Building the Entrepreneurs Colony: Hong Kong Vs Singapore By Cora Cheung

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1 Building the Entrepreneurs Colony: Hong Kong Vs Singapore By Cora Cheung Start-ups have been the buzz words in recent years and it is believed to be the driver of the next economic boom; sharing the spotlight are locally grown Small Medium Enterprises ( SMEs ). Naturally, forward thinking authorities flock to capture these markets, Hong Kong and Singapore are no exception. Both city states have been neck to neck competing for international investments, each boasting transparent and attractive investment environments, providing the perfect hunting ground for Venture Capitalists and Private Equity Funds to seek the next big thing. With the freshly released Hong Kong and Singapore budgets, this article evaluates how each jurisdiction s tax policies are geared to win the hearts of investors and entrepreneurs alike. The governments have each launched numerous grants and financing schemes, however, the write-up focuses only on the tax incentive regimes targeting Start-ups and SMEs. Corporate Tax Starting off with some good news for all corporates, both Hong Kong and Singapore governments are following the tradition of distributing sweets in their 2015 budget. Hong Kong proposed a tax rebate of 75% while Singapore trails behind with the sweetener of only 30% rebate. However, Singapore has capped the rebate at approximately USD14,600 per company per year, quintupling Hong Kong s cap amount of approximately USD2,580. The prevailing tax rates has maintained a 0.5% difference since (Please refer to the summary table below) Tax incentives for the investors The top priority, for most start-ups and SMEs seeking to expand, is raising capital. Hong Kong holds its own in this arena being the plunge pool for Chinese investors and the traditional financial hub of Asia. On top of the reputable infrastructure and robust investment environment, a further boost is given in this year s Hong Kong budget. A new profit tax exemption for offshore private equity was proposed and is in operation as of 20 March This new regime provides tax exemption on offshore private funds as well as the eligible underlying Special Purpose Vehicles ( SPVs ), regardless if it is managed by fund managers licensed under securities and Future Ordinances. The existing exemption does not include securities of private company and requires the fund to be managed by licenced/regulated fund manager. However, do note that there are limitations on number of investors, capital commitment, percentage of Hong Kong operations and assets for this new tax exemption. On the other hand, Singapore has been striving to catch up with Hong Kong through various tax incentives schemes. In the budget 2015, the Angel Investors Tax Deduction ( AITD ) scheme has been extended, allowing approved angel investors 1 a 50% tax deduction on the amount invested in qualifying start-ups until March 2020 (capped at SGD250,000 per year). The deduction is granted upon completion of a 2-year investment holding period. The incentive can be used in combination with government cofunding scheme established for start-ups, i.e. investors will be able to share the risk with the government agency and still benefit from tax deduction for making potentially high return on investments. 1 Application needs to be made to SPRING Singapore, details can be found on their website (

2 Further, Singapore s Enhanced-Tier Fund 2 tax incentive is improved in this year s budget, chorusing Hong Kong s tune in including SPVs in the exemption regime. From 1 April , entities (including SPVs) within a master-feeder fund structure meeting the conditions of Enhanced-Tiered Fund tax incentive on a collective basis will enjoy the tax exemption on specified income from designated investments. Zooming in on investors investing in Indonesia Investors will be more concern with business risks, set-up and recurring costs when investing in emerging markets where the commercial infrastructure is not matured. To contain legal, operational and tax risks, international investors prefer to invest through a collective investment structure which will limit their legal liabilities and is tax neutral. The question is very often where to set up the fund? and typically a tax haven would have been the choice jurisdiction to avoid double taxation at the fund level. However, these types of structure may become counterproductive in the new world of anti-taxavoidance. Thus, onshore jurisdictions with favourable tax regimes for housing funds are gaining popularity. Both Hong Kong and Singapore are well placed in this perspective. In the case of Indonesia, Singapore has been the gateway due to the fairly good tax treaty, effective since Hong Kong is the new contender with the recently signed tax treaty which has some superior treaty terms compared to Singapore s. However, in practice there seems to be a misalignment in the administration of Hong Kong Indonesia treaty benefits which may impede the effectiveness of a Hong Kong fund structure. Singapore, on the other hand, is a familiar investment and trade partner to Indonesia. Both public administrators and private service providers are familiar with the necessary procedures in making investments and distributing the investment returns thereafter. Further, considering the proposals of the ASEAN Economic Community, there could be more benefits in setting up the fund within the ASEAN member states (e.g. reduce capital controls, lower cost of capital). Tax incentives for Start-ups & SMEs Hong Kong adopts a direct approach in assisting Start-ups and SMEs through grants and financing programmes, as most companies in their initial growth phase may not have a steady stream of income. Hence, they will not be able to benefit from tax incentives immediately. Singapore casts a double net by providing tax incentives as well as grants and financing assistance. For instance, a new Singapore company that is not in the business of investment holding or property development will be granted progressive exemptions on the first SGD 300,000 of taxable income in each of the first three years of operation, resulting in an effective tax rate of 5.67%. A similar exemption would apply to all enterprises beyond the three year mark, resulting in an effective tax rate of 8.36% for the first SGD300,000 of taxable income. These incentive measures coupled with the lucrative concessionary tax rate and double tax deduction on the global activities aim at promoting home grown Start-ups and SMEs. 2 Section 13X of the Singapore Income Tax Act (Cap. 134) 3 As of 18 May 2015 there is no further information but MAS is expect to release further details.

3 Intellectual Property (IP) development and holding incentive for the booming tech start-ups Primarily, Hong Kong and Singapore s economies depend on MNCs and foreign investments which make them very susceptible to global turmoil. To hedge against such market vulnerability, authorities have focused their attention to nurture home grown brand names and businesses. One such initiative is to encourage the development and holding of intellectual properties, which has a huge potential to increase employment of highly skilled researchers, build up high value assets within the territories and generate recurring income from all over the world. Singapore is the front-runner in IP development activities and pursuant to this, it has initiated the Productivity and Innovation Credit ( PIC ) scheme in PIC provides an unrivalled 400% tax deduction on qualifying expenses capped at SGD 600,000 per year per qualifying activity. PIC prescribes 6 categories for the qualifying activities, i.e. for each qualifying activity, the company is eligible for up to SGD 2,400,000 tax deductions per year from the year of assessment 2015 to Further, if the company is unable to utilise the tax deduction, it could opt to convert part of the qualifying expenditure to cash payout of up to SGD 60,000 per year. The option to cash out aims to help SMEs and start-ups sustain and survive during the initial phase of development. On top of that, Singapore has the Pioneer Incentive and the Development and Expansion Incentive whereby the qualifying income, which includes activities contributing to growth of research and development and innovation capabilities, may be treated as exempt from tax or subject to concessionary tax rates. Hong Kong on the other hand, introduced a modest IP expenditure 100% deduction regime. It allows deduction on direct research and development expenditure as well as payments to approved research institutes and certain capital expenditure. However, it is far less fervent than Singapore in chasing IP development and ownership. Summary In context of the tax policies, Singapore s regime might seem more zealous than Hong Kong s in creating a conducive climate for the entrepreneurs and investors. Understandably, tax advantages are only part of business considerations, the choice location should have a strong eco-system to support the Start-ups and SMEs. The evaluation above aims to help investors and business owners have a clearer overview on tax benefits available in both states with all other things being equal. The table below summarizes the tax benefits available in both jurisdictions from stakeholders perspective in this eco-system. May the best state wins.

4 Comparison table for Start-ups and SMEs 4 Hong Kong Corporate Tax 75% rebate for 1 year with a cap of HKD 20,000 (approx. USD 2,580). Existing rate: 16.5% Singapore 30% rebate for the next 2 years with a cap of SGD20,000 per year (approx. USD 14,600). Existing rate: 17% Tax incentives for investors (Venture capitalists, Angel Investors, Private Equity Funds, etc.) Tax incentive for start-up companies Profits Tax exemption for offshore private equity funds of private equity funds Hong Kong government seems to focus on providing grants and other forms of support instead of tax incentives to Start-ups and SMEs. Extending and enhancing the Angel Investors Tax Deduction ( AITD ) scheme - 50% deduction Improving the Enhanced-Tier Fund tax incentive scheme - exempt qualifying income Dividends received from Singapore Companies is exempt from Singapore tax. Approved Loan Tax exemption for the first 3 consecutive years: 100% exemption on first SGD100,000 50% exemption on next SGD 200,000 Tax incentive for SMEs Concession tax rate on income from qualifying internationalisation activities Enhanced double deduction on qualifying internationalisation expenses, increase 4 Information retrieved from Hong Kong and Singapore governmental websites, may not be exhaustive.

5 Intellectual Property development and holding incentive Extend tax deductions for intellectual property (IP) purchases - 100% deduction on qualifying expenditure Hong Kong does not have specific tax incentives for intellectual properties or Research & Development ( R&D ) activities. The authority encourage such activities through grants instead. grants for qualifying activities Partial tax exemption for all Singapore taxpayer: 75% exemption on first SGD10,000 50% exemption on next SGD 290,000 Productivity Innovation Credit on R&D expenses and IP acquisition costs - 400% deduction with cash payout option Pioneer Incentive provides a corporate tax exemption while the Development and Expansion Incentive provides a reduced corporate tax rate on income from qualifying activities such as anchoring leading-edge technology, skills or activities in Singapore. Cora Cheung is a chartered accountant in Singapore and holds an Advanced LL.M. in International Tax Law from the International Tax Center, Leiden University. She began her career in public accounting with one of the Big 4 accounting firms, and has made the shift into international taxation and structuring as a consultant in the financial services sector. As well as the commercial environment, Cora has a keen interest in the research and implementation of tax policy in developing countries. She can be reached at cora.tax@gmail.com.