China's ultra-rich continue to set sights on Singapore

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OVER the past decade, the Chinese regulatory environment and its administration have become more stringent. It has never been easy to transfer funds out of China because of massive foreign exchange controls and this is compounded by the fact that a resident will need to report details of foreign financial assets and liabilities, and economic transactions conducted with non-Chinese nationals, either directly or through financial institutions.

All of this makes it very complicated - or nearly impossible - for Chinese business owners to hold foreign investments directly or through shell companies. However, they can choose to establish a regional holding company in a reputable location to hold their overseas investments. They can also consider setting up a family office using that particular holding company and thus kill two flies with one strike: investing while generating revenue.

In this respect, Singapore has a number of advantages. Most importantly, the Republic's domestic system does not award tax residence certificates to holding companies without economic substance.

If a pure shareholding (investment holding) company is set up in the country and files its tax returns, which is equivalent to claiming that it regards itself as a local tax resident, the Singaporean tax authorities will regularly ask questions about the reasons for the set-up here, the existence of non-nominee directors, the background of certain decisions made at board level, etc.

The documentation produced in this particular communication with the Singapore tax authorities can be of good use for meeting the Chinese regulatory requirements, especially the beneficial ownership criteria under the double tax treaty.

Singapore is ranked as one of the top five least corrupt countries in the world. Its reputation and legal system create a favourable environment for financial markets; as a result, a regional holding vehicle set up in the Republic may benefit from easier fund-raising and well-established financial infrastructure and expertise.

There are also no exchange control restrictions or thin-capitalisation rules in Singapore. The country's large tax treaty network, non-taxation of non-Singapore sourced income and the foreign tax credit pooling system help to reduce the overall effective tax rate by consolidating global investments under a Singapore holding vehicle. While the family investment holding company incentive expired in 2013, the local environment provides tax incentives for Singapore-based regional and global headquarters as well as for funds and trusts managed out of the country.

Importantly, Singapore can serve not only as a location to establish a hub for investments in South-east Asia and other countries, but also to efficiently structure an inter-generational wealth transfer.

To start with, unlike many other jurisdictions, there are no capital gains, real estate, inheritance or gift taxes in Singapore. Moreover, through the use of Singapore trusts one may achieve asset protection within and beyond his or her lifetime without incurring an additional tax burden.

There are a great variety of tax exemption schemes for the fund vehicles tailored for both resident and offshore funds managed by Singapore fund managers.

Under the respective schemes, tax exemption is granted in respect of all "specified income" and gains derived from the "designated investments" by the fund. Such fund schemes may also be efficiently implemented to structure a family office set up for current and future generations.

Statistics show that more than half of China's millionaires are either considering emigrating or have already taken steps to do so. More than 60 per cent of mainland Chinese high net worth individuals and over 20 per cent of ultra-high net worth individuals have completed their immigration process, with close to 50 per cent of the latter currently considering leaving.

Educational opportunities

Hong Kong and Singapore are among the most popular destinations for the rich Chinese nationals. Non-tax reasons underpinning the move include geographical and cultural proximity to mainland China, which facilitate settling in as compared to the previously popular western destinations such as Canada and Australia.

However, there are also other factors that Chinese nationals find important when considering this move - better educational opportunities for their children, high standards of safety and a comparatively healthier environment (an increasingly important factor given concerns over China's environmental situation).

In the case of Singapore, our tax system is among one of the most attractive in the world, encompassing the quasi-territorial basis of taxation, a relatively low marginal income tax rate capped at 20 per cent, non-taxation of capital gains, an abundance of tailored tax incentives for individuals and an absence of estate or gift tax.

A growing number of Chinese investors have also acknowledged the benefit of portfolio diversification and are expanding their reach beyond their main business assets, which are often located in mainland China. This might comprise bonds and Asian stocks or subsidiaries in other countries. However, it is real estate that is most exciting, as it is an asset that can be passed on to the next generation.

The scarcity of land in Singapore and the historic sharp appreciation of real estate over recent decades have attracted many Chinese buyers to Singapore properties in Sentosa and other parts of the country. While the relatively new additional buyer's stamp duty might have slowed down this appetite a bit, it could just be a short-term bump in the road.

Singapore will continue to be a choice destination for Chinese investors in the years to come and it may soon overtake Hong Kong as an investment platform. With its favourable tax regime and unique position - comparably close-by and familiar, but still sufficiently distant from the Chinese mainland to be regarded as a stable independent player - Singapore will continue to attract high net worth individuals from China for the mid to long term.

The writer is the private company services leader and tax partner at Deloitte Southeast Asia

Source: Business Times, 16 May 2014