BSL Bulletin

The M&A allowance incentive was introduced by the Minister for Finance in his 2010 Budget. Its aim is to incentivise companies in Singapore to grow and internationalise through M&A by helping to defray some of the cost of acquisitions.

This article sets out briefly, the qualifying conditions and the general framework for the M&A allowance incentive.

M&A Allowance

A company (“the acquiring company”) that acquires the ordinary shares of another company (“the target company”) will be granted an M&A allowance equal to 5% of the value of the acquisition of the shares (excluding transaction costs) subject to a cap of $5 million for each year of assessment if the acquisition is a qualifying M&A acquisition.

The M&A allowance is deductible against the acquiring company’s taxable income over 5 years in equal amounts and cannot be deferred. Any unutilised M&A allowance will not be available for group relief or carry back for set-off against previous year profits. It may be carried forward for set-off against future profits subject to the substantial shareholding test.

Stamp Duty Remission

Stamp duty relief is also granted to the acquiring company for the acquisition of unlisted ordinary shares and is capped at $200,000 per financial year.

Effective Period

M&A allowance is available in respect of qualifying M&A share acquisitions made
during the 5 year-period from 1 April 2010 to 31 March 2015.

Qualifying Acquiring Company

-A company incorporated in and a tax resident of Singapore.

-Where the acquiring company belongs to a corporate group, its ultimate holding company must be incorporated in and a tax resident of Singapore.

-Carrying on a trade or business as at the date of M&A.

-Has at least 3 Singapore-based employees (ie Singapore citizens or Singapore PR where the employer and employee make CPF contributions) excluding company directors, working for the acquiring company for at least 12 months preceding the date of M&A.

-It must not be directly and indirectly connected to the target company for 2 years prior to the date of M&A.

“Connected” means

-at least 75% of the total number of ordinary shares in one company is beneficially held directly or indirectly, by the other; or

-at least 75% of the total number of ordinary shares in each of the 2 companies is beneficially held, directly or indirectly by a third company.

Qualifying Target Company

-Carrying on a trade or business in Singapore or elsewhere as at the date of M&A; and

-Has at least 3 employees working for the company for at least 12 months preceding the date of M&A.

Qualifying M&A Share Acquisitions

Qualifying M&A share acquisitions are those made by the acquiring company in the target company which result in the acquiring company

More than 50% Ownership test

(a) owning more than 50% of the total number of ordinary shares in the target company after the M&A share acquisitions if it owns 50% or less of the total number of ordinary shares in the target company before the date of the M&A share acquisitions, or

75% or more Ownership test

(b) owning 75% or more of the total number of ordinary shares in the target company after the M&A share acquisitions if it already owns more than 50% but less than 75% of the total number of ordinary shares in the target company before the date of the M&A share acquisitions.

Where the acquiring company made M&A share acquisitions in multiple share acquisitions during a 12 month period before the date of the 50% or 75% ownership thresholds are crossed, all the share acquisitions made during the 12 month period may be added together to qualify for the M&A allowance.

Subsequent Divestment, Cessation of Trade or Cessation of Employment of at least 3 Local Employees by the Acquiring Company

Where the acquiring company divests of its shares in the target company which reduces the acquiring company ownership of the ordinary shares in the target company to 50% or less or to a percentage below 75% as the case may be, the M&A allowance will cease to be given from the Year of Assessment to which the divestment of the shares relates.

M&A allowance will not be granted if the acquiring company ceases to carry on a trade or business in Singapore or ceases to employ at least 3 local employees.

Full claw back of stamp duty relief will also apply if the above events (divestment, cessation of trade or business in Singapore or ceases to employ 3 local employees) occur within a two-year period starting from the date of the M&A. In addition, an interest penalty of 6% per annum is payable on the stamp duty recovered.

Where the divestment does not result in the acquiring company owning less than or equal to 50% or less than 75% as the case may be, of the ordinary shares of the target company, the M&A allowance shall continue but on a prorated basis based on the reduction in share-holding.

Conclusion

The M&A allowance and remission of stamp duty for M&A acquisitions may provide an impetus for Singapore SMEs planning to grow and internationalise in order to seize the growing business opportunities of the Asian markets.

A company once it is incorporated, is treated as a separate legal entity from its members and directors. A company is capable of owning properties in its own name, may incur debts and liabilities on its own and the members will not be liable in respect of the said debts and liabilities. The liability of the members is limited to the amount of capital invested in the company. A company must have at least one member and at least one director who is ordinarily resident in Singapore. It has a perpetual succession until winding up or striking off. There is no maximum number of members for public companies whereas for private companies, the maximum number is fifty.

Generally there are three types of companies:

(a) Companies limited by shares

It is the most common type of companies in Singapore and are profits making business. The liability of its members is limited to the amount unpaid on the shares taken up by them. If a member’s shares have been fully paid up, the member has no further liability to the company. Should the company become insolvent, the member need not contribute to the payment of the company. Companies limited by shares can be incorporated as a private company or a public company.

Exempt Private Company (“EPC”) is a sub-category under private companies. It is a company which has no more than twenty members and no corporation holds a beneficial interest throughout the whole of the financial year. It can also be a company the Ministry of Finance declared as an EPC. The benefit of an EPC includes exemption from:

-lodgment of its financial statements with Annual Return with the ACRA if the EPC is solvent;

-audit requirement if its annual revenue is S$5 million or less; and

-restriction on loans to directors and persons related to the directors under Section 162 and Section 163 of the Companies Act, Cap 50 (the “Act”).

Public Company is any company other than private company. A public company can issue shares to the public and its shares can be transferred freely. Unlike private company, a public company can only commence business after receiving the certificate to commence business issued by the ACRA.

As provided under Section 205B(2) of the Act, Dormant Company is a company with no accounting transaction occurs throughout the whole of the financial year and the company ceases to be dormant upon the occurrence of accounting transaction. Under Section 205B(3) of the Act, the following transactions are not to be considered when determining accounting transactions:

-The appointment of a secretary of the company;

-The appointment of auditors;

-The maintenance of a registered office;

-The keeping of registers and books;

-The payment of fees to the ACRA or any fine or penalty paid to the ACRA; and

-The taking of shares in the company by a subscriber to the memorandum in pursuance of an undertaking of his/her in the memorandum.

A dormant company shall be exempted from audit if it has been dormant since incorporation or since the end of the previous financial year.

(b) Companies limited by guarantee

It is a public company treated as a separate legal entity that has no share capital. The liability of its members is limited to the amount which the members have agreed to contribute. It is usually formed for non-profit making purposes, commonly used for charitable bodies, clubs and associations.

(c) Unlimited Companies

It is a company where the liability of the members is unlimited when it comes to winding up of a company. A creditor of the company may sue a member for debts owe by the company. When a company is wound up, the past and present members are liable to contribute to the debts of the company until payment is fully settled.