Singapore Trusts: what happens if the settlor or a beneficiary of a Qualifying Foreign Trust (QFT) becomes a citizen or resident of Singapore?

A well-planned trust structure is an increasingly popular option for high-net-worth Asian families. Trusts offer a flexible mechanism for ensuring the orderly succession of assets and the preservation of wealth for future generations, while delivering tax efficiencies and maintaining confidentiality.

The most effective wealth management structure for families in the Asia region is the Singapore’s Qualifying Foreign Trust (QFT), which benefits from highly advantageous tax exemptions.

A QFT must be administered by a trustee company in Singapore and neither the settlor nor any beneficiary can be a Singapore citizen or resident in Singapore. In the case of an entity, it must be neither incorporated nor resident in Singapore.

A Singapore QFT and its underlying holding companies enjoy tax exemption on ‘specified income’ derived from ‘designated investments’ under Section 13G of the Income Tax Act (Cap 134) (the ITA) and the relevant regulations. ‘Specified income’ generally includes income from the following sources that is received in Singapore:

• Interest and dividends derived from any designated investments outside Singapore.
• Rents, royalties, premiums, and any other profits arising from property outside Singapore.
• Gains or profits derived from sale of any designated investments outside Singapore.
• Distributions from foreign unit trusts derived from outside Singapore.

Designated investments include stocks and other securities of non-Singapore companies and financial institutions that are denominated in a currency other than Singapore dollars, deposits with approved banks in Singapore, foreign exchange transactions, Singapore government securities, and real property located outside Singapore.

This tax exemption further applies to distributions to beneficiaries and any underlying company of the trust that qualifies as an ‘eligible holding company’. An eligible holding company is a company incorporated outside Singapore, that is wholly owned by the trustee and formed specifically to hold the assets of the QFT, and whose operations consist solely of trading or making investments for the purpose of the QFT.

In addition to these tax advantages, Singapore QFTs offer enhanced confidentiality. There is no registration requirement for Singapore QFTs and no requirement to publicly disclose the identities of the settlor or the beneficiaries.

They are also very flexible. Under Singapore law, trusts are valid for a maximum period of 100 years and can be revocable or irrevocable, discretionary or fixed interest, depending on the objectives to be achieved.

But what happens if the settlor of a Singapore QFT, or one of the beneficiaries, subsequently becomes a citizen or resident of Singapore?

Are all these benefits lost?

The answer is ‘no’.

A properly established and managed QFT can continue to enjoy these tax exemptions provided that the QFT is effectively ‘frozen’ from the point at which Singapore citizenship or residence is taken.

In the case of a settlor, this means in practical terms that:

• No new assets can be injected into the trust by the settlor from the day he or she becomes a citizen of Singapore or resident in Singapore.
• The settlor cannot receive or enjoy any benefit under the trust and must not exercise any power of appointment in favour of any person who is a citizen or resident in Singapore.
• The settlor cannot revoke the trust or vary the terms of the trust to cause any benefit to be paid to a person who is a citizen or resident in Singapore.

In the case of the beneficiaries, it means that the total value of all distributions made by the trustee to beneficiaries who are citizens or residents of Singapore must be less than 20% of the cumulative value of total trust distributions, and that all beneficiaries who are citizens or residents of Singapore can only be beneficially entitled to less than 20% of the trust assets.

Even if these conditions cannot be met and the QFT status of the trust is lost, an appropriately structured trust that is administered by a trustee company in Singapore will still be able to avail of the Locally Administered Trust (LAT) Exemption Scheme under Section 13Q of the ITA.

The scope of exemption for LATs is not as wide as that enjoyed by QFTs, but LATs and their underlying holding companies enjoy tax exemption on Singapore-sourced investment income and foreign income that is received directly by individuals in Singapore. Exempted income received by a beneficiary is similarly tax exempt.

To qualify as a LAT, every beneficiary must be an individual or charitable institution, trust or body of persons established for charitable purposes. The settlor must be an individual and cannot be the sole beneficiary of the LAT.

“Singapore is regarded as a highly attractive base for trusts due on its common law legal framework, economic, social and political stability, internationally compliant regulation, highly competitive tax regime (including no capital gains tax or estate duty), excellent infrastructure and a network of over 90 comprehensive double tax agreements, including with many of its Asian neighbours,” said Andrew Galway, Managing Director of Sovereign Management Services in Singapore.

“If you’re considering setting up a trust in Singapore or elsewhere, or if you have overlapping concerns about how a new or existing trust may be affected by your residency plans, Sovereign can offer specialist advice in this area.”

For further information, please contact Andrew Galway below.