Why the world's ultra-rich are parking their money in S'pore, explained

MS Explains: In the past few years, we've seen Google co-founder Sergey Brin, British entrepreneur James Dyson, and Haidilao co-founder Zhang Hanzhi begin financial activities here. Why?

Andrew Koay | May 04, 2021, 02:57 PM

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Observers of financial and business news in Singapore might have noticed a trend in recent times — the world's wealthiest individuals are increasingly setting up shop on our tiny island.

In the past few years, we've seen Google co-founder Sergey Brin, British inventor and entrepreneur James Dyson, and son of Haidilao founders Zhang Hanzhi setting up family offices, and buying property here.

What are "family offices"?

Family offices are described by Investopedia as being advisory firms that manage the finances or investments of an affluent individual or family.

In other words, if you're a rich person with lots of money that you want to preserve for your lifetime and the next few generations, you might set up one of these offices to help you do that.

In response to a parliamentary question on the topic, Minister for Trade and Industry Chan Chun Sing said on Apr. 4, 2021 that about 400 family offices had been operating here since the end of 2020.

This is double the number given by Senior Minister Tharman Shanmugaratnam in October 2020, just six months prior.

At the time, Tharman also cited research estimating that each family office typically managed assets in excess of US$100 million (S$132.77 million).

If that figure still holds true, the total assets managed by family offices in Singapore would be at least S$54.4 billion today.

So if we take the proliferation of family offices here as evidence of the the ultra rich parking their money in Singapore, the next question to ask would be: Why?

A safe place to operate

The most obvious reason why the ultra-rich are fond of Singapore is that it is a rather safe place for a wealthy person to park their money.

An indication of this is the fact that our country receives top marks for its sovereign credit rating.

In fact, Singapore is one of the few countries in the world to currently hold the highest possible score of an AAA rating from the three most influential agencies handing out these ratings — Moody's, Fitch, and Standard and Poor's.

Those looking to establish a family office might be interested in specific factors such as political and economic stability, as well as the strength and transparency of its legal system, which all count toward a stronger credit rating.

For example, if a country's government or judiciary is known to have high levels of corruption, a wealthy individual may choose not to operate there over concerns about how they may treated, should they be unable to get into the good books of those in power.

Or maybe a country's politics may be so unstable that there is a risk of the government collapsing into chaos, or even just changing its corporate tax policy, for example, after every election. This too would understandably be a turn off for someone looking for a location to headquarter their financial activities.

Yet, safety and stability can't be the only things making Singapore attractive to the rich.

After all, countries like Sweden, Denmark, and Switzerland have also received AAA ratings across the board; Canada, the United States, the United Kingdom, and Australia also rate highly.

So while safety and stability are basic requirements, something else is needed to really draw the money of the world's wealthiest to Singapore.

Here are a few of them:

Tax incentives

According to Deloitte, Singapore is known for having one of the most competitive tax regimes in the world.

Corporate tax here is levied at a flat rate of 17 per cent, while income tax comes in at 22 per cent for those in the highest bracket.

Compare that to tax rates in fellow AAA-rated country Sweden where corporate tax is about 20 per cent and income tax can be as high as 57 per cent, according to Investopedia.

Meanwhile in Singapore, Deloitte cites the absence of capital gains taxes and tax on foreign-sourced income in the hands of individuals — a rarity in the developed world — as being particularly attractive to ultra high net worth individuals.

Apart from the friendly taxation, a few other government policies have made it easier for rich persons to bring their wealth to Singapore.

This includes the Variable Capital Company (VCC) framework introduced in January 2020 and administered by the Accounting and Corporate Regulatory Authority (ACRA).

Explaining how VCCs work is beyond the scope of this article, but in simple terms, Financier Worldwide wrote that it provides a new legal structure that provides a superior option to existing fund or collective investment scheme structures.

According to InCorp Asia, VCCs allow shareholders greater freedom and flexibility to enter and exit a fund through easy subscription and redemption of shares, increasing the efficiency of investment funds.

In even simpler terms, this just makes it easier for a wealthy person to manage their money.

To make things even more convenient for those looking to move their wealth here from other tax havens, MAS is covering some of the cost of setting up VCCs until 2023.

Another policy that has helped to draw the rich to our island nation has been the Global Investor Programme (GIP).

Under the GIP, an individual may apply for permanent residency here if they invest S$2.5 million or more in new or existing Singapore-registered companies, or GIP funds that invest in Singapore companies.

Once they've attained Permanent Resident status, their families may then enjoy Singapore's world-class education system as well as the other advantages and amenities our city has to offer.

Setting ourselves apart from the competition

We've established that Singapore is something of a tax haven with investor-friendly policies.

But ever the competitor, there are things that set us even further apart from the other tax havens out there like the Cayman Islands, Switzerland, or Hong Kong.

One is our status as a financial hub.

It means that the range of services needed by family offices, or individuals seeking to invest their wealth, are widely available in Singapore.

Accounting and advisory services company Crowe Singapore pointed to our strong eco-system and the "deep pool of talent such as asset managers, private bankers and legal and finance professionals".

Aside from having the infrastructure to support the financial activities of the world's millionaires and billionaires, Singapore benefits from being in Asia.

Writing for CNA, David Kuo — co-founder of investment education website The Smart Investor — highlighted that Asia has been touted as the next centre of global economic growth. Singapore therefore presents itself as an entry point for those looking to invest in the region.

How about Hong Kong? The special administrative region boasts some of these advantages that we've described already — it is a financial hub in Asia.

One popular point of view is that political instability in Hong Kong has turned many off.

Asian Investor quoted Steve Diggle, founder of Singapore-based multi-family office Taurus Investment Management, as saying in 2020 that wealthy families from mainland China seemed to be moving their money out of Hong Kong.

Likewise, Nikkei Asia Review spoke to a private banker of nearly two decades who said that "individuals in Hong Kong whose financial assets exceed $20 million had dispersed their assets in multiple overseas locations, including Singapore".

Good or bad for Singapore?

So how should we view this development in our nation?

On one hand, it can be argued that the rich coming here and investing their money should be seen as a good thing.

Theoretically, by bringing their money into Singapore, using our banking and financial services, and in some cases investing in our businesses, the ultra-rich are creating jobs for those of us with less.

Chan, in his parliamentary reply, said that family offices "generate indirect employment when they work with external finance, tax and legal professionals on wealth planning and operational matters" and expand the pool of capital for Singapore-based startups and business ventures, as well as the funds that invest in such companies.

Kuo, in his commentary, pointed out the "multiplier effect" family offices have on the economy.

"It is not unreasonable, for instance, for a S$100 million family fund to spend around S$1 million a year in expenses."

But others may point to the ongoing issue of inequality — brought to light especially by the Covid-19 pandemic — and wonder if pandering to the ultra-rich may have undesirable effects on society at large.

The topic of redistributing wealth was broached by Member of Parliament Foo Mee Har in February earlier this year.

In parliament, Foo pointed out that the trend of getting the wealthy to contribute more was "gaining traction globally".

"When you consider that selected entities or individuals may have enjoyed outsized windfalls because of Covid-19, it may not be unreasonable to expect that they do more for the common good," she said.

In reply, outgoing Finance Minister Heng Swee Keat acknowledged the pandemic's uneven effects on society.

"We will indeed continue to review our wealth taxes," he said.

Mothership Explains is a series where we dig deep into the important, interesting, and confusing going-ons in our world and try to, well, explain them.

This series aims to provide in-depth, easy-to-understand explanations to keep our readers up to date on not just what is going on in the world, but also the "why's".

Top image made from photos by Zhu Hongzhi and Jason Leung via Unsplash