Sophisticated investors, often supported by their investment advisers, such as private bankers and accountants, occasionally ask real estate consultants whether they should set up Special Purpose Companies (SPCs) to invest in Singapore properties.
These investors see several advantages in setting up an SPC to hold a Singapore property:
1. Inheritance and wealth transfer. While there are no advantages in terms of savings on inheritance taxes in Singapore, a high-net-worth individual who is senior in age may invest in properties under an investment trust, a family foundation or an offshore vehicle to facilitate the ease of wealth distribution and transfer to selected beneficiaries and loved ones.
2. Owning a residential property through an SPC attracts a 15 per cent Additional Buyer Stamp Duty (ABSD). However, at the point of divesting the property, should the next buyer opt to buy over the shares of the SPC, the next buyer will save a significant sum on stamp duties. Depending on the jurisdiction where the SPC has been set up — for example, Cayman Islands or British Virgin Islands — the stamp duties on the transfer of shares could be zero. If the shares of the company are sold within four years, the seller is not liable for Seller’s Stamp Duty.
3. Buying a non-residential Singapore property through an SPC is even more common, as there is no deterrent in the form of the hefty 15 per cent ABSD and especially for larger assets, the opportunity to minimise Goods and Services Tax through using a Singapore company to invest in an office for the investor’s use could yield significant savings.
4. Having an SPC own the property separates the property ownership, income and expenses from the high net-worth investor’s personal finances, which may bring advantages in terms of personal income tax payments.
However, owning a property under an SPC requires much more planning, effort and costs. There could also be disadvantages in the restrictions on home loans. In cases where the SPC shares are transferred for the sole purpose of selling a property, the tax authorities may also assess if the setting up of the SPC was for the avoidance of real estate stamp duty and taxes..
We can look at this from another angle. An investor asks: “I’m considering buying an apartment as my home, and it seems that the seller owns the apartment under an SPC. The seller suggested that I buy over the shares of the company instead of buying the property directly. This will reduce my stamp duty to just 0.2 per cent of the transaction value, meaning I will get to save on the Buyer Stamp Duty and the ABSD. What are your views on the seller’s suggestion?”
The answer: In addition to the possibility of the IRAS looking through the SPC structure to determine if its sole aim was aggressive tax reduction, one needs to be aware that the ongoing yield of the overseas SPC could be significantly reduced as (a) withholding taxes could be applied against the rental income to the SPC; (b) dividend distributions by the SPC may not qualify as tax-exempt income; and (c) income of the SPC may be brought to tax by one or more tax jurisdictions, depending on the specific residency situation of the investor.
Should you decide to proceed, you should also note that the purchase procedure will be different from a normal property purchase: Instead of receiving a standard Option to Purchase, you may receive a letter of offer for the sale of the SPC’s shares.
You will need to engage the services of an experienced lawyer and accountant to look through the corporate background of the SPC and its financial accounts. Your lawyer and accountant will provide their opinions about whether the SPC and its accounts have any outstanding liabilities and obligations, and they will give their opinions about the risks of proceeding with the investment in the shares of the SPC.
As for loans, there are additional restrictions for SPC-held properties to secure financing. For example, under the current Total Debt Servicing Ratio (TDSR) rules, the maximum loan-to-value ratio for a residential property held under an SPC is 20 per cent. But, if you are buying in cash, this is not a concern.
Another complication arises with loans: When you decide to sell the property in future, the next buyer of the SPC may not be able to take over the mortgage under this SPC. The next buyer will likely have to buy over the SPC with cash in full such that the existing mortgage is discharged and then take on a fresh mortgage when the SPC ownership is completely transferred. At that point, the SPC would have several years of accounts and history, and so the next buyer’s financial due diligence process might be slower and more costly.
On top of these, the compliance checks, anti-money laundering checks and the entire due diligence process could get complicated, especially for overseas SPCs and foreign bank accounts. There are also annual corporate secretarial and accounting costs in maintaining the SPC.
The additional effort and expenses involved are usually more than compensated in terms of tax savings for the institutional investors where large assets such as commercial buildings, retail malls or factories are involved. The proliferation of shoebox retail, industrial and commercial properties in the past five years saw many individual owners purchase such properties under Singapore-registered companies. However, the benefits for an individual investor setting up an SPC to own a strata-titled property of less than S$2 million are not so clear cut.
On matters involving corporate structures and taxes, investors should always consult lawyers and accountants for detailed assessments about their financial circumstances before making any investment decision.
Adapted from: TODAY, 28 October 2016