Singapore Hedge Fund

Alternative asset management in Singapore

A guide to investing in Singapore…

We are Migrating the blog here: http://singaporehedgefund.com – faster, better,bigger…….

Here is a new quick guide to investing in Singapore found by my colleague at VBK Partners:  Patrick Kemmis. It comes from Investoroffshore.com and it is quite thorough… Here it is:

Located in South East Asia, Singapore is a highly developed and successful free market economy which enjoys an open and corruption-free environment, stable prices, a low tax regime and a per capita GDP equal to that of most parts of Western Europe.

Historical and Economic Overview

Although most probably think of Singapore the city, the Republic of Singapore is actually a 700 square kilometre island sandwiched between Indonesia and the tip of the Malay peninsula. The city was founded as a British trading colony in 1819 and formed an important strategic trading and naval post within the British Empire in the 19th and early 20th centuries.

After the Second World War, decolonisation meant that Singapore gravitated towards the Malaysian Federation, which it joined in 1963. However, this was a short-lived phase of the country’s history, and, two years later, Singapore become an independent republic. Subsequently, it has become one of the world’s most prosperous countries with strong international trading links and one of the busiest international ports.

Since independence, Singapore has been a parliamentary republic with a directly elected unicameral parliament. As a legacy of its association with the former British Empire, Singapore’s legal system is based on English common law. Also, English is one of the four official languages spoken on the island, alongside Chinese, Malay and Tamil.

Approximately three-quarters of Singapore’s population of 4.65m (2009) are of Chinese origin but there are significant minorities of Malaysians and Indians, while the presence of the major global multinationals in the city also ensures a sizeable army of expats from Europe, North America and elsewhere around the globe. Singapore’s currency is the Singapore dollar, which has been appreciating against the US dollar. In 2009, US$1 was worth S$1.41.

Singapore’s economy has been heavily dependent on exports, particularly in electronics and manufacturing and it was hard hit by the slump in the technology sector at the turn of the century. An outbreak of Severe Acute Respiratory Syndrome in 2003 hampered its recovery by curbing tourism and consumer spending. However, fiscal stimulus, combined with low interest rates, a surge in exports, and internal flexibility led to vigorous recovery in 2004, with real GDP rising by 8%, the economy’s best performance since 2000. Real GDP growth averaged 7% between 2004 and 2007, but fell to 1.2% in 2008. The government is playing down hopes of a speedy recovery..

The government, led by Prime Minister Lee Hsien Loong has also been actively putting in place investor-friendly reforms in order to diversify the economy and better insulate it against future troughs. It is the government’s ambition to elevate Singapore to the position of South East Asia’s main financial services and investment hub, a position currently occupied by Hong Kong.

Trading Agreements

As a member of the Association of Southeast Asian Nations (ASEAN), Singapore will benefit from participation in world’s largest free trade area, with China committed to reducing tariffs on certain goods traded with the 10-nation group, which includes Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Thailand and Vietnam. Japan and South Korea will also participate in this tariff-cutting process.

The deal will trigger cutbacks in tariffs over a five year period, commencing an enduring process of economic integration in the region. Furthermore, Singapore can be expected to benefit from an FTA with China, which was signed in October, 2008.

The first round of negotiations for a Free Trade Agreement (FTA) between Singapore and Costa Rica took place in April, 2009, focused on drawing up a package of measures to liberalize trade in goods and services, as well as looking at ways to simplify customs procedures and promoting reciprocal investment.

Bilateral trade between Singapore and South Korea almost doubled in 2008 to reach USD25bn (GBP18bn) after a Korea-Singapore Free Trade Agreement (KSFTA) came into effect in 2006. It has also been revealed that Korea’s investments in Singapore have increased by over USD800m (GBP570m) in the three years since the FTA’s introduction.

Tax

For resident individuals, Singapore’s tax regime is fairly benign. Capital gains taxes are only levied in very limited circumstances, there are no gift taxes and estate duty was abolished in 2008. Personal income tax rates in Singapore are also relatively light: resident individuals are taxed at progressive rates up to 20% (reduced from 22% in 2006) on income accruing in or derived from Singapore.

From January 1st 2004, foreign income received or deemed received by a resident individual in Singapore was no longer subject to Singapore income tax, except if received through a partnership in Singapore.

A non-resident employee present in Singapore for more than 60 days but less than 183 days in a calendar year faces a 15% tax on gross employment income, or is taxed as a resident on that employment income, whichever is higher.

Non-resident individuals employed in Singapore for 60 days or less are exempt from tax on employment income. Other income derived in Singapore by non-residents is taxed at the corporate tax rate, with the exception of interest income derived from approved financial institutions in Singapore, which is tax-exempt.

Corporate tax stands at 18%, but this will be reduced to 17% in 2010. The 2009 budget offered a range of stimulus measures to assist business:

  • Unutilized trade losses and capital allowance for YA 2009 and YA2010 can be carried back to set off against Assessable Income of three immediately preceding YAs up to a limit of SGD200,000;
  • Businesses that incur qualifying Renovation and Refurbishment expenses in the basis periods for YA 2010 and YA 2011 can deduct such expenses in one year instead of over three years, subject to the cap of SGD150,000 for each relevant three-year period;
  • Companies Limited by Guarantee (CLGs) will be allowed to qualify for the tax exemption scheme for new start-up companies effective from YA2010;
  • A new tax framework for qualifying amalgamations will be introduced;
  • An accelerated write-down of capital allowance (CA) will be allowed on plant and machinery acquired in the basis periods for YA 2010 and YA 2011. CA is computed based on 75% of the capital expenditure for the first YA and 25% of the capital expenditure for the second YA.
    Under the Block Transfer Scheme (BTS), withholding tax (WHT) exemption can be granted in respect of interest payable on a loan taken by a shipping enterprise from a lender outside Singapore to acquire a Singapore-flagged ship. This WHT exemption is for ships registered with the Singapore Registry of Ships (SRS) on any date from January 1, 2009 to December 31, 2013;
  • The tax exemption schemes for foreign investors and qualifying resident funds, tax incentive schemes for approved trustee companies and financial sector incentive companies will be enhanced by expanding the list of specified income and designated investment;
  • The tax deduction for collective impairment provisions made by banks, merchant banks or finance companies under MAS Notices 612, 811 and 1005 will be extended for a further three years, subject to conditions.

Singapore currently has tax treaties with 55 countries. Notable among these are treaties with Australia, Belgium, Canada, China, France, Germany (awaiting ratification as of May 2005), India, Italy, Japan, the Russian Federation, South Africa and the United Kingdom. Limited treaties have also been signed with Bahrain, Chile, Hong Kong, Oman, Saudi Arabia, the United Arab Emirates and the United States.

Agreements in place between Singapore and Chile, Hong Kong, Oman, Saudi Arabia and the US cover only international air-transport or shipping operations. Treaties with Slovak Republic, Oman, and Libya are in progress.

Social contributions to the CFP (Central Provident Fund) in 2005 amounted to 36% of gross salary (16% from the employer and 20% from the employee), but they are optional for non-permanent residents.

For non-resident individuals withholding taxes are levied on Singapore-source income at varying rates; foreign-source income is untaxed whether remitted or not.

In his February 2005 budget, Prime Minister and Minister for Finance, Lee Hsien Loong announced a series of new tax incentives designed to boost the city’s wealth management industry.

Singapore is well advanced with e-filing for tax returns: the Inland Revenue Authority announced that at the close of Singapore’s e-Filing deadline on April 18, 2009, around 962,000 taxpayers e-filed their tax returns, setting a new record of a 91% e-filing rate. This is an increase of 4% compared to last year’s 87%. More than 1,059,000 taxpayers filed their returns, making up a 90% filing rate.

Investment Sectors:

Property

Singapore is emerging as a genuine player in the real estate finance market that is developing across the Asia-Pacific region. In 2005, a report by Standard & Poor’s Ratings Services noted that Singapore, with over US$1 billion in capital raised since 2002, was increasingly being seen as a key player in the region’s REIT and securitised real estate market arena.

Real estate investment trusts (REITs) are in the main publicly traded companies that own and, in most cases, actively manage income-generating commercial real estate. Generally speaking, the majority of a firm’s income is passed onto investors without taxation at the corporate level. In Singapore, REIT dividends are tax-free provided more than 90% of the firm’s income is distributed to investors. Most of the city’s many listed REITS have chosen to do this.

According to S&P, the marriage of tax benefits with factors such as a highly-skilled and educated workforce, clear legal system and ’AAA’ rating has made Singapore the preferred location to list shares for many regional real estate owners.

Keen to encourage foreign interest in the domestic REIT scene, in his 2005 budget speech Prime Minister Lee announced that foreign non-individual investors would be encouraged to invest in the Singapore property market with a cut in the withholding tax on REIT distributions to 10% from 20%, for a period of five years. Additionally, to attract more REIT listings, the government wants to waive stamp duty on the instruments of transfer of Singapore properties into REITs to be listed, or already listed on the Singapore Exchange, for a five-year period.

The sector was looking decidedly wobbly in 2009, however, with Moody’s putting it on negative watch.

Funds

Regulatory changes made by the Singapore authorities have lured many international fund managers to relocate their operations to the city. New Star International Investment Products, which expanded its operations from Hong Kong to Singapore in 2005, is an example of the calibre of fund firms being attracted to the city. Singapore‘s regulatory changes have meant that international fund managers are no longer required to maintain a physical presence in the territory, and are permitted to make their funds available via private banks.

While Japan and Hong Kong dominate the region’s hedge fund management arena, Singapore is emerging as one of the most popular Asian locations amongst hedge fund managers for fund start ups.

Nonetheless, the growth potential is there, and Singapore seems to be rapidly ascending the hedge fund ladder due in large part to the relatively uncomplicated registration process, an issue identified by hedge fund managers as crucial when deciding where to set up. While fund registration in Singapore may take around two weeks, in Hong Kong it can take several months. As a result, Singapore has managed to attract interest from some major American funds including the likes of Tudor, Everest and Moon Capital.

Also, under changes designed to help foster growth in the financial services sector, Prime Minister Lee announced in February 2005 that start-up fund managers would be given a 12-month grace period to meet the requirement that 80% of share capital must come from foreign investors to qualify for a 10% tax rate on fee income, which also helped to win over the global hedge fund community.

There are thriving securities trading markets: in October, 2008, the Singapore Exchange Limited (SGX) announced that both its derivatives and Exchange Traded Funds (ETF) markets set new trading records in September 2008. SGX’s derivatives market saw record volumes for both the July-September 2008 quarter and the month of September 2008, while SGX-listed ETFs set records for both the value and volume traded in September.

“We are pleased that customers are finding value in using our market access products, including futures contracts and ETFs. In particular, SGX has both futures contracts and ETFs traded on indices covering the Singapore, India and Taiwan markets, offering further trading opportunities. Our products enable investors to capitalise on investment opportunities and actively manage risks, even in challenging markets,” said Mr Chew Sutat, SGX Executive Vice President & Head of Market Development.

A record 17,369,505 contracts were traded in the July-September 2008 quarter, a 17% increase over the 14,831,554 contracts in the previous record set in the quarter of January-March 2008.

For the month of September, a total of 6,483,272 contracts were traded. This is nearly 11% higher than the previous record of 5,842,187 contracts traded in July 2008, and a 68% increase over the 3,854,634 million contracts traded in September 2007.

Also in September 2008, the yen-denominated SGX Nikkei 225 Index Futures contract reached a new monthly record of 3,064,898 contracts traded – surpassing by 18% the previous record of 2,603,567 contracts set in August 2007.

In fact, the total volume of 46,619,152 contracts traded in the futures and options market in the first nine months of 2008 has already exceeded the total volume for the full year of 2007. SGX’s key Asian equity derivatives registered particularly strong performances.

“Our attractiveness lies in our Asian Gateway strategy of providing a one-stop, pan-Asian equity derivatives product range. We offer the transparency of a listed platform, the credit risk management function of a central clearing house, and the enhanced capital efficiency offered via cross-margining capabilities all at one exchange. This is complemented by our contract specifications enhancements as well as our efforts to grow our customer base, especially targeting algorithmic and proprietary trading firms both in the region and globally,” added Mr Chew.

Islamic Banking

Singapore is intent on becoming an Islamic banking hub, particularly in the area of wealth management. Although it faces some challenges, including the creation of a designated regulatory system, there are almost 270 million Muslims right on Singapore‘s doorstep in the Islamic states of Malaysia and Indonesia. The city has also attracted interest from Middle Eastern investors.

While Singapore has its work cut out catching up with more established Islamic banking centres such as Labuan and the United Arab Emirates, Prime Minister Lee made a start in the 2005 budget by announcing new rules abolishing double taxation for Shariah-compliant property transactions. The budget also granted Islamic bonds the same concessionary tax treatment as those given to conventional financing.

In early 2009, the Monetary Authority of Singapore (MAS) announced the completion of its sukuk (Islamic bond) issuance facility, which will provide Shariah-compliant regulatory assets.

Speaking at the signing ceremony held at Singapore’s monetary authority, Heng Swee Keat, Managing Director, MAS, said: “Today’s signing ceremony marks a further milestone in our developmental efforts. This sukuk is the Shariah-compliant equivalent of Singapore Government Securities (SGS), and is of the highest credit standing. The sukuk will be given equal regulatory treatment as SGS, such as qualifying as an asset in the computation of capital and liquidity requirements, and as eligible collateral for tapping MAS’s liquidity. MAS is committed to the facility, issuing to meet the needs of financial institutions that are carrying out or plan to carry out Shariah-compliant activities in Singapore, as this will strengthen their ability to meet their capital and liquidity requirements”.

V. Shankar, Group Management Committee member, Standard Chartered Bank, spoke about the unique structure of the programme at the signing ceremony. He said: “The size, maturity and pricing of each issuance will be determined in line with the investor requirements and the prevailing market conditions. Thus it will be a demand driven issuance to satisfy the needs of the investors.”

Mr Shankar congratulated MAS for being the first central bank of a non-Muslim majority jurisdiction to come up with an ongoing local currency sukuk issuance programme. He added: “I hope this will become an important building block for the promotion of Islamic banking in Singapore.”

Abdulla Hasan Saif, Chairman of Islamic Bank of Asia, said: “Not only will this initiative bolster Singapore’s efforts in becoming a leading Islamic financial centre, it may very well become a case study for other countries with similar financial sector requirements and aspirations. The Islamic Bank of Asia is looking forward to utilising the programme for regulatory requirements, to facilitate the development of a range of Sing-dollar, Shariah-compliant products that will cater to our customers’ needs.”

Abdulla Hasan Saif announced at the signing ceremony that IB Asia will be placing an order for the sukuk shortly, making Islamic Bank Asia the programme’s first investor.

The MAS also announced Singapore-based banks may enter into Murabaha interbank placements and offer Ijarah Wal Iqtina financing with immediate effect.

Ijarah Wal Iqtina financing is a kind of hire purchase agreement between the bank and the customer whereby the bank ‘rents out’ equipment or other assets to its client for a fixed lease period, after which ownership is trasnferred to the client.

These changes will enable Singapore’s financial institutions offering Islamic finance a wider range of instruments in their management of liquidity and in their matching of assets and liabilities and have been made after detailed consultation with the industry.

In a statement MAS vowed to “continue to work closely with the industry to ensure that our regulatory and tax framework, and other necessary infrastructure and conditions are in place to foster good risk management and the further growth of Islamic finance in Singapore.”

Living in Singapore:

Residence

Under Singapore’s Global Investor Programme foreign investors with substantial capital and good entrepreneurial track records may apply for permanent residence. Foreigners who have net personal assets of at least S$20 million and who place at least S$5 million of financial assets with a financial institution regulated by the Monetary Authority of Singapore (MAS) may apply for permanent residence under the Financial Investor Scheme. Applications can be obtained from MAS-regulated institutions or the Financial Investor Scheme Secretariat of the Financial Centre Development Department.

Also, persons born in Hong Kong or who can show proof that they have or used to have rights of abode in Hong Kong may also apply for in-principle approval for permanent residence.

The fee for an Entry Permit in 2005 was S$100 and the fee for a Re-Entry Permit was S$10 per year. For foreigners requiring a visa, the visa fee is was S$20 per issue. Processing time for an application is around 3 months.

Lifestyle and Cost of Living

Singapore’s tropical climate ensures that temperatures are hot the year round. With two monsoon seasons from December to March and from June to September, the climate is also very humid and in the heat of the city those from chillier European or North American climes may find the atmosphere somewhat oppressive. Nevertheless, Singapore is a modern, cosmopolitan and vibrant city where various far eastern cultures mix harmoniously with western influences.

According to a survey conducted by Mercer in 2003 the cost of living in Singapore is not as prohibitive as one might expect, and the city emerged as a considerably less expensive place to live than Hong Kong or Beijing. This survey, which compared the cost of 200 items including housing, food, clothing and household goods, transport and entertainment placed Singapore 32nd in a ranking of 144 cities.

Renting and Buying Property

However, Singapore’s limited land availability means that the real estate stock has to be carefully managed. Naturally this makes property quite expensive to both rent and buy.

The need for Singapore to manage land development means that foreigners face restrictions when buying certain types of property on the island, such as vacant land, ‘landed properties’ or bungalows, semi-detached and terrace houses. In these cases, foreign buyers need to apply for approval from the Singapore Land Authority for permission to buy.

Once a buyer has identified a property, they can pay 1% of the purchase price in exchange for the Option to Purchase. Option to Purchase is usually prepared by the seller’s solicitor or property agent. The buyer then has 14 days to decide whether to proceed with the purchase. If the option is exercised, an additional 9% of the purchase price is passed to the seller’s solicitor. Alternatively, buyers can bypass this procedure and ask their realtor to prepare the Offer to Purchase. The latest ruling by the MAS entitles buyers to borrow up to 80% of the valuation or purchase price, whichever is lower.

Bank accounts

To open an account in Singapore will requires copies of one’s passport, an employer’s letter, and a statement from a bank in the applicant’s home country. Most of the major banks in the world are represented in the city and there is an extensive network of automated teller machines (ATMs) as well as a cashless payment system called NETS. Most banks open from 9.30 am to 3 pm on weekdays and 9.30 am to 11.30 am on Saturdays.

Conclusion

So, in conclusion, Singapore maintains its reputation as a culturally diverse, democratic and business-friendly location which welcomes input from investors from around the globe. A rising star in the world of alternative investment, Singapore is quickly becoming the regional location of choice for new hedge fund start-ups, while Islamic banking and wealth management are also making their mark upon the city.

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