13O Substance Requirements: Comprehensive Guide to Staffing, AUM & Local Spend
- newhmteam
- Aug 4
- 9 min read
Table of Contents
Understanding 13O Tax Incentive in Singapore
Core Substance Requirements Overview
Staffing Requirements Breakdown
Assets Under Management (AUM) Thresholds
Local Business Spending Obligations
Timeline for Meeting Substance Requirements
Compliance Reporting and Documentation
Common Challenges and Solutions
Strategic Considerations for Fund Managers
Conclusion
13O Substance Requirements: Staffing, AUM & Local Spend—Full Breakdown
Singapore's position as Asia's premier wealth management hub is bolstered by its attractive tax incentive schemes for fund managers. Among these, the Section 13O tax exemption (formerly known as 13R) stands out as a cornerstone framework that enables qualifying funds to enjoy zero taxation on specified income. However, accessing these benefits requires fund managers to fulfill specific substance requirements set by the Monetary Authority of Singapore (MAS).
Navigating these substance requirements can be complex, particularly for fund managers new to Singapore's regulatory landscape. This comprehensive guide unpacks the three pillar requirements under 13O: staffing thresholds, minimum Assets Under Management (AUM), and local business spending obligations. Understanding these requirements is essential not just for compliance, but for strategically positioning your fund management operations in Singapore's sophisticated financial ecosystem.
Understanding 13O Tax Incentive in Singapore
The Section 13O tax incentive is part of Singapore's broader strategy to strengthen its position as a global fund management hub. This tax exemption scheme is designed for Singapore-based funds managed by licensed fund managers, offering exemption from tax on specified income derived from designated investments.
The 13O scheme (previously 13R) requires the fund to be established as a Singapore company and managed by a fund manager holding a Capital Markets Services (CMS) license or registered under applicable exemptions with MAS. The primary advantage of 13O is that it allows for 0% tax on qualifying investment income, capital gains, and foreign dividends.
However, these tax benefits come with defined substance requirements that ensure fund managers contribute meaningfully to Singapore's economy. These requirements are not merely regulatory hurdles but strategic considerations that shape how fund managers structure their operations in Singapore.
Core Substance Requirements Overview
The substance requirements under Section 13O are designed to ensure that fund managers establish genuine economic substance in Singapore rather than simply using the jurisdiction for tax advantages. These requirements fall into three main categories:
Staffing Requirements: Minimum number of investment professionals employed in Singapore
Assets Under Management (AUM) Thresholds: Minimum fund size requirements
Local Business Spending: Annual expenditure requirements within Singapore
These requirements work in tandem to create a comprehensive framework that contributes to Singapore's financial sector growth while providing attractive tax benefits to qualifying funds. Each requirement has specific thresholds and conditions that must be met and maintained throughout the life of the fund.
It's important to note that these requirements are subject to review by MAS, and failing to meet or maintain them can result in the loss of tax exemption status. Let's examine each requirement in detail.
Staffing Requirements Breakdown
The staffing requirement is perhaps the most fundamental aspect of substance under the 13O framework, as it directly creates employment opportunities within Singapore's financial sector.
Minimum Investment Professionals
Under the 13O scheme, fund managers must employ at least three investment professionals (IPs) in Singapore. These professionals must be:
Employed directly by the fund management company
Based in Singapore
Engaged in conducting investment management activities
Qualifying Roles and Expertise
Investment professionals who count toward the requirement typically include:
Portfolio managers
Research analysts
Traders
Investment advisors
These professionals must be involved in core investment activities such as research, asset allocation, portfolio construction, trading, or risk management. Support staff such as operations, legal, compliance, or administrative personnel—while essential—do not count toward fulfilling the investment professional requirement.
Employment Structure Considerations
The employment structure must demonstrate genuine economic substance:
Professionals must be employed on a full-time basis
Compensation should be commensurate with industry standards
Employment must be substantiated through proper documentation including employment contracts, CPF contributions, and tax filings
For new fund managers establishing operations in Singapore, MAS may allow a reasonable timeframe to fulfill the staffing requirements, typically up to one year from the fund's inception.
Assets Under Management (AUM) Thresholds
The second pillar of substance requirements under 13O relates to the minimum size of assets that must be managed from Singapore.
Minimum Fund Size Requirements
Under the 13O scheme, fund managers must commit to building up a minimum AUM of S$10 million within a reasonable timeframe. This threshold demonstrates the fund's substantive presence and commitment to Singapore as a fund management base.
The AUM requirement ensures that funds operating under the tax exemption are of sufficient scale to contribute meaningfully to Singapore's asset management industry. It also helps differentiate between serious fund management operations and those potentially seeking to exploit tax benefits without substantial activity.
Calculation Methodology
The calculation of AUM includes:
Directly managed assets within the Singapore fund structure
Related funds under the same fund management entity
Committed capital (for private equity and venture capital funds)
In calculating AUM, MAS typically considers:
Invested capital
Uninvested cash and cash equivalents held for investment purposes
Committed capital that has been contractually secured
Growth Timeframes and Expectations
While the initial AUM may be below the threshold when operations commence, fund managers must typically demonstrate a clear path to meeting the S$10 million requirement:
New fund managers generally have a grace period of 12-24 months to build up their AUM
The growth trajectory should be realistic and aligned with the fund's investment strategy
Regular reporting to MAS is required to demonstrate progress toward the AUM target
Failure to meet AUM targets within agreed timeframes may result in a review of the tax exemption status, although MAS typically adopts a practical approach when evaluating compliance, especially in challenging market conditions.
Local Business Spending Obligations
The third substance requirement focuses on ensuring that fund management operations contribute directly to Singapore's economy through local business expenditure.
Annual Spending Requirements
Under 13O, fund managers must commit to and maintain an annual local business spending of at least S$200,000. This requirement ensures an ongoing economic contribution to Singapore's economy beyond just employment creation.
Local business spending includes expenditure incurred directly by the Singapore-based fund manager in the course of its operations. This expenditure must occur in Singapore and contribute to the local economy.
Qualifying Expenditures
Expenditures that typically qualify toward meeting the local business spending requirement include:
Office rental and related costs
Staff salaries, CPF contributions, and benefits for Singapore-based employees
Professional services procured from Singapore-based providers (legal, audit, tax, compliance)
Technology infrastructure and services purchased locally
Research and data subscriptions
Local transportation and business travel originating from Singapore
Training and development programs conducted in Singapore
It's important to note that certain expenses may not count toward the requirement, particularly those that do not contribute to the Singapore economy or are paid to overseas entities.
Documentation and Verification
Fund managers must maintain detailed records of qualifying expenditures, including:
Invoices and payment records
Service agreements with local providers
Salary records for employees based in Singapore
Rental agreements and property-related expenses
These records are subject to verification during regular reviews by MAS and during annual tax filings with the Inland Revenue Authority of Singapore (IRAS).
Timeline for Meeting Substance Requirements
Understanding the timeline for compliance is crucial for fund managers planning to establish or maintain operations under the 13O framework.
Initial Application Period
During the initial application for the 13O tax exemption, fund managers must present a concrete plan demonstrating how they will meet the substance requirements. This includes:
A hiring plan for investment professionals
A strategy for AUM growth
A projected local business spending budget
MAS evaluates these plans based on their feasibility and the fund manager's commitment to establishing genuine substance in Singapore.
Ramp-up Allowances
Recognizing that building substance takes time, MAS typically allows for a ramp-up period:
Staffing: Generally, 6-12 months to hire the required investment professionals
AUM: Usually 12-24 months to reach the S$10 million threshold
Local Spending: Expected to commence immediately but may scale up over the first year
The specific timeline allowances may vary based on the fund's size, strategy, and the fund manager's track record and commitments.
Ongoing Compliance Monitoring
Once operational, fund managers must maintain continuous compliance with substance requirements:
Annual reporting to MAS is required to demonstrate ongoing fulfillment of requirements
Material changes to operations that may affect substance must be promptly communicated
Temporary disruptions (such as staff departures) must be addressed within reasonable timeframes
Compliance Reporting and Documentation
Proper documentation and reporting are essential aspects of maintaining compliance with 13O substance requirements.
Annual Reporting Requirements
Fund managers operating under 13O must submit annual returns demonstrating compliance with substance requirements. These typically include:
Details of investment professionals employed, including their roles, qualifications, and remuneration
Statement of AUM with supporting documentation
Breakdown of local business expenditure with supporting evidence
These returns are generally submitted alongside the annual tax filing to IRAS and may also be subject to specific reporting requirements to MAS.
Ongoing Record-Keeping Practices
Beyond annual reporting, fund managers should maintain comprehensive records throughout the year:
Employment records for all staff, with particular detail for investment professionals
Fund performance and AUM reports generated on at least a quarterly basis
Financial records detailing all business expenditure with clear identification of local spending
Documentation of investment decisions and activities demonstrating that management is conducted from Singapore
These records serve not only for regulatory compliance but also as evidence of substance during any regulatory reviews or audits.
Handling Changes and Transitions
Changes in operations that affect substance requirements must be handled proactively:
Staff departures should be addressed with immediate recruitment efforts
Significant changes in AUM (such as large redemptions) should be reported if they threaten threshold compliance
Material changes to business spending patterns must be evaluated for impact on compliance
Proactive communication with MAS regarding any challenges in maintaining substance requirements is generally viewed more favorably than discovering non-compliance during regulatory reviews.
Common Challenges and Solutions
Navigating 13O substance requirements presents several common challenges for fund managers, each with potential solutions and mitigation strategies.
Talent Acquisition and Retention
Challenge: Finding and retaining qualified investment professionals in a competitive market.
Solutions: - Develop relationships with local universities and financial training programs - Consider experienced professionals returning to Singapore from overseas positions - Create compelling compensation packages and career development opportunities - Work with specialized financial services recruiters with deep networks in Singapore
AUM Growth in Competitive Markets
Challenge: Building sufficient AUM in competitive fund markets, especially for new managers.
Solutions: - Focus on developing a distinctive investment strategy with demonstrable advantages - Leverage Singapore's connectivity to target both regional and international investors - Consider strategic partnerships with established financial institutions - Develop phased growth strategies with realistic targets aligned with market conditions
Maximizing Effective Local Spending
Challenge: Meeting local spending requirements while maintaining operational efficiency.
Solutions: - Structure operations to naturally incorporate local service providers where possible - Evaluate outsourcing versus in-house functions based on both cost and substance considerations - Explore co-working or flexible office arrangements that still qualify as local spending - Consider participation in industry events and professional development that contribute to local spending
Strategic Considerations for Fund Managers
Beyond mere compliance, successful fund managers approach 13O substance requirements as part of their broader strategic positioning.
Integrating Compliance with Business Strategy
Savvy fund managers align substance requirements with their business objectives:
Using the professional staffing requirement as an opportunity to build a strong, diverse investment team
Viewing AUM targets as aligned with natural business growth objectives
Treating local spending as an investment in building valuable local networks and expertise
This strategic approach transforms compliance from a cost center into a business development opportunity.
Leveraging Singapore's Financial Ecosystem
The substance requirements naturally position fund managers to benefit from Singapore's advantages:
Access to a deep pool of financial services talent and supporting professional services
Connection to a comprehensive ecosystem of investors, from family offices to institutional players
Opportunity to leverage Singapore's status as a gateway to Asian markets
Benefits from Singapore's extensive network of tax treaties and international agreements
By viewing substance requirements through this lens, fund managers can maximize the strategic value of their Singapore operations.
Long-term Planning for Sustainable Compliance
Successful fund managers develop long-term approaches to substance requirements:
Creating robust business continuity plans addressing potential staff transitions
Developing diversified investor bases to ensure AUM stability
Building sustainable operational models that naturally generate sufficient local spending
Regular assessment of compliance status against business growth to ensure alignment