Where should Entrepreneurs set up shop?
“Start-ups” have been the buzz words in recent years and it is believed to be the driver of the next economic boom and sharing the spotlight are locally grown Small Medium Enterprises (“SMEs”) in their expansion phase. Naturally, forward-thinking authorities flock to capture these markets, Hong Kong and Singapore are no exception. The city-states have been neck on neck competing for international investments, each boasting transparent, simple and attractive investment environment, providing the perfect breeding ground for start-ups and SMEs seeking funding for expansion.
With the freshly released Hong Kong and Singapore budgets, this article evaluates how each jurisdiction’s tax policies are geared to win the hearts of investors and entrepreneurs alike. There are numerous government grants and financing schemes available in both jurisdictions, however, we will be focusing on the tax incentives targeting the Start-ups and SMEs.
Tax incentives for investors
“ The top priority, for most start-ups and SMEs seeking to expand, is capital raising. In order to attract entrepreneurs, authorities understood that they need to first attract the investors. ”
Hong Kong holds its own in this arena being the plunge pool for Chinese investors and the traditional financial hub of Asia. On top of the strong infrastructure and robust investment environment, a further boost is given in this year’s Hong Kong budget. A new profit tax exemption is given to offshore private equity funds, the details of which will be released later on in the year.
On the other hand, Singapore has been striving to catch up through various tax incentives schemes. In the budget 2015, the Angel Investors Tax Deduction (“AITD”) scheme has been extended, allowing approved investors a 50% tax deductions of up to SGD500,000 per year on the amount invested in start-ups until March 2020. This incentive can be used in combination with the government co-funding scheme for start-ups, i.e. Investors will be able to share the risk with the government agency and still benefit from a tax deduction for making potentially high return investments.
Further, Singapore slashed the tax rates for investment funds by upgrading the tax incentives for venture capital funds and exempting qualifying income for private equity funds. A qualifying venture capital fund and fund management company may enjoy 5% concessionary tax rate until March 2020 while more private equity fund managed in Singapore may enjoy tax exemption on qualifying income with less stringent requirements.
Tax incentives for Start-ups & SMEs
Hong Kong takes a direct approach in assisting Start-ups and SMEs through grants and financing programmes as most companies in their initial growth phase may not have a steady stream of income thus have no tax liabilities to be reduced.
Singapore goes with the two-pronged approach by providing tax incentives on top of grants and financing assistance. A new Singapore company that is not in the business of investment holding or property development, will be granted staggered exemptions on the first SGD 300,000 of taxable income, resulting in the effective tax rate of 5.67%. Similar exemptions at a lower rate applied to all enterprises beyond the three-year mark, resulting in the effective tax rate of 8.36% for the first SGD300,000 of taxable income.
These measures coupled with the new concessionary tax rate and double tax deduction on internationalisation activities aim to benefit Start-ups and SMEs.
Intellectual Property development and holding incentive
“ Singapore is the front-runner in this aspect as it introduced the Productivity and Innovation Credit (“PIC”) in 2010. PIC provides an unrivaled 400% tax deduction on qualifying expenses...”
Hong Kong and Singapore’s economies largely depend on MNCs and foreign investments which make them very susceptible to global turmoil. To hedge against such market risks, authorities are paying more attention to nurture homegrown brand names. One of such initiatives is to encourage the development and holding of intellectual properties, this will encourage the employment of highly skilled researchers, build up high-value assets within the territories and generate recurring income from all over the world.
Singapore is the front-runner in this aspect as it introduced the Productivity and Innovation Credit (“PIC”) in 2010. PIC provides an unrivalled 400% tax deduction on qualifying expenses capped at SGD 600,000 per year per qualifying activity (there are 6 categories of qualifying activities), i.e. for each qualifying activity, the company could get up to SGD 2,400,000 tax deductions per year from the year of assessment 2015 to 2018. Further, if the company is unable to utilise the tax deduction, it could opt to convert part of the qualifying expenditure to a cash payout of up to SGD 60,000 per year.
On top of that, Singapore has the Approved Royalties Incentive (“ARI”) whereby qualifying income could be exempt from tax or subject to concessionary tax rates.
Hong Kong, on the other hand, introduced a modest IP expenditure 100% deduction scheme. It is noteworthy that the Hong Kong Innovation and Technology Commission provides a Patent Application Grant to assist the development of Intellectual property.
In the context of tax policies, Singapore might seem more aggressive than Hong Kong authorities in the battle for entrepreneurs and investors. However, tax advantages are only part of the business environment, the winning party is likely to have a strong eco-system to support the Start-ups and SMEs.
The table below summarizes the tax benefits available in both jurisdictions for the benefit of all stakeholders in this ecosystem. May the best state wins.