Singapore proposes tax exemption for profit-related returns

The proposed exemption is likely to reshape the tax treatment of carried interest and other performance-linked returns in Singapore.  

On 19 August 2026, the Monetary Authority of Singapore (MAS) announced a series of potentially significant enhancements to the Singapore asset management landscape. The proposal includes an exemption for profit-related returns for fund managers and their investment professionals. This appears to be an exemption for carried interest but may, in fact, be broader, with details to be announced as part of Singapore Budget 2027. This is a significant development that will increase Singapore’s appeal as a financial services hub.

Why the tax treatment of carried interest matters

The Singapore taxation of carried interest has been an area of debate. Where a carry structure is implemented, the basic question is whether a distribution received by a participating investment professional is an investment return or a reward for services performed as an employee. Singapore does not tax capital gains, and dividends received by individuals are exempt in most circumstances under the Income Tax Act 1947 (ITA). If a carry distribution is characterised as an investment return, it will generally not be subject to Singapore tax. If the same amount is considered a reward for services, it is liable to be taxed as employment income at progressive rates of up to 24%.

This point of characterisation is not unique to Singapore. In many jurisdictions, it is a matter of determining whether a carry return is treated as a capital gain or employment income. This determines the tax rules and rate to be applied, rather than the more binary outcome of whether an amount is subject to tax. The UK, US and Australia are examples of jurisdictions where this is the foundational question. Some administrative guidance has been developed by local tax authorities in other jurisdictions to assist fund sponsors. The best example is the longstanding agreement between Her Majesty’s Revenue and Customs (HMRC) and the British Venture Capital Association, which dates back to 2003.

In Singapore, the taxation of carried interest structures is mostly framed by reference to the general anti-avoidance provision of Section 33 of the ITA. The Inland Revenue Authority of Singapore (IRAS) may apply this provision where a carry structure is considered a contrivance designed to change the character of taxable personal services income. The IRAS has provided clear guidance in the context of corporate structures used by local medical professionals, which serves as a proxy. Assessments have been raised where the IRAS has considered that companies have been used to average down the rate of tax on amounts which are considered to be diverted personal services income. The recent case of Chek Jin Adrian and others v CIT [2026] SGHC 132 is an example of the structures that have been challenged.  

While certain principles can generally be drawn from administrative guidance and cases on Section 33, it has never been possible to identify clear parameters in the design of a carry structure from a Singapore tax perspective. A range of different structures and perspectives have emerged which are also the result of different commercial variables. These include the size and geographical coverage of the sponsoring fund manager and the funds themselves. For example, a carry structure for a global manager sponsoring a large international private equity fund differs from the carry structure for a Singapore-based start-up fund manager launching its first fund.

Lessons from Hong Kong

In Hong Kong, the Inland Revenue Department (IRD) has stated in administrative guidance that they may recharacterise and tax carry distributions in appropriate circumstances^[i]. The IRD indicate that they may use either the transfer pricing or anti-avoidance provisions of the Inland Revenue Ordinance. A number of carry structures have been scrutinised as a result of increased audit activity.

Against this backdrop, an exemption for carried interest was introduced in 2021. However, a key impediment is the requirement for a fund to be certified by the Hong Kong Monetary Authority, which requires a large amount of information to be disclosed as part of that process, together with other practical limitations such as the carry payment needing to flow through the Hong Kong fund manager or investment advisor and the specific nature of the underlying profits for which the carry relates.

In late 2024, it was announced that a revised carry concession would be implemented. This led to the introduction of the Inland Revenue (Amendment) (Preferential Tax Regimes for Funds, Family-owned Investment Holding Vehicles and Carried Interest) Bill in 2026 (the Bill), which continues its passage through the Legislative Council. The amendments in this bill aim to expand the applicability of the concession and relax certain key issues within the existing rules. The regime is based on self-assessment and is linked to funds that fall within the scope of the Unified Funds Exemption (UFE); albeit the underlying profits for which the carry relates is no longer restricted to private equity transactions exempt under the UFE (nor profits exempt under UFE more broadly). Returns linked to the investment performance of a fund and earned by either a fund manager or its qualifying employees are to be exempt from tax to the extent that they arise from the provision of “investment management services” in Hong Kong, which is broadly defined.

Even though the incoming Hong Kong regime is described as a carried interest concession, it is not limited to returns from private equity or venture capital funds. This concession potentially applies to performance fees paid by funds with liquid strategies. It also accommodates the receipt of returns through a carry or sponsor vehicle. A recent press release from the Financial Services and the Treasury Bureau of Hong Kong provides guidance on what constitutes a fund^[ii] for the purpose of the UFE. It is confirmed that a business that trades proprietary capital with a view to generating profits on its own account is not to be considered a fund for these purposes and therefore, distributions by such business do not qualify for the carry concession.

The Singapore announcement

The announcement made by the MAS on 19 August 2026 was short but highly significant. It signals Singapore’s intention to implement a regime for carried interest that will be substantively similar to the one under development in Hong Kong. This helps to address capital and talent flight concerns. 

In the announcement, the MAS describes an exemption for profit-related returns that are derived from funds which are either approved under a fund incentive (Sections 13O, 13OA, 13U or 13V) or rely upon the offshore fund tax exemption under Section 13D of the ITA. These fund-level tax incentives contain their own substance-related requirements and ongoing conditions.

The MAS states:

In simplified terms, this tax exemption will apply to a share of investment profits earned by fund managers and investment professionals when they deliver strong returns for investors in qualifying funds. It does not apply to ordinary salaries, bonuses or other forms of employee remuneration.

Key questions

Until further details are released next year, it is only possible to speculate about the specific design features of this incoming exemption.

An immediate question is what this means for existing carry structures. Some existing structures may potentially fall within this new tax exemption, or they may be capable of being restructured within the terms of existing fund documentation. Unless specifically stated, the creation of this exemption should not mean that a structure that does not fall within its scope is either risky from a Singapore tax perspective or automatically liable to tax. The ITA contains examples of safe harbour provisions that are designed to coexist with what may be a favourable position under general principles. A good example is the participation exemption under Section 13W of the ITA. This provides an exemption for certain realisation gains but does not presume that those gains are taxable in the first place.

The MAS announcement indicates that the new exemption will apply to profit-related returns as they flow through interposed structures. The MAS refers to a share of a qualifying fund’s profits being “contractually received by corporate entities, partnerships or individuals directly or indirectly for the provision of fund management services”. This is an important feature and should ensure parity with the Hong Kong regime, accommodating the way carry structures are typically designed.

There are, however, additional variations to consider. For example, it is not uncommon for immediate family members to hold a stake in a carry vehicle or for such vehicles to be owned by a private wealth structure, such as a discretionary trust. Interests in carry vehicles may also be held by immediate family members of an investment professional, such as a spouse or even children. Investment professionals may leave employment during the life of a fund while retaining their interest in a carry structure if they retire or are otherwise regarded as good leavers. It will be interesting to see the extent to which the exemption applies in these and similar circumstances.

Another question is how this exemption intersects with the rules applying to the taxation of employee shares and options. This will be relevant where a carry entitlement exists as an interest in a carry vehicle and is subject to vesting conditions. A taxable discount may arise for a Singapore-based investment professional when those vesting conditions are met. This may be a number of years after the fund has launched and after the fund’s underlying assets have been revalued upwards. The same issue may arise for a new investment professional who is invited to participate in a carry structure during the life of the fund. It is easy to envisage arrangements in which the economic value of a carry entitlement could potentially be taxable upon the grant or vesting of the carry right itself. Ideally, this possibility will be specifically covered by the exemption.

Specific guidance will be needed on how this exemption is to apply to contractual profit-sharing arrangements. The MAS announcement states that this exemption is to apply to a share of a fund’s profits which is contractually received, though it is not meant to apply to bonuses or other forms of employee remuneration. The distinction between a profit-linked contractual entitlement and a bonus received by an investment professional may be difficult to draw at the margins. Potentially, the difference may turn upon a payment made to investment professional, contingent on fund performance rather than merely discretionary in nature.   

A related consideration is how this exemption applies to local fund companies themselves, and in particular to Singapore sub-advisors. The Singapore sub-advisors of large international managers very often do not share in performance fees directly. Economic sharing of performance fees is initially achieved through the payment of bonuses or other forms of variable compensation to local investment professionals. This directly affects the amount of taxable profits recognised by a local sub-advisor, depending on the transfer pricing methodology selected. Ideally, the new exemption will apply to any incremental profit recognised by a Singapore sub-advisor to the extent that it is traceable to funds benefiting from Section 13U or Section 13D.

What happens next

The recent announcement by the MAS represents a significant development for the Singapore fund management industry, helping to ensure that Singapore remains competitive as a fund management hub. Local fund managers would be advised to revisit existing structures and consider next steps once details are provided. Changes to carry structures, the capital structure of locally managed funds and existing fund documentation may all be required.

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The co-authors of this article are Stephen Banfield and Sudeep Sirkar, both Partners, Financial Services Tax, Ernst & Young Solutions LLP and Sharon Chiam, Associate Partner, People Advisory Services Tax, EY Corporate Services Pte. Ltd.