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The impact of BEPS 2.0 Pillar Two on Singapore funds

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Louisa Yeo
3 May 2023
Subject You and the Taxman
Categories Thought leadership
Jurisdictions Singapore

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The Model GloBE Rules issued by the OECD provide exclusions for investment funds, but analysis is required to assess how the investment fund exemption applies to Singapore fund structures.

On 14 February 2023, Singapore announced in Budget 2023 that it plans to implement the Global Anti-Base Erosion (GloBE) Rules, i.e., Income Inclusion Rule (IIR) and Undertaxed Profits rule (UTPR), as well as the Domestic Top-up Tax (DTT) for businesses with financial years starting on or after 1 January 2025. The application of DTT will result in the top-up of a multinational enterprise (MNE) group's effective tax rate in Singapore to 15%. The DTT will apply to MNE groups operating in Singapore that have annual revenues of at least €750mn, as reflected in the consolidated Ultimate Parent Entity[1] (UPE). As the Model GloBE Rules are based largely on accountancy rules, in particular, in relation to their approach in identifying groups, an entity will not be considered a UPE if it is consolidated into another entity.

It should be noted that the legislation relating to the GloBE Rules and DTT in Singapore has yet to be released.

The asset management landscape in Singapore is relatively broad as it encompasses fund managers that are invested across various strategies, such as hedge funds, mutual funds, private equity, venture capital, real estate, debt, etc. A common theme across these strategies, following the introduction of the Variable Capital Company (VCC) in January 2020, is the domiciliation of fund structures in Singapore, in view of the various tax incentives that are applicable to such funds. Investment funds that are domiciled, or managed by fund managers, in Singapore generally enjoy Singapore tax exemption on qualifying income under the Section 13O and 13U tax exemption schemes. Therefore, the applicability of DTT to such funds could erode the competitiveness of Singapore as the jurisdiction of choice.

The good news is that the current Model GloBE Rules provide exclusions for certain entities, including government entities, international organisations, non-profit organisations, pension funds, and investment funds[2] and real estate investment vehicles that are UPEs. An Excluded Entity is also an entity owned (directly or through a chain of Excluded Entities) by one or more Excluded Entities, provided certain ownership thresholds and activity conditions are met. If an investment fund is not a UPE, it could be subject to the Model GloBE Rules where it forms an MNE Group that separately meets the revenue threshold with a UPE.

The GloBE attributes of Excluded Entities are removed from the various computations under the GloBE Rules, except for the application of the revenue threshold (€750mn). This means such entities are not excluded for purposes of determining the identity of the MNE Group or whether the MNE Group meets the revenue threshold for being in scope of the GloBE rules. In addition, Excluded Entities do not have to file a GloBE Information Return Consideration.

While the Model GloBE Rules issued by the Organisation for Economic Co-operation and Development (OECD) provide for exclusions for investment funds, a case-by-case analysis is required to assess applicability of the investment fund exemption. This analysis can get complicated depending on the investment strategy of each fund. In the case of private equity funds, as these funds may hold majority shareholdings in some of their portfolio companies, the applicability of the GloBE Rules should be considered both at the fund level as well as at a portfolio level. At the fund level, potential impact may arise where a fund consolidates its portfolio businesses and have aggregate revenues of at least €750mn or where a fund is consolidated by an in-scope investor. In the case of portfolio businesses, potential impact may arise where a portfolio business meets the €750mn revenue threshold and is an in-scope entity.

Based on the assumption that Singapore will adopt the same or similar definition of Excluded Entities per the Model GloBE Rules, it is recommended that fund managers perform an analysis of the applicability of the GloBE Rules to their investment structures, taking into account the timeline of 1 January 2025 as announced by the Singapore Government. This includes an assessment on:

  1. Whether the master fund or feeder fund forms an MNE Group that meets the revenue threshold of €750mn in the consolidated financial statements of the UPE.
  2. If the master fund or feeder fund forms an MNE Group that meets the revenue threshold, whether the fund qualifies as an Excluded Entity in the Model GloBE Rules. In particular, it depends on whether “investment funds” will include funds that are managed or advised by Singapore fund managers exempt from licensing (such as real estate fund managers and single family offices) as well as single-investor investment funds.
  3. For entities held by the master fund or feeder fund, whether such entity forms a separate MNE Group that meets the revenue threshold of €750mn[3] in the consolidated financial statements of a UPE (which is not the master fund or feeder fund). This may include investment in joint ventures, portfolio companies held by the investment fund, as well as investment in minority investments.

In this scenario, where a joint venture investment held by the master fund forms part of a separate MNE Group that meets the revenue threshold (and does not qualify as an Excluded Entity), the UPE in the other MNE Group will be required to calculate the DTT due for its allocable shareholding in the Joint Venture group. This will then impact the after-tax returns of the Joint Venture investment.

Given that this will involve a discussion with the joint venture partner(s), such discussions should be conducted early to identify any potential risks ahead of the potential implementation timeline.

As we await the Singapore Government to publish the details on the DTT, it is important for fund managers to assess the applicability of investment fund exemption depending on the consolidation rules used in the structure.

The co-authors of this article are Louisa Yeo and Tom Toryanik, each a Partner, Financial Services Tax from Ernst & Young Solutions LLP, and Tammy Tan, Director, Financial Services Tax from EY Corporate Advisors Pte. Ltd.

  • Show notes#Hide notes

    1. A UPE is an entity that:

    • Owns directly or indirectly an interest in an entity that it is required to consolidate their results on a line-by-line basis or would be so required if consolidated financial statements were prepared
    • Its results are not consolidated on a line-by-line basis with another entity

    2. An Investment Fund means an entity that meets all of the criteria set out in paragraphs (a) to (g) below:

    a)      It is designed to pool assets (which may be financial and non-financial) from a number of investors (some of which are not connected)

    b)      It invests in accordance with a defined investment policy

    c)      It allows investors to reduce transaction, research, and analytical costs, or to spread risk collectively

    d)      It is primarily designed to generate investment income or gains, or protection against a particular or general event or outcome

    e)      Investors have a right to return from the assets of the fund or income earned on those assets, based on the contributions made by those investors

    f)       The entity or its management is subject to a regulatory regime in the jurisdiction in which it is established or managed (including appropriate anti-money laundering and investor protection regulation)

    g)      It is managed by investment fund management professionals on behalf of the investors

    3. Joint Venture means an entity whose financial results are reported under the equity method in the consolidated financial statements of the UPE provided that the UPE holds directly or indirectly at least 50% of its ownership interests, subject to exclusions.