How to Set Up a Family Office in Singapore
Between 2017 and 2019, Singapore has seen a 5-fold increase in the number of Family Offices. This astounding growth reflects the rising numbers of affluent families in Asia that are consolidating their wealth in Singapore through formal structures. Not surprisingly, Singapore is ranked number 2 globally as the preferred offshore wealth hub.
Those who intend to start a family office need to keep in mind that it is a business entity, and should best be set up and managed accordingly. When not done professionally from the start, it often becomes ineffective over time.
This article deals with pertinent considerations for the UHNW with regards to establishing a family office in Singapore and useful information, such as tax incentives and exemptions, how family offices can capitalise on the Variable Capital Company framework, and more.
Definition of family office
The general understanding is that ‘family office’ is an entity which manages the assets and investments of ultra-high-net-worth (UHNW) individuals or families. It also provides a variety of services to such individuals.
In terms of Singapore legislation, ‘family office’ is not defined under the Securities and Futures Act (SFA). However, the FAQ issued on the Licensing and Registration of Fund Management Companies by the Monetary Authority of Singapore (MAS) in 2017 states:
“An SFO typically refers to an entity which manages assets for or on behalf of only one family and is wholly owned or controlled by members of the same family. The term ‘family’ in this context may refer to individuals who are lineal descendants from a single ancestor, as well as the spouses, ex-spouses, adopted children and stepchildren of these individuals.”
Objectives for setting up a family office
Knowing the objectives helps one frame the right issues to consider when finalising the optimal structure for the family office. Here are two scenarios to illustrate this.
Scenario 1: A patriarch’s main objectives are to enable his key family members to acquire a legitimate status to work and be based in Singapore. As such, he needs to appoint these family members as members of his Family Office Investment Committee.
Scenario 2: A family wishes to retire in Singapore. A plausible option would be to redomicile their assets in Singapore and explore possible tax residency statuses.
The following are some of the common objectives for forming a family office.
1. Consolidate reporting obligations
It is important for families to understand what gets disclosed and who gets disclosed, especially with the implementation of the Common Reporting Standard (CRS), Economic Substance Code and Declaration of Beneficial Ownership.
2. Development of Wealth and Investment Strategies
The core purpose of the family office is to develop integrated strategies for investment and wealth generation activities. This includes coordinating wealth transfer, tax planning, financial strategies and other investment considerations.
The family office is dedicated to serving a specific UHNW family. As such, it provides tight protection for the family’s privacy and security of financial information. Furthermore, it falls under legislation which allow for confidentiality to be preserved.
4. Leveraged purchasing power and cost saving
When UHNW family members pool their resources, they multiply their buying power through pooled investment vehicles to provide efficient access to best-in-class resources.
5. Consolidated advisory
The family office coordinates the expertise of many advisors (from attorneys to investment professionals) to provide comprehensive financial support. It also serves as a one-stop library which stores the family members’ personal histories, values, preferences, financial detail and long-term goals.
6. Succession planning
One of the key roles of a family office is to guide owners of a trust to be responsible stewards of the wealth through formal and informal initiatives as well as educating beneficiaries.
Structure of a family office
A typical structure in Singapore would have the Family Board consisting of all participating members of the UHNW family. Reporting to this Board is an Executive Team, which is employed in a Holdings Corporation and oversees the Family Office.
The Executive Team consists of a Chief Executive Officer (CEO), who leads the whole investment firm, a Chief Investment Officer (CIO) who is responsible for investment decisions and a Chief Financial Officer (CFO) who is responsible for tax and financial topics and a Chief Operating Officer (COO) who is responsible for daily operations.
There would be Back Office staff to support the daily work and necessary operational functions such as accounting, human resources, IT, public relations and portfolio management.
The Investment Team analyses various classes of assets such as financial investments, real estate, private equity, and so on. A smaller family office sometimes outsources to a professional asset manager with family office services.
The smallest SFO consists of only the Executive Team. Slightly larger ones have some employees in the Back Office and the rest of the functions are outsourced to external providers. Larger SFOs with billions of assets under management have several sub-divisions with their own dedicated teams for each operational department as well as a specialised team for each asset class.
How to apply for licensing
Since an SFO is not defined under the SFA, how is it defined for licensing or regulatory purposes? It may rely on the exemption provided for a corporation which manages funds for its related corporations under the Second Schedule to the Securities and Futures (Licensing and Conduct of Business) Regulations. Alternatively, an SFO that provides financial advisory services to its related corporations may rely on an existing exemption from licensing under the Financial Advisers Regulations.
Assets to inject into the family office
There are many types of assets ranging from financial investments to private or publicly listed companies. With regards to real estate, common issues that often crop up are whether the property is in a jurisdiction which imposes inheritance tax, transfer tax and other holding restrictions.
Once specific assets are determined, respective lawyers can be engaged to provide specific tax and legal advice to facilitate the best mechanism for the transfer of assets.
Investment strategy and mandate for the family office
First, investment objectives and risk profile must be made clear. Then, a family office can decide on the amount of personal assets that will be used for investments.
Investment strategies and the chosen products must match the family’s risk profile and objectives. This is actually a requirement for applications under the Monetary Authority of Singapore (MAS) and the Economic Development Board (EDB). They expect the family office to have a clear roadmap of the investment strategy and business mandate as part of its evaluation process.
Tax incentives and exemptions
To encourage more family offices to be established in Singapore, the government has introduced several attractive programmes. These schemes allow funds managed by family offices to be exempted from Singapore income tax on almost all investment gains.
They are as follows:
- Onshore Fund Tax Incentive Scheme (section 13R of ITA)
- Enhanced-Tier Fund Tax Incentive Scheme (section 13X of ITA)
- Global Investor Program Family Office Option (GIP – FO Principals profile)
The following are some of the administrative requirements which may arise before and throughout the course of the family office’s operation:
- opening of bank accounts for the family office
- selecting the best premise for the family office
- implementing IT systems for portfolio aggregation and securing data
- hiring employees and complying with Singapore Ministry of Manpower regulations
- annual tax reporting
- annual financial audits
- other regulatory reporting obligations, such as the Common Reporting Standards (CRS) and the Foreign Account Tax Compliance Act (FATCA)
Succession planning tools
The first tool is a Family Constitution which establishes family governance guidelines. This prevents family squabbles and infighting after the patriarch passes on.
Next, there are tools that outline succession of the family office ownership. For example, a will, a Lasting Power of attorney and private trust companies. Training for beneficiaries may need to be put in place as well to prepare them for inheriting the business and investments.
Benefits of the VCC
Family offices set up under the 13R and 13X scheme can also utilise the Variable Capital Company structure. The structure is a highly flexible corporate vehicle for collective investment schemes (CIS).
These are among a VCC structure’s most prominent corporate and regulatory advantages over other forms of corporate vehicles:
1. Cost efficiency
It can be set up as a standalone fund, or as an umbrella fund with two or more-sub-funds. Fund managers can thus incorporate multiple sub-funds into a single VCC entity under the scheme.
2. Tax savings
A VCC structure is regarded as a single company, so it is considered a single identity for taxation purposes by the IRAS. This negates the need to file multiple tax returns for individual sub-funds.
3. Flexible distribution and return of capital
Shares of a VCC are redeemable at the fund’s net asset value (NAV). It can pay dividends from the capital, which is not normally allowed in other forms of corporate vehicles.
Choosing an asset manager
Hiring all the personnel to support the Back Office and Investment Teams can amount to a huge cost. That is why some family offices outsource some of these functions:
1. Activities that are costly
Performance reporting, for instance, needs software for customized reporting. This software is typically expensive and time-consuming to maintain. Many asset management firms offer such a service to office families. Since they have already invested in the software, they can provide this service at a low marginal cost.
2. Sensitive areas
Tax submissions and legal compliance are examples of areas which can be complicated and require a level of sophistication to avoid costly errors.
3. Lower priority activities
These are easy-to-delegate areas such as run of the mill administrative work. Outsourcing these would free up a family office’s resources for the Investment Team.
Here are a few types of firms which offer support services:
1. Investment consulting firm
It provides investment advice, outsourced CIO services, performance reporting and investment due diligence. This type of firm can help to save a large part of manpower costs on Investment Teams.
2. Professional firm
Most family offices outsource their tax and legal work to accounting and law firms. Some of these firms offer additional services to support family offices; for instance, compliance functions, administrative matters such as entity administration, foundation management, record keeping and bookkeeping.
3. Multi-family office
An MFO is a firm that provides family office services to a select group of ultra-wealthy families. MFOs can offer a bundled price.
4. Other single-family offices
A larger family office can provide performance reporting and administrative support for a smaller family office for a fee.
There is no single fixed formula for setting up and running a family office in Singapore. Many factors must be taken into account such as the objective of the UHNW patriarch, size of assets under management and types of assets to be managed.
The beauty of having a setup here in Singapore allows family offices to tap on government schemes that allow family office managed funds to be exempted from income tax on almost all investment gains.
Co-Founder, Managing Director
John has over 20 years of experience in providing multi-tiered services in the areas of fiduciary, tax, accounting, trust and asset management. His network includes ultra-high net worth individuals and families, corporations and conglomerates from ASEAN countries.
As a trained lawyer, John has been intimately involved in the set-up and implementation of his clients’ structures, often being able to value add beyond the original mandate.
John’s pride is seeing many working relationships with clients transforming into close friendships. Sharing the same vision with his partners and teammates, he aims to bring safe investments with good alpha returns to investors.