Singapore as a regional fund domiciliation hub under its refreshed Financial Services Industry Transformation Map 2025. In terms of AUM, Singapore has generally seen a steady upward trend – from S$1.6 trillion in 2012 to a peak of S$5.4 trillion in 2021. While this came down slightly to S$4.9 trillion in 2022 in line with the wider decline in global AUM, Singapore’s AUM grew by 10 per cent to S$5.4 trillion in 2023, faster than the AUM growth in Asia. The steady growth of Singapore’s AUM illustrates its importance to foreign investors and asset managers as a global financial centre. Further, the encouraging take up of Singapore’s new variable capital company (VCC) regime, with a total of 1,089 VCCs being established as of 1 July 2024 , has also helped to raise Singapore’s profile as a fund domicile to global fund managers and investors.

Singapore offers global asset managers a stable and flexible platform to raise and deploy capital in Asia-Pacific and capitalise on growth in the region; it has also enhanced its tax regime and offers a variety of legal structures that may be used as investment fund vehicles which we explore further below. Similarly, Hong Kong, with its close proximity to the China market and status as an international financial centre, has also sought to capitalise on the onshoring trend, introducing tax exemptions and improving its fund structures to promote itself as an Asian asset management hub.

Taxation

Tax considerations play a critical role in fund formation and structuring as fund managers seek to minimise tax leakage and maximise returns for investors. Some factors that fund managers need to consider include an increasing focus on substance requirements globally, tax incentives offered for funds and fund managers in the relevant jurisdiction, and the availability of double taxation agreements (DTAs) with jurisdictions in which the underlying investments of the fund are located. Singapore is well placed in this regard.

Addressing Substance Requirements And BEPS

An increasing focus on substance requirements has meant that fund managers are incentivised to co-locate funds in the same jurisdictions where they are being managed from. Base Erosion and Profit Shifting (BEPS) refers to tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, or to erode tax bases through deductible payments. Tasked by the G20, the Organisation for Economic Co-operation and Development (OECD) has developed a two-pillar approach to address tax avoidance, streamline international tax rules, and provide a more transparent tax environment.

To prevent treaty abuse, the Principal Purpose Test was introduced into many tax treaties. This gave tax authorities the ability to deny tax benefits if one of the principal purposes of the transaction structuring was to obtain a treaty benefit. To satisfy this test, fund managers should have sufficient substance in the jurisdiction of fund establishment. For example, this may be supported by having a majority of the board of directors or key decision makers who are tax residents of the jurisdiction of fund establishment. For asset managers with investment professionals working and living in Singapore, co-locating their funds in Singapore with investment and management teams that are operating and making investment decisions for their funds should provide a strong basis to support such substance requirements.

Apart from international tax laws, Singapore has recently amended its domestic tax laws to address avoidance risks. Prior to 1 January 2024, Singapore had no capital gains tax, whether on foreign-sourced or Singapore-sourced gains. However, a new section 10L to the Income Tax Act 1947 (ITA) of Singapore was introduced, where gains received or deemed to be received in Singapore by an entity of a relevant group from the sale or disposal of any foreign asset may, under certain conditions, be treated as income chargeable to Singapore income tax under section 10(1)(g) of the ITA. For instance, the foreign-sourced disposal gains may be subject to tax if the entity does not have adequate economic substance in Singapore.

Note however, the MAS has clarified that funds relying on the tax incentive schemes under section 13O and section 13U of the ITA (further explored below) will automatically be regarded as meeting the economic substance requirement for the basis period covered by the annual declaration required by the MAS as part of the ongoing compliance requirements for the incentives, if it submits such annual declaration to the MAS and meets the qualifying criteria for these tax incentive schemes. These are designed to provide economic substance in Singapore, such as requiring the fund to be managed by a Singapore-based fund manager with a minimum number of full-time Singapore-resident investment professionals.

Section 10L of the ITA will also not apply to gains from the sale or disposal of a foreign asset (not being an intellectual property right) that is carried out as part of, or incidental to, the business activities of a holder of a capital markets services licence under the Securities and Futures Act 2001 of Singapore (SFA). This paradigm shift in Singapore’s approach towards capital gains tax is to “address international tax avoidance risk by entities without real economic activities in Singapore”, and should be seen “in the context of [its] broader policy to align key areas of [Singapore’s] tax regime with international standards such as the rules against harmful tax practices agreed by the Inclusive Framework on BEPS, as well as the EU Code of Conduct Group Guidance”.

Another example of Singapore’s strategy of encouraging funds to have more economic substance in Singapore can be seen in its implementation of certain legal requirements for funds structured as VCCs in Singapore. For example, a VCC must have at least one Singapore-resident director, a Singapore-resident company secretary and auditor, and a registered office in Singapore; it must also be managed by a Singapore-licenced fund manager.

Leveraging Double Taxation Agreements

Where investors are resident in a jurisdiction different from the fund’s domicile, double taxation issues may arise. As such, the availability of DTAs is an important consideration when determining the domicile of a fund, taking into account where most of its investors are likely to be tax resident. In addition, DTAs also help to reduce the potential withholding tax and/or gains subject to tax in an investee country that the fund may otherwise be subject to. As at the end of June 2024, Singapore has concluded more than 90 comprehensive DTAs (covering all types of income) and eight limited DTAs (covering income from shipping and/or air transport activities). With one of the most extensive networks of DTAs in the world, Singapore provides a significant advantage to Singapore-domiciled funds over many other jurisdictions. Notably, as most other factors (such as the effective tax rate) may be internally determinable as a matter of policy of a jurisdiction, its DTA network cannot be unilaterally adjusted.

Tax Incentives

To level the playing field with tax neutral offshore jurisdictions, Singapore offers various tax incentive schemes for funds under the ITA. To encourage domiciliation of funds in Singapore, the MAS may approve fund companies relying on the exemption under section 13O of the ITA, which affords income tax exemption on a wide category of qualifying fund income. A key requirement of such an exemption is that both the fund company and the fund manager must be based in Singapore , lending to the exemption also being known as the ‘Resident Fund Scheme’. It was additionally announced in the Singapore Budget Statement 2024 that the Resident Fund Scheme will be extended until 31 December 2029, and it is also expected that from 1 January 2025, the Resident Fund Scheme will be enhanced to include limited partnerships registered in Singapore.

In addition, the MAS may approve onshore and offshore fund structures relying on the exemption under section 13U of the ITA, also known as the ‘Enhanced Tier Fund Scheme’ which also affords income tax exemption on a wide category of qualifying fund income. Unlike the Resident Fund Scheme that currently applies only to Singapore companies, the Enhanced Tier Fund Scheme is available to the widest range of fund structures, including trusts, limited partnerships, companies, and managed accounts, wherever domiciled. The current key requirements of the Enhanced Tier Fund Scheme include a minimum fund size of S$50 million, and that the fund manager must be based in Singapore , with at least three investment professionals employed by such fund manager.

Apart from tax incentives covering the investments of a fund, the MAS also offers a scheme for fund managers. Under the ‘Financial Sector Incentive – Fund Management Award’, the MAS may provide approved Singapore fund management companies with a concessionary corporate income tax rate of 10 per cent provided certain conditions are met, as compared to the default corporate income tax rate of 17 per cent in Singapore.

Apart from management fees, fund managers are usually also rewarded by earning carried interest, which is a share of the fund’s overall profits, usually triggered after a certain preferred return is earned by the investors of the fund. Currently, while Singapore has no capital gains tax, there are also no specific guidelines on the taxation of carried interest in Singapore, and Singapore has no specific tax concessions in respect of carried interest. However, to the extent that carried interest is income accruing to a fund management company that has been granted the Financial Sector Incentive – Fund Management Award, such carried interest may be taxed at the concessionary tax rate of 10 per cent.

Availability Of A Variety Of Flexible Fund Structures

Apart from tax, the availability of suitable fund structures in a jurisdiction also provides more structuring options for fund managers. To facilitate the co-location of the fund and the fund manager, Singapore has been progressively and proactively introducing new legal structures and improving existing structures to cater to investment funds.

Singapore is no stranger to the limited partnership structure, having introduced it in 2009 under the Limited Partnerships Act 2008 of Singapore (the LP Act) and primarily modelled the structure on the equivalent legislation in the United Kingdom. Singapore’s limited partnership structure is also largely comparable to the Cayman Islands’ exempted limited partnership structure, which is commonly used for private equity funds. We have observed an increased number of Singapore-based fund managers make use of the Singapore limited partnership structure, and indeed, there has been a steady increase in the number of Singapore limited partnerships registered with the Accounting and Corporate Regulatory Authority of Singapore (ACRA), with a total of 773 Singapore limited partnerships as of 1 July 2024 , as compared to 483 in January 2021 .

To further strengthen Singapore’s position as a leading fund management and domiciliation hub, and to update the existing provisions of the LP Act so that the regulatory framework keeps pace with the needs of businesses, ACRA sought feedback on proposed amendments to the LP Act in October 2021. Some of the proposed amendments include differentiating between limited partnerships used as investment fund vehicles (Fund LP) and those that are used for other purposes, and providing greater certainty and flexibility to Fund LPs to structure fund terms in line with market norms.

Another legal structure gaining popularity in Singapore is the VCC, which was introduced on 14 January 2020 under the Variable Capital Companies Act 2018 following a pilot programme initiated by the MAS in September 2019. Key features of the VCC regime include a statutory segregation of assets and liabilities of different sub-funds under an umbrella fund, permissible redemption out of capital, and payment of dividends out of capital. The VCC offers another fund structuring option that enhances Singapore fund offerings. As of 1 July 2024, a total of 1,089 VCCs have been incorporated or re-domiciled in Singapore.

Destination Or New Port Of Call?

While we have observed more fund managers adopting onshore fund structures in Singapore in recent years, in the medium to longer term, we do not believe this is a “zero-sum game”, where funds will be domiciled in only one jurisdiction to the exclusion of others. With fund managers dealing with increasingly sophisticated investors from multiple jurisdictions and more complex regulatory environments for foreign investments, we have increasingly observed that structures in different jurisdictions are often used in tandem with each other to achieve different objectives.

It is increasingly common to see private funds utilising a master-feeder structure involving both onshore and offshore vehicles. As illustrated in Figure 1, this may involve a feeder fund vehicle, such as a Cayman Islands exempted limited partnership, that invests through a master fund vehicle domiciled onshore, such as a VCC in Singapore. The investor-facing offshore feeder fund benefits from investor familiarity, while the Singapore master fund VCC potentially can access Singapore’s network of DTAs, which may be beneficial for the downstream investments of the fund.

Figure 1: Master-Feeder Structure

Parallel funds that accommodate investors restricted from participating in certain types of funds, or to attract investors from different jurisdictions with specific regulatory requirements, may also be established in a different jurisdiction from the main fund to keep separate pools of capital for different investors while following the same overall investment strategy of the main fund. For instance, as illustrated in Figure 2, a main fund that is established in Singapore may establish a Luxembourg parallel fund that complies with the Alternative Investment Fund Managers Directive in Europe for European investors. The fund sponsor will typically control the general partners and managers in each location, and the fund documentation of the main fund and the parallel fund will be aligned to ensure that the terms on which the parallel fund operates are largely similar to that of the main fund, so that the parallel fund and the main fund have a common investment policy and strategy and asset portfolio.

Figure 2: Parallel fund structure

Fund structuring is a multi-faceted process, which should take into account a variety of considerations, including tax planning, commercial flexibility, and investor familiarity. Considerations of global trends, such as mitigation of tax avoidance and anti-financial crime measures, should also be taken into account, especially for funds vying for capital from institutional investors. While traditional offshore fund jurisdictions remain popular and well accepted by most international investors, Singapore’s targeted tax incentive schemes for funds, extensive DTA network, and variety of flexible fund structures, coupled with its traditional strengths as an open economy and reputable financial services hub, make it a compelling onshore jurisdiction for asset managers to co-locate their fund management and investment operations with their funds.

With increasingly complicated regulatory environments and cross-border investment considerations, we believe that fund structures will also need to evolve, and a variety of offshore and onshore fund vehicles may need to be deployed in tandem to cater to these requirements.
 

 

 1  Council of the European Union, Taxation: Council revises its EU list of non-cooperative jurisdictions (18 February 2020). See https://www.consilium.europa.eu/en/press/press-releases/2020/02/18/taxation-council-revises-its-eu-list-of-non-cooperative-jurisdictions/.

2     Financial Action Task Force, Jurisdictions under Increased Monitoring – February 2021 (February 2021). See https://www.fatf-gafi.org/en/publications/High-risk-and-other-monitored-jurisdictions/Increased-monitoring-february-2021.html.

3     Commission Delegated Regulation (EU) 2022/229 of 7 January 2022 on amending Delegated Regulation (EU) 2016/1675 supplementing Directive (EU) 2015/849 of the European Parliament and of the Council, published in the Official Journal of the European Union on 21 February 2022. See https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32022R0229.

4    The Cayman Islands was removed from the European Union’s non-cooperative tax jurisdictions blacklist in October 2020, the Financial Action Task Force’s “grey list” in October 2023, and the European Union’s anti-money laundering blacklist effective February 2024. See the following: Council of the European Union, EU list of non-cooperative jurisdictions for tax purposes: Anguilla and Barbados added, Cayman Islands and Oman removed (6 October 2020) at https://www.consilium.europa.eu/en/press/press-releases/2020/10/06/eu-list-of-non-cooperative-jurisdictions-for-tax-purposes-anguilla-and-barbados-added-cayman-islands-and-oman-removed/, FATF, Jurisdictions under Increased Monitoring – 27 October 2023 (October 2023) at https://www.fatf-gafi.org/content/fatf-gafi/en/publications/High-risk-and-other-monitored-jurisdictions/Increased-monitoring-october-2023.html, and Commission Delegated Regulation (EU) 2024/163 of 12 December 2023, amending Delegated Regulation (EU) 2016/1675, published in the Official Journal of the European Union on 18 January 2024, at https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=OJ:L_202400163.

5    KPMG, Growing in a Turbulent World (6 December 2023). See https://assets.kpmg.com/content/dam/kpmg/cn/pdf/en/2023/12/growing-in-a-turbulent-world.pdf.

6     MAS, Financial Services Industry Transformation Map 2025. See https://www.mas.gov.sg/development/financial-services-industry-transformation-map-2025.

7     MAS, Asset Management Surveys 2017 and 2022. See https://www.mas.gov.sg/-/media/mas/news-and-publications/surveys/asset-management/singapore-asset-management-survey-2017.pdf and https://www.mas.gov.sg/-/media/mas/news-and-publications/surveys/asset-management/asset-management-survey-report-2022_version-finalised.pdf.

8     MAS, Asset Management Surveys 2022 and 2023. See https://www.mas.gov.sg/-/media/mas/news-and-publications/surveys/asset-management/asset-management-survey-report-2022_version-finalised.pdf and https://www.mas.gov.sg/-/media/mas/news-and-publications/surveys/asset-management/singapore-asset-management-survey-2023.pdf.

9     ACRA, Business Registry Statistics: 2024 Statistical Highlights – Monthly business entity count. See https://www.acra.gov.sg/training-and-resources/facts-and-figures/business-registry-statistics.

10    OECD, What is BEPS?. See https://www.oecd.org/tax/beps/about/.

11     Section 10L of the ITA.

12     Deloitte, IRAS e-Tax Guide on new rules for taxation of foreign asset disposals published (9 January 2024). See https://www.taxathand.com/article/33914/Singapore/2024/IRAS-e-Tax-Guide-on-new-rules-for-taxation-of-foreign-asset-disposals-published.

13     MAS, FDD Cir 04/2024, Guidance for Funds on the Tax Treatment of Gains or Losses from the Sale of Foreign Assets (4 April 2024). The MAS has also clarified therein that a fund relying on the tax incentive scheme under section 13D of the ITA will be required to meet the economic substance requirement.

14     Singapore Parliamentary Debates: Official Report (3 October 2023), Vol 95 No 113, Chee Hong Tat (Senior Minister of State for Finance and Transport). See https://sprs.parl.gov.sg/search/#/fullreport?sittingdate=03-10-2023.

15     Inland Revenue Authority of Singapore, List of DTAs, Limited DTAs and EOI Arrangements (last updated 16 April 2024). See https://www.iras.gov.sg/taxes/international-tax/list-of-dtas-limited-dtas-and-eoi-arrangements?pg=1&indexcategories=DTA.  

16     Vincent Ooi, “Tax considerations for funds structuring in Asia” (October 2020). See https://ink.library.smu.edu.sg/cgi/viewcontent.cgi?article=5161&context=sol_research.

17     Specifically, the fund company must be incorporated and tax resident in Singapore, and be managed or advised directly by a fund manager in Singapore which holds a capital markets services licence under the SFA for fund management or is exempt from such requirement.

18     Inland Revenue Authority of Singapore, Budget 2024 – Overview of Tax Changes. See https://www.iras.gov.sg/docs/default-source/budget-2024/budget-2024---overview-of-tax-changes.pdf.

19       It was additionally announced in the Singapore Budget Statement 2024 that the economic criteria for funds to qualify under the Enhanced-Tier Fund Scheme will be revised to take place from 1 January 2025 and the MAS is expected to provide further details by the third quarter of 2024.

20     Specifically, the fund must be managed or advised directly by a fund manager in Singapore which holds a capital markets services licence under the SFA for fund management or is exempt from such requirement.

21     ACRA, Business Registry Statistics: 2024 Statistical Highlights – Monthly business entity count. See https://www.acra.gov.sg/training-and-resources/facts-and-figures/business-registry-statistics.

22     ACRA, Business Registry Statistics: 2021 Statistical Highlights – Monthly business entity count. See https://www.acra.gov.sg/training-and-resources/facts-and-figures/statistical-highlights-2021.

23     ACRA, Public Consultation on Proposed Changes to the Limited Partnerships Act. See https://www.acra.gov.sg/legislation/legislative-reform/listing-of-consultation-papers/public-consultation-on-proposed-changes-to-the-limited-partnerships-act.

24     ACRA, Business Registry Statistics: 2024 Statistical Highlights – Monthly business entity count. See https://www.acra.gov.sg/training-and-resources/facts-and-figures/business-registry-statistics.

25     Indranee Rajah, ““Variable Capital Companies Bill (2018)” – Second Reading Speech by Ms Indranee Rajah, Second Minister for Finance, on 1 October 2018”. See https://www.mas.gov.sg/news/speeches/2018/variable-capital-companies-bill-2018.

26     Ibid.

27     Ibid.

28     MAS, Asset Management Survey 2023. See https://www.mas.gov.sg/-/media/mas/news-and-publications/surveys/asset-management/singapore-asset-management-survey-2023.pdf.