Singapore: the real estate opportunity in the year of the rooster
It is no secret that Asian real estate funds are growing in popularity, be it through Asian focused funds, the increase in allocation to Asia for global funds or single investor mandates focusing on Pan –Asian countries.
As this capital finds its way to various investment destinations within Asia-Pacific, it is common to find a holding location which efficiently pools capital or if possible, has the holding vehicle in the same location as the fund manager. In this pursuit, Singapore is often the choice. There are a few reasons for this, one being the fund management team is based in Singapore and the added benefit of an extensive tax treaty network that Singapore has globally (in excess of 80 tax treaties and counting).
The question being asked is ‘Does an extensive network actually translate into the best tax outcome for an investor?’ The answer unfortunately is not that straight forward. As you will know, for a real estate investment, the focus is to manage the tax paid on distributable profits especially where there are core assets in play, but the cream on the top in some cases, is to be able to exit with no capital gains tax in the underlying country.
Does Singapore’s tax treaty network offer the magic capital gain exemption on the sale of unlisted shares of land rich companies where they are wholly owned by the foreign investor? If it does not, then are we missing out on an alternative holding location such as the Netherlands?
Let’s start with looking at some of the popular destinations like Australia, India, China and Japan.
The tax treaties that Singapore has with Australia and Japan do not exempt capital gains on the sale of interests in property holding vehicles. There are ways to manage the tax paid in those countries but there is no prudent manner of sale which results in no tax on exit. The Dutch treaty with Australia is broadly consistent with the Singapore tax treaty and so there is no clear winner here. The same could be said for the Japanese tax treaty with the Netherlands as it does not offer capital gains tax exemption on the sale of interests in land rich companies.
China has no preferred partners, so the 10% tax on exit is something that investors are getting used to.
Coming to India, the tax treaty with Singapore was a good one as it offered capital gain exemption on the sale of shares of Indian property companies similar to the exemption offered with under the India-Mauritius tax treaty. Even though both treaties offered the same exemption, the Singapore treaty was considered the preferred option as it gave certainty of exemption if certain conditions were met. Well, that is likely to be history at least for direct transfer of shares, given the treaty with Singapore has been re-negotiated to do away with the capital gain exemption (at the back of the Mauritius treaty). The Dutch treaty with India gives India the right to tax gains on sale of shares of a company which derives value mainly from the Indian immovable properties. However, interestingly, it excludes a real property where it is used for the business of the company. This does potentially present an opportunity to argue that businesses such as hotels and factories should not be considered land rich companies. How successfully this can be argued out with the Indian tax authorities warrants a separate in-depth review.
Moving to the South East Asian region, Vietnam, Thailand and Indonesia are gaining traction on the amount of real estate investment going into these countries.
Where Singapore was used as a holding platform, it used to work well for Thai real estate investments, as the treaty did offer exemption on the gains from the sale of shares of Thai property holding companies. However, with effect from 1 January 2017, the new treaty with Thailand doesn’t offer that capital gain exemption anymore.
The tax treaties with Vietnam and Indonesia do not offer that exemption to a Singapore company holding shares in a Vietnamese/Indonesian real estate company.
On the other hand, the Netherlands has managed to negotiate good tax treaties with Thailand and Indonesia which does not give taxing rights to these two countries in respect of the sale of shares on real property companies. The Netherlands has a reasonably good treaty with Vietnam. Even if it does not offer a blanket capital gain exemption, one could claim exemption on gains on the sale of shares on the grounds that the property was used in the business of a company, such as a hotel building or the company was in the business of renting an office building, though such a claim needs to be tested thoroughly. In any case, an indirect transfer of shares is an option since the Dutch treaty offers that exemption.
Looking at the above, it is surprising how the Dutch have managed to negotiate capital gain exemption for sale of shares for the above South Asian countries and a marginally better one with India, at least on paper. Does this spell bad news for Singapore? Maybe not.
Any treaty claim has to be backed with a good commercial reason for using that location coupled with the presence of people on the ground. This holds true more so now with tax structures in this new world of tax morality and fairness. Using that principle, even if some of the Asian treaties with the Netherlands did well on the capital gain exemption, the cost of maintaining a Dutch platform could be expensive and at the same time not practical given the key people on the ground would be in Asia and in many cases in Singapore. So, in the end, Singapore could still be the answer for Pan-Asian investments.
Investment into European assets Given that the Dutch treaties put up a good show for Asian investments, it would be only fair for Singapore to make a bid as an alternative platform to hold European real estate assets. Sounds ludicrous ? Well, let’s test it out.
Asian capital is steadily moving towards European real estate investments for diversification. Interesting times lie ahead for the real estate community as we see capital move both ways and not just from the traditional route of West to the East. Where Luxembourg and the Netherlands have traditionally been used as a gateway to Europe, does that hold true for Asian investors ? Maybe not. To illustrate this, let’s pick some popular locations: UK, Germany, Spain and Italy.
Starting with the UK, a holding company in Jersey, Luxembourg or the Netherlands is popularly used but could prove to be cumbersome operationally for an Asian investor. Incidentally, Singapore as an alternative to hold UK direct investment works equally well, meaning no UK tax on exit. It is arguably easier and cheaper to administer.
The same applies to German real estate assets. Where German real estate is held directly by a foreign company, there is no German tax on the sale of the shares of the foreign company, be it Luxembourg, the Netherlands or Singapore.
Where the Netherlands, Luxembourg or Singapore is used to hold shares of a Spanish/Italian real estate company, no taxes are paid in Spain/Italy on the sale of shares of the property holding company. Though it appears that the Netherlands and Luxembourg have an edge over Singapore when it comes to exemption on dividends and interest paid by the property holding companies. This is due to EU parent-subsidiary directives. It is not easy to claim this exemption. This usually entails heavy substance requirements like office space and employees to benefit from these income exemptions. Given the cost to maintain substance, it may outweigh the benefit of the tax exemption on income flows which makes Singapore the natural choice for such investments.
In fact, it is interesting to note that Singapore actually has better treaties with some European countries. Eg: Spain’s tax treaty with Singapore offers 0% withholding tax on dividends and 5% on interest, whereas Spain’s tax treaties with Luxembourg and Netherlands is 10% on dividends and interest.
Once all options have been considered, Asian investors looking to invest in Europe need not settle for a European holding platform. It may be more appropriate, and possibly more efficient, to opt for an Asian platform, like Singapore.
Closing thoughts Looking at all of the elements together, Singapore is a realistic option as a preferred investment platform for real estate investment in the Asia-Pacific and European regions. But having said that, there is always room for improvement especially when it comes to providing some exemption on the sale of land rich companies in Singapore’s tax treaties. For example, Singapore is currently negotiating its tax treaty with Indonesia. It could mimic Hong Kong’s treaty with Indonesia which exempts the sale of shares of a company with asset heavy businesses. This could make the treaty relatively attractive.
In respect of European real estate investments, holding companies in Luxembourg, Jersey or the Netherlands have been used previously. That could have been because of European investors buying into such investments in the past. This may not hold true of Asian investors, who would prefer a location closer to home to hold European investments. Singapore could be that location. Though a Singapore holding company may not be a familiar structure on exit especially if sold to a European buyer.
The ultimate advantage is that it is still cheaper and easier to administer a Singapore company (as opposed to a European one) from Asia.
Authored by Teo Wee Hwee, Partner at PwC Singapore and Anulekha Smant, Taz Director at PwC Singapore