Understanding Tax Deductions for Singapore Angel Investors

Always one of the leading global centres of business, Singaporean governments and industry figures have worked hard to make the country more welcoming to investment by local and foreign entrepreneurs. Our country is fast becoming a global destination for entrepreneurship; nearly 60,000 businesses were incorporated during the 2011 calendar year alone.

To support this continued growth and to encourage the development of more high-tech and innovation-focused businesses within the country, the government announced a tax exemption scheme for qualifying angel investors. The Angel Investors Tax Deduction Scheme will benefit investors providing crucial seed funding and business expertise in the initial stages of a company.

Angel investors are highly valuable to entrepreneurs and new business owners. They provide time, money and experience to the management team, helping to shape the business in its early years and ensure a successful beginning to the company.

Angel investors differ from venture capital investors in their background and the origin of their money. Venture capital firms and individuals use money pooled from a number of sources, and frequently have never had experience in the industries they are investing in. Angel investors are generally retired or mature executives or entrepreneurs wanting to put their skills to good use by tutoring the next generation of business-owners, while also hoping to see a profit through investment of their own private wealth.

Singapore has seen a growing amount of activity by angel investors in the past decade, although the participation rate is below that of the United States and of many countries in Europe. Domestically, angel investors generally provide between S$30,000 and S$500,000 to promising new businesses.

This article provides an overview of the benefits, eligibility criteria, and application and claims process of the Angel Investors Tax Deduction Scheme.

Defining the Angel Investors Tax Deduction Scheme (AITD Scheme)

The AITD Scheme was introduced in the February 2010 budget. It offers tax incentives to qualifying angel investors and is designed to boost investment activity by local and foreign investors.

Subject to conditions, approved investors who invest at least S$100,000 in a company satisfying a number of criteria, will be eligible to claim tax deductions equal to 50 per cent of their total investment amount at the end of a two-year holding period. This deduction will be capped at S$250,000 for each of Year of Assessment (YA) and will be offset against the investor’s total taxable income.

The original scope of the Scheme of 2010 to 2015 has since been broadened, and the Scheme has been extended to 31 March 2020.

What kind of businesses and investors qualify for the AITD Scheme?

Both start-ups and angel investors will have to satisfy the eligibility criteria set by scheme administrator SPRING Singapore, a national enterprise development agency.

Angel investor eligibility

  • Investments must be made on an individual level. Investments made via trusts, corporations, institutionalised funds or any other investment vehicles will not be eligible under the Scheme.
  • The angel investor must be able to prove their ability to add value to the investee company. SPRING Singapore will assess the applicant on their ability to nurture companies. Applicants must meet one of the following criteria:
    • Must be a serial entrepreneur with a strong track-record of entrepreneurship; or
    • Must be an existing angel investor with experience in early-stage investments; or
    • Must be a senior executive or management professional with a long history of relevant senior management experience in the corporate sphere.
  • Additionally, successful applicants will possess the following qualities:
    • Extensive business experience and strong business acumen;
    • Exceptional business and managerial capabilities, allowing them to advise the investee on growth strategies and how to best enter new markets;
    • In-depth knowledge of industry developments and current trends;
    • Extensive scientific and technical understanding; and
    • Current business contacts and strong, diversified industry networks.
  • For a two-year period prior to the date of first investment, Approved investors and their relatives must not be in possession of more than 25 per cent of the investee company’s debt capital, or 25 per cent of the share capital.

Investee company eligibility

  • On the date of first investment by the approved angel investor, the investee business must:
    • Be a private limited company resident in Singapore and incorporated for less than three years;
    • Not be listed on any Singaporean stock exchange;
    • Have a minimum of 50 per cent of its share capital held by no more than 20 shareholders;
    • oHave no shareholders related to the approved angel investor;
  • Additionally, the company must:
    • Have current business operations within Singapore;
    • Be a tax resident of Singapore for the entire two-year holding period;
    • Not be engaged in any of the following business activities:
      • Activities defined as undesirable, including gambling and gambling-related businesses, nightclubs, prostitution, social escort services and non-category 1 spa/massage establishments;
      • Speculate activities;
      • Holding investment of any kind of assets;
      • Property investment or real estate development; and
      • Any other such activities to be determined by the government.

How to apply for the AITD Scheme

  • All investors wanting to qualify under the AITD Scheme will be required to be certified as ‘Approved Angel Investors’ by SPRING Singapore. Applicants will be required to submit the following details and documentation:
    • Completed AITD Scheme application form;
    • A detailed resume showcasing relevant experience;
    • Documentary evidence of a track record of investment; and
    • Any other information that demonstrates the applicant’s ability to add value to an investee company without a formal director or advisor role.
  • Applicants may be required to attend an interview to assess their suitability following the submission of documents.
  • Applications take approximately three to four weeks to process.
  • Successful applicants will receive an approval letter from SPRING Singapore as documentation of their certification as an Approved Angel Investor. This certification is valid for a period of one-year after which it will require renewal.

Terms and Conditions

After the application process, the angel investor will be required to abide by a number of restrictions and conditions before and during their investment of the company.

Investment

All investments made by an approved angel investor must be in compliance with the following criteria:

  • Investors must be accredited as an Approved Angel Investor before thee can invest in the investee company.
  • The first investment in the company must be made within 12 months of the investor being accredited as an Approved Angel Investor. The approved investor will have to invest a minimum of S$100,000 within 12 months from the date of the first investment.
  • Including potential shareholding in the event a convertible loan is converted into shareholding, an Approved Angel Investor cannot hold more than 50 per cent of issued shares or loans in any investee company within the two-year holding period.
  • Investments co-founded by other schemes such as Business Angel Funds or the SPRING Start-up Enterprise Development Scheme are not eligible for the AITD Scheme. No tax deduction will be allowed for such investments, but investors can still benefit from deductions on any portion of the investment not matched by other schemes.
  • All investments must meet the following conditions:
    • Cash investment must not be for the replacement of capital and must be in newly issued shares for the raising of fresh capital;
    • Cash investment made in newly issued preference shares will have no fixed or guaranteed dividend payment attached for the two-year holding period;
    • No fixed or guaranteed dividend paid on newly issued Redeemable Preference Shares and no right to redemption during the holding period;
    • No interest payments and no principal repayment made on convertible loans by the start-up company during the holding period.

Holding period

According to guidelines set by SPRING Singapore:

  • Approved Angel Investors must hold any investment they make for a continuous period of two years counted from the date of the final qualifying investment to qualify for the tax deduction.
  • The two-year holding period will be clocked from the date the last investment tranche was made;
  • Any shares transferred prior to the holding period will be considered ineligible;
  • Investee companies merged, liquidated or acquired within the holding period will be considered ineligible unless otherwise approved by SPRING Singapore.

Reporting requirements for investors

Approved Angel Investors must adhere to the following reporting requirements as set out by SPRING Singapore:

  • Investors must update SPRING Singapore every six months about investments they’ve made during the qualifying period; and
  • Investors must submit annual reports to SPRING in the prescribed format.

Claiming tax deduction under the Scheme

According to the Inland Revenue Authority of Singapore (IRAS):

  • Individuals accredited as Approved Angel Investors under the Scheme may claim a tax deduction on qualifying investments in qualifying start-up companies by completing and submitting the Claim Form to IRAS accompanied by the SPRING Singapore-issued approval letter.
  • Individuals accredited as Approved Angel Investors under the Scheme may claim a tax deduction on qualifying investments in qualifying start-up companies by completing and submitting the Claim Form to IRAS accompanied by the SPRING Singapore-issued approval letter.
  • Tax deductions will be provided for the Year of Assessment (YA) relating to the basis period in which the day the two-year period ends falls.
  • Utilised deductions in any YA are not allowed to be carried forward and will be disregarded.

Example:

An approved angel investor provides S$2,000,000 in qualifying investment to a start-up company in September of 2011. When the two-year holding period expires in June of 2013, the investor can claim a deduction of S$250,000 (50 per cent of the S$500,000 investment cap) on their return for YA 2014.

The importance of the Angel Investors Tax Deduction Scheme

One of the most frequently encountered problems start-ups face during the initial stages of growth is a cash crunch. The Singapore government hopes the AITD Scheme will enhance the flow of capital to SMEs across the country by attracting more foreign and domestic investment, enabling more people to commercialise their business ideas.

To learn more about how you can get involved in the scheme, speak to the experts at Ottavia today. You can also download the application form and read more about the terms and conditions at http://spring.gov.sg/aitd.

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