Maritime Sector Incentive. A. The Maritime Sector Incentive 01

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1 Maritime Briefing May 2013 Contents A. The Maritime Sector Incentive 01 (MSI) B. MSI Approved International 01 Shipping Enterprise Award and the MSI Approved International Shipping Enterprise Entry Award C. Maritime (Ship or Container) 02 Leasing Award D. MSI Ship Related Support 04 Services E. Incentives Specifically Legislated 04 to be Available to Flagged Ships Contacts 06 Maritime Sector Incentive A. The Maritime Sector Incentive Almost two years since the introduction of the Maritime Sector Incentive (the ʺMSIʺ), take up is still at a high level. This briefing provides an overview. On 1 June 2011, all existing tax incentives available to the maritime sector were consolidated under the MSI. The consolidated incentives include: 1. the Approved International Shipping Enterprise Scheme; 2. Section 13A of the Income Tax Act; 3. the Maritime Finance Incentive; 4. the Approved Shipping and Logistics Scheme; and 5. the Ship Broking and Forward Freight Agreement Trading Incentive. By consolidating these incentives the MSI simplifies and enhances the tax incentives available to the maritime sector, and further establishes as an international maritime centre. B. Maritime Sector Incentive Approved International Shipping Enterprise Award ( MSI AIS Award ) and the Maritime Sector Incentive Approved International Shipping Enterprise Entry Award (ʺMSI AIS Entry Award ) The MSI AIS Award generally consolidates the incentives previously available under the Approved International Shipping Enterprise Scheme and Section 13A of the Income Tax Act. The MSI AIS Entry Award is a wholly new incentive introduced under the MSI. By long standing tradition, income derived by a shipping enterprise from the operation of flagged ships is exempt from income tax. However, income derived from the operation of foreign flagged ships is generally taxable in unless the company is awarded the MSI AIS Award or the MSI AIS Entry Award. wfw.com

2 02 MARITIME BRIEFING 1. Entities eligible for the MSI AIS Award and MSI AIS Entry Award i. In order for a company to be eligible for the MSI AIS Award or the MSI AIS Entry Award, the applicant company should own or operate a fleet of ships. The scale of the applicant s operations will determine if the applicant company is awarded the MSI AIS Award (which, so long as qualifying conditions are met, is granted for renewable 10 year periods of up to a maximum tenure of 40 years) or the MSI AIS Entry Award (which is granted for a non renewable period of five years with the option to graduate to the MSI AS Award if certain criteria are met). 2. A company awarded the MSI AIS Award or the MSI AIS Entry Award will enjoy the following benefits: i. tax exemption on the following: a. income from the operation of foreign flagged ships plying in international waters; b. qualifying in house ship management fees derived from related qualifying special purpose vehicles; c. income resulting from foreign exchange and risk management activities that are carried out incidental to the operation of ships; d. dividend or share of profits received from an approved network company ( ANC ) 1 which are paid out of shipping profits; The MSI ML Award generally includes the incentives previously available under the Maritime Finance Incentive. ii. gains from the disposal of ships are not subject to income tax. This is certain until 2014 (although this date may be extended); iii. withholding tax exemption on charter payments to non an shipping companies; and iv. subject to additional conditions, withholding tax exemption on qualifying payments made in respect of qualifying loans entered into before 31 May 2016 with foreign lenders to finance the purchase or construction of or foreign flagged ships. C. Maritime (Ship or Container) Leasing Award ( MSI ML Award ) The MSI ML Award generally includes the incentives previously available under the Maritime Finance Incentive. 1. The following two entities are eligible to take advantage of the benefits available under the MSI ML Award. i. Approved Shipping Investment Enterprise (MSI ASIE) A qualifying MSI ASIE must be a incorporated/registered ship leasing company, shipping fund, business trust or partnership. Additionally, a qualifying MSI ASIE will source for public funding (by listing on the Exchange) or private funding (by way of institutional or private investors) to do one of the following: a. own vessels; or b. take equity interests in vessel owning entities that are determined to qualify as Approved Special Purpose Vehicles ( MSI ASPVs ) under the MSI ML Award. 1 An ANC is an overseas affiliate company that is at least 25% related to a company which has been awarded the MSI AIS Award. It is important to note that a qualifying MSI ASIE is permitted to lease its vessels to ship operators.

3 MARITIME BRIEFING 03 ii. Approved Shipping Investment Manager (MSI ASIM) An MSI ASIM is a incorporated company that carries out the asset management of the MSI ASIEs. The MSI ASIM will be related to the MSI ASIE by way of contractual management agreement(s) that empower the MSI ASIM to manage the operations of (and vessels held by) the MSI ASIE. Operations may include the arranging of charters, negotiating charter party contracts with lessees or acting as fund manager for the MSI ASIE. 2. A MSI ASIE awarded the MSI ML Award will enjoy the following benefits: i. tax exemption on the following: a. if the vessel is to be used outside the port limits of, income from the chartering or finance leasing2 of the following: 1. vessels to a person who is neither resident of nor a permanent establishment in ; 2. vessels registered with the Registry of Ships; or 3. vessels to a company that has been granted the MSI AIS Award or the MSI AIS Entry Award; An MSI ASIM is a incorporated company that carries out the asset management of the MSI ASIEs. b. income resulting from foreign exchange and risk management activities that are carried out in connection the qualifying ship leasing activities of the MSI ASIE as described in 1, 2 and 3 above; c. dividend income or share of profits from foreign MSI ASPVs that are distributed out of qualifying ship leasing activities as described in 1, 2 and 3 above; ii. withholding tax exemption with regard to charter payments made to foreign MSI ASPVs; iii. withholding tax exemption on qualifying payments made in respect of qualifying loans entered into on or before 31 May 2016 with foreign lenders to finance the purchase or construction of flagged and foreign flagged ships. iv. if the relevant transfer agreement is executed on or before 31 May 2016, remission of stamp duties for the transfer of shares in an MSI ASPV to an MSI ASIE if the latter is listed on the Exchange or will be listed on the Exchange within 6 months from the date of the transfer agreement; and v. gains from the sale of flagged vessels will not be subject to income tax. This is certain until 2014 (although this date may be extended). 3. A MSI ASIM awarded the MSI ML Award will enjoy the following benefits: i. A tax rate of 10% on the following: a. income derived from the management of MSI ASIEs; and b. income derived from the services carried by the MSI ASIM for the MSI ASIE(s). 2 Finance leasing does not include leases treated as sold under Section 10D (1) of the Income Tax Act. Watson, Farley & Williams May 2013

4 04 MARITIME BRIEFING D. Maritime Sector Incentive Ship related Support Services ( MSI SSS Award ) The MSI SSS Award generally includes the incentives previously available under the Approved Shipping and Logistics Scheme and the Ship Broking and Forward Freight Agreement Trading Incentive. The MSI SSS Award seeks to encourage shipping conglomerates to set up their corporate services in as well as encourage the growth of ancillary shipping service companies in. Successful applicants will be granted the MSI SSS Award for a period of 5 years. The MSI SSS Award seeks to encourage shipping conglomerates to set up their corporate services in MSI SSS Tax Benefits An approved MSI SSI company will enjoy an income tax rate of 10% on the incremental income derived from the provision of the following shipping related support services: i. ship broking; ii. forward freight trading; iii. ship management; iv. ship agency; v. freight forwarding and logistic services; and vi. corporate services rendered to qualifying related parties who are at least 25% directly or indirectly related to the incentive recipient in terms of issued shares and are carrying on the business of shipping related activities. E. Incentives specifically legislated to be available to flagged ships Income derived by a shipping enterprise from the operation of flagged ships plying in international waters is exempt from income tax. Tax exemption includes the following: 1. income derived from the operation of flagged ships plying in international waters. a. Operation means in relation to a ship: i. the carriage of passengers, mails, livestock or goods outside the limits of the port of ; ii. towing or salvage operations outside the limits of the port of ; iii. the charter of the ship for use outside the limits of the port of ; or iv. for the year of assessment 2007 and subsequent years of assessment, the use outside the limits of the port of of the ship as a dredger, seismic ship or vessel used for offshore oil or gas activity. 2. ship management fees derived from related qualifying special purpose vehicles. A qualifying special purpose vehicle is a company that: a. at least 50% of the total number of issued ordinary shares of which are beneficially and directly owned by a incorporated company that qualifies for income tax exemption under Section 13A of the Income Tax Act; and b. that owns or operates a flagged ship or new building that is to be flagged as a ship (in respect of which the qualifying ship management services are rendered); and

5 MARITIME BRIEFING income derived from foreign exchange and risk management activities which are carried out in connection with and incidental to the operation of flagged ships. Vessels under flag will also enjoy the following: 1. Tax certainty until the Year of Assessment 2014 that the gains derived from the disposal of flagged ships will not be subject to income tax; 2. Automatic withholding tax exemption on interest and related payments made in respect of qualifying loans entered into on or before 31 May 2016 with foreign lenders to finance the purchase or construction of flagged ships, subject to conditions. Watson, Farley & Williams May 2013

6 06 MARITIME BRIEFING If you have any questions on queries regarding the MSI, or any other maritime law matter, please contact a member of our team, or your regular contact at Watson, Farley & Williams. Contacts Mei Lin Goh Partner mlgoh@wfw.com Damian Adams Partner dadams@wfw.com Peter Chean Partner pchean@wfw.com Battery Road # Tel: Fax: All references to Watson, Farley & Williams and the firm in this brochure mean Watson, Farley & Williams LLP and/or its affiliated undertakings. Any reference to a partner means a member of Watson, Farley & Williams LLP, or a member of or partner in an affiliated undertaking of either of them, or an employee or consultant with equivalent standing and qualification. This brochure is produced by Watson, Farley & Williams. It provides a summary of the legal issues, but is not intended to give specific legal advice. The situation described may not apply to your circumstances. If you require advice or have questions or comments on its subject, please speak to your usual contact at Watson, Farley & Williams. This publication constitutes attorney advertising. Watson, Farley & Williams SIN 02/05/2013 wfw.com