Foreign investors can set up a variety of business structures in Singapore for their investments. Establishing a
subsidiary, branch office, or representative office are some of the most popular options. Investors need to assess their specific business needs before deciding on a corporate structure to operate from.
Those entering Asia for the first time, for instance, may want to set up a low-risk, exploratory presence in the form of a representative office, while those looking to use Singapore as a springboard to access the ASEAN markets may need more strategic commitments by setting up a branch office or subsidiary company.
Singapore’s investment-friendly landscape has made it a premier regional hub, attracting a multitude of international firms engaging in conventional as well as new-age industries across Asia and the world. This is reflected from its impressive Ease of Doing Business ranking and strong network of free trade agreements (FTAs) and double tax agreements (DTAs).
Despite this, investors need to be aware of the risks presented by each avenue of investment and determining the ideal route for market entry or expansion needs thoughtful consideration about the intended scope of investment, the nature of business activities, tax implications, and legal liability
Private Companies Limited by Shares
A private company limited by shares, also known as a private limited company, is by far the preferred structure among small and medium-sized (SME) foreign companies for setting up a local business presence in Singapore.
A private limited company can benefit from tax incentives available to local companies. It is also a separate legal entity from its directors, shareholders and officers of the company; this means that the foreign holding company cannot be held for the liabilities of its subsidiary. In addition, the holding company’s liability is limited to the share capital subscribed in its subsidiary.
As a private limited company can be wholly owned by a foreign individual and/or corporate investor, this legal entity can be established as a regional holding company or subsidiary of the foreign holding company. Having a Singapore incorporated company increases the advantage of gaining access to the wider Asian market and ASEAN Free Trade Zones, as well as other FTAs through ASEAN, which include ASEAN-Hong Kong, ASEAN-India, and ASEAN-China. This is particularly helpful for companies looking to set up larger manufacturing operations elsewhere in ASEAN.
Foreign companies can establish branch offices to conduct any type of business activity that falls within the scope of the parent company.
Branch offices are not eligible for the tax exemptions and incentives available to local companies as ultimate control of the branch remains vested in the overseas parent company. As such, branch offices are regarded as an extension of the foreign holding company and is therefore taxed as a non-tax resident at the corporate tax rate of 17 percent.
The name of the branch office must be the same as the parent company and as a legal extension of the parent company. The parent company must bear ultimate legal responsibility for all liabilities and be registered with ACRA, which is responsible for the monitoring of new companies in Singapore. Because of this liability, many foreign companies choose to establish a subsidiary or private limited company rather than branch offices.
The parent company will bear all the liabilities of its branch office as it is viewed as a legal extension of the parent company. This means they are also subject to Singaporean taxes and are not eligible for local tax incentives and exemptions.
A Representative office (RO) is a short-term, temporary arrangement with a limited purpose; however, it must be established for a maximum of three years, of which the RO status is subject to evaluation by Enterprise Singapore, the government agency under the Ministry of Trade and Industry, before the RO can be further renewed on an annual basis.
This set up is an ideal choice for foreign investors who are still researching their investment options before setting up a fully-fledged office in Singapore. Companies looking to set up a RO must have sales turnover of at least US$250,000 and must be represented by staff from their own HQ or a Singaporean citizen.
ROs can be staffed by a maximum of five individuals, with the parent company bearing liability for the activities of the RO and is responsible for financing its operations. The RO is confined to activities set out by Enterprise Singapore, which include:
- Gathering of information on markets and potential clients;
- Carrying out research to ascertain product/service information;
- Developing trade contacts and manage product enquiries;
- Participating in trade shows and exhibitions; and
- Gathering information on regulatory requirements for the set-up of a permanent entity.
Variable Capital Companies
In January 2020, the Monetary Authority of Singapore (MAS) and the Accounting and Corporate Regulatory Authority (ACRA) launched the Variable Capital Company (VCC), a new innovative corporate structure for all types of collective investment schemes (investment funds) in Singapore.
The VCC is regulated under its own legal framework through the Variable Capital Companies Act and offers more operational flexibility compared to investment fund structures currently available in the country through trusts, limited partnerships, or private limited companies.
This means fund managers can establish investment funds across both traditional and alternative strategies and as open-ended or closed-end fund strategies.
Open-ended funds are offered through fund companies that sell shares directly to investors, allowing them to enter and exit according to their convenience. There is also no limit on the number of shares they can issue, as long as there is an appetite for the fund.
Close-ended investments, however, are overseen by a fund manager or brokerage firm and are listed on the stock exchange. There are a fixed number of shares that are issued.
The government hopes this flexibility will attract more investment funds to be domiciled in Singapore and bring the country to the forefront of the global investment services industry.
What are the key benefits of using the VCC structure?
There are several benefits a VCC structure has over current collective investment schemes in Singapore.
- The VCC can be used as a standalone fund (comprising of a single investment portfolio) or as an umbrella entity with various sub-funds allowing for the segregation of portfolios and liabilities. Having multiple funds in a single VCC can improve cost efficiencies;
- The VCC capital will always be equal to its net assets. This is because the VCC’s shares are only created when investments are made. This provides flexibility in the distribution and reduction of capital as dividends can be paid out of capital, easing the ability of fund managers to meet dividend payment obligations; and
- Fund managers can easily re-domicile existing overseas investment funds by transferring their registration as a Singapore VCC.
There are also several tax benefits for VCC’s. These include:
- A VCC is not burdened by the same capital requirements of an open-end fund in Singapore, and has access to the country’s more than 80 tax treaties;
- An umbrella VCC will only need to file a single corporate income tax return (CIT) to the Inland Revenue Authority of Singapore (IRAS);
- Income from a VCC can be exempt from tax if it qualifies for the government’s Enhanced Tier Fund (ETF) Scheme. There are two criteria for this:
- The VCC must have a minimum fund size of S$50 million (US$36 million); and
- Must have a local business spend of S$200,000 (US$148,558).
- The VCC could qualify for the tax exemptions for startups scheme (SUTE) and obtain a 75 percent tax exemption on the first S$100,000 (US$73,000) of chargeable income during the first consecutive three years. The next S$100,000 (US$74,272) of chargeable income can receive a 50 percent tax exemption; and
- The entity can recover goods and services tax (GST) on expenses occurred in Singapore.