Introduction
Singapore is continuing its strategic approach to establishing itself as a wealth management center and to making itself an attractive destination for those seeking a tax-effective place of residence in Asia. Although tax rates in Singapore remain slightly higher than those in Hong Kong, its major competitor in the region, both Singapore and Hong Kong now offer similar tax systems to individuals, with no tax on other than locally sourced income and no donation or inheritance taxes. For companies, Singapore taxes foreign income that is remitted to Singapore, but careful planning can result in a similar taxation approach as the one that applies in Hong Kong, where only Hong Kong–source income attributed to a trade or business carried out in Hong Kong is subject to tax.

A major advantage Singapore has relates to its very wide network of tax treaties (more than 50 compared with 3 for Hong Kong). For corporate and other business structures, treaties offer many advantages, including reductions in withholding rates and the avoidance of where there is no permanent establishment maintained in the relevant country to which profits can be attributed. For individuals, treaties provide the additional benefit of protection from domestic residence rules in a third country. For example, a resident of Hong Kong who visits Canada regularly and maintains connections there may well be considered a tax resident of Canada. The same connections to Canada maintained by a Singapore resident may not result in Canadian residence status because of protection under the tie-breaker rules in the tax treaty between Singapore and Canada—a huge advantage given Canada’s worldwide system of taxation. Singapore is sprinting ahead of Hong Kong in its strategic approach to bi-lateral treaties and through its investment in education in the wealth management area.

2008 Budget
Singapore’s 2008 budget was delivered by Minister for Finance Tharman Shanmugaratnam in Parliament on 15 February 2008. The announcement that personal income tax bands and rates are to remain unchanged has left some disappointed, because many expected the budget to address the disparity between the corporate tax rate (18 percent) and the top marginal personal income tax rate (20 percent). Overall, good news was provided to high-net-worth individuals (through the abolition of estate duty and the tax exemption of certain income received by family owned investment holding companies) as well as to private banks and their associated entities (through grants of concessionary tax rates on income derived from certain financial activities).

Key Changes
The proposed changes have potential implications for the private banking industry.

Abolition of Estate Duty
Estate duty was abolished effective 15 February 2008, consistent with the government’s desire to promote the wealth management industry in Singapore. With this proposed change, Singapore will be in accordance with such countries as Australia, Malaysia, and Hong Kong that have similarly abolished estate duty. Therefore, we expect the abolition to be a boost in attracting the immigration of high-net-worth individuals to Singapore.

It will be interesting to see the impact this proposed change has on the trust industry in Singapore. Because the abolition of estate duty in Hong Kong resulted in a decline in the volume of trusts set up by Hong Kong residents, the same situation might develop in Singapore. Trustees that mainly service the local market will need to find other ways to attract local clients to set up trusts.

Tax Exemptions for Family-Owned Investment Holding Companies
A new incentive scheme for family-owned investment holding companies will be introduced to grant tax exemption to qualifying companies on locally sourced investment income and foreign-sourced investment income similar to the tax exemption currently granted to individuals. The incentive is valid from 1 April 2008 to 31 March 2013.

In the past, family investment holding vehicles have been treated less favorably than have individuals in terms of tax treatment, and families were better off holding their assets directly. This incentive encourages families to use holding companies to hold their assets. As more details are released shortly, we hope that the difference in tax treatment will be equalized.

Not-Ordinarily Resident Scheme (NOR)
The NOR scheme is designed to attract foreign talent to Singapore and grants favorable tax concessions to senior executives taking on regional positions in Singapore. An individual can qualify for the NOR scheme if he or she is a resident of Singapore for income tax purposes for the year of assessment (YA) and is not a resident of Singapore for income tax purposes for the three consecutive YAs before that YA.

NOR individuals may enjoy a time apportionment of Singapore employment income, subject to certain conditions. Previously, only NOR individuals with a minimum 10 percent effective tax rate could qualify for time apportionment of Singapore employment income. This 10 percent effective tax rate condition will be replaced by a S$160,000 income threshold, and the scope of time apportionment concessions will also be expanded to cover perquisites and leave pay. These changes will be of primary interest to senior executives who move to Singapore to take up regional positions.

In addition, tax exemption of the employer’s contributions to nonmandatory overseas pension schemes, currently granted to NOR individuals, will now be subject to the condition that the employer does not claim a deduction for the contributions.

Promoting New Financial Activities
A number of changes have been proposed that might encourage private banks and their associated entities to increase the range of investment products and services they offer to clients.

Extension and Enhancements to the Financial Sector Incentive (FSI) Scheme. Currently, the FSI scheme offers a concessionary tax rate of 5 percent on income derived from qualifying high-growth and high-value-added activities and 10 percent on income derived from qualifying financial activities that are important to Singapore’s financial center development objectives, subject to conditions.

Qualifying high-growth and high-value-added activities include, but are not limited to, the following:

• Arranging, underwriting, and distributing any issued qualifying debt securities (QDS¹)
• Trading of qualifying derivatives
• Offering services such as brokerage, nominee, and custodian in connection with transactions relating to shares, bonds, and other securities of foreign companies listed on the SGX

The FSI scheme was set to expire on 31 December 2008, but pursuant to the budget, it will be renewed for a period of five years from 1 January 2009 until 31 December 2013 (both dates inclusive).
In addition, enhancements will be made that include, but are not limited to, the following:

• A grant of a concessionary tax rate of 5 percent on the qualifying income derived from the following qualifying Shariah-compliant activities (subject to conditions):
  — lending and related activities
  — fund management and other investment advisory activities
• The scope of qualifying activities with respect to QDS will be expanded to include trading of QDS and Qualifying Project Debt Securities (QPDS²) effective from 16 February 2008

Concessionary Tax Rates on Income Derived from Insurance Brokering and Advisory Services to Offshore Clients. Currently, income of insurance and reinsurance brokers is subject to tax at 18 percent. However, the rate will be reduced following the budget. Fees and commissions derived from the provision of insurance brokering and advisory services, by qualifying licensed direct and reinsurance brokers, to non-Singapore-based clients will only be subject to tax at the concessionary rate of 10 percent for a period of up to 10 years.

Extension and Enhancement to Tax Incentives to Promote Project Financing. Currently, certain tax incentives relating to the project finance industry have been granted, subject to conditions. These incentives include, but are not limited to, the following:

• Tax exemption on qualifying income derived by investors from QPDS
• Tax exemption on foreign-sourced interest income received by qualifying entities listed on the SGX from offshore qualifying infrastructure projects
• A 5 percent concessionary tax rate on income derived by an approved company under the FSI (project finance) scheme from arranging, underwriting, and distributing any QPDS and qualifying project loan and from provision of project finance advisory services related to a qualifying infrastructure project

These incentives were originally scheduled to expire on 31 December 2008. However, following the budget, they have been extended from 1 January 2009 to 31 December 2011 (both dates inclusive).

In addition, effective from 1 April 2008 to 31 December 2011 (both dates inclusive), a 10 percent concessionary tax rate will be granted, for a period of up to 10 years, on income derived by a company from the provision of management services to business trusts and funds that own offshore infrastructure assets and list in Singapore.

It is expected that the Monetary Authority of Singapore will release further details of the proposed changes shortly.

Other General Tax Changes
Some other observations on the budget of key interest to the private banking industry are as follows.

Liberalization of Definition of Start-Up Company
The definition of a start-up company has been amended so that it is now easier to qualify for the tax benefits under the start-up exemption scheme.³

Currently, an eligible start-up company is defined as one that (1) is incorporated in Singapore, (2) is a tax resident of Singapore, and (3) has total share capital that is beneficially held, directly or indirectly, by no more than 20 persons all of whom are individuals throughout the basis period⁴ for that year of assessment (YA).

Following the budget, effective from YA 2009, an eligible start-up will still need to meet the incorporation and residency requirements. However, the requirement relating to total share capital has been liberalized, and a start-up company with corporate shareholders may now be eligible to apply for the tax benefits under the start-up exemption scheme, subject to conditions. This proposed change will also apply to existing companies still within the first three years of assessment of their establishment.

Liberalization of Conditions that Govern Access to Tax Benefits Relating to Equity Remuneration
The conditions allowing key employees of companies to enjoy tax benefits⁵ relating to equity remuneration have been relaxed. Following the budget, notwithstanding other conditions, companies no longer need to offer share awards or stock options to at least 50 percent of their employees. Instead, companies need to meet only a 25 percent requirement.

Unilateral Tax Credit for Foreign-Sourced Income
Singapore currently has avoidance of double tax agreements (DTA) with more than 55 countries but does not have DTAs with the United States and Hong Kong. In the past, unilateral tax credits were available only in relation to specific types of income from nontreaty jurisdictions, such as foreign-sourced service income, royalties, dividends, employment income, and foreign branch profits.
Unilateral tax credits for foreign income taxes have now been extended to all types of foreign-sourced income that are remitted to Singapore from non-DTA countries, subject to certain conditions. Most significantly, unilateral tax credits will be available to foreign-sourced interest income, which is not exempted under the foreign-sourced income exemption.