Singapore Tax Deduction Scheme for Angel Investors

To encourage entrepreneurship and start-up activities in Singapore, the government has recently announced a special tax exemption scheme for angel investors called Angel Investors Tax Deduction Scheme.

Angel investors play a critical role in nurturing the growth of high potential start-ups in early stages. By providing seed funding and business expertise, business angels often hope to achieve significant returns on their investment of time and money in start-ups. According to official estimates, Singapore is home to more than 100 angel investors who are known to typically invest S$30,000-S$500,000 in promising start-ups. Although business angel investment is prevalent in Singapore, the participation rate is yet to match that of the United States or Europe.

An angel investor is essentially an entrepreneur’s best friend. They are successful entrepreneurs who invest their own time and money in a new startup to help it succeed. This is a sharp contrast to most venture capital investors who have never been in the driver’s seat and are betting with other people’s money.

In this article, we will provide an overview of the Angel Investors Tax Deduction Scheme and discuss the eligibility criteria to qualify for the scheme, application procedure, and other terms and conditions. For general information on personal taxation, refer to Singapore personal income tax guide.

What is the Angel Investors Tax Deduction Scheme (AITD Scheme)?

• The Angel Investors Tax Deduction Scheme (AITD Scheme) is a tax incentive scheme that was introduced by the Singapore government in March 2010 and is available up till 31 Mar 2020, to boost angel investment activity in the country by attracting qualified angel investors.
• An approved angel investor who invests a minimum of S$100,000 of qualifying investment in a qualifying start-up is eligible to claim tax deductions under the AITD Scheme.
• Under the scheme, the approved business angel can enjoy a tax deduction for each Year of Assessment (YA) based on 50% of his investment amount, at the end of a two-year holding period. The tax deduction will be subject to a cap of S$250,000 in each Year of Assessment (YA), and will be offset against total taxable income.

Duration of the AITD Scheme

The tax incentive is applicable to approved angel investors who invest in qualifying Singapore start-ups between the period spanning 1 March 2010 to 31 March 2020.

Who Can Qualify for the Angel Investors Tax Deduction Scheme?

Eligibility Criteria for Angel Investors

In order to qualify for the AITD Scheme, the business angel must satisfy the following criteria:

• The investment must be made at the individual level. The scheme does not apply to investments made via corporations, trusts, institutionalized funds or other investment vehicles.
• The investor must qualify under any one of the following qualifying criteria:
  • Must be an angel investor with experience in early-stage investments; or
  • Must be a serial entrepreneur with an entrepreneurial track-record; or
  • Must be a senior management professional or executive with appropriate corporate senior management experience.
• In addition, the investor must demonstrate the ability to nurture investee companies by possessing the following attributes:
  • Rich business experience and acumen;
  • Strong managerial and business capabilities to advise on growth strategies and entry into new markets;
  • In-depth understanding of industry trends and developments;
  • In-depth technical and scientific understanding; and
  • Strong industry networks and business contacts.
• The approved investor, together with any of his/her relatives, must not hold more than 25% of the investee company’s share capital or 25% of the debt capital within a period of two years prior to the date of first investment.

Eligibility Criteria for Investee Companies

In order to qualify under the AITD Scheme, investee companies must satisfy the following criteria:

• At the point of first investment, the investee company must:
  • Be a Singapore private limited company (excluding company limited by guarantee) that has been incorporated in Singapore for less than three years
  • Not have shares listed on any stock exchange in Singapore
  • Has more than 50% of its total share capital held by less than 20 individual shareholders
  • Not have any shareholder who is related to the approved angel investor
• In addition, the company must:
  • Have business operations in Singapore;
  • Be a Singapore tax resident for the entire holding period of the investment;
  • Not engage in the following business activities:
    • Undesirable activities, such as prostitution, nightclubs, social escort services, gambling-related businesses, non-category 1 massage/spa establishments (as indicated under MHA guidelines);
    • Speculative activities;
    • Holding of investment of any kind of assets;
    • Real estate development and property investment; and
    • Any other such activities as determined by the government.

Application Procedure for AITD Scheme

• Angel investors who are interested in qualifying under the AITD Scheme must be certified as ‘Approved Investors’ by Enterprise Singapore, a national enterprise development agency that administers the AITD Scheme. Applicants must submit the following documents and details to the AITD Administrator in Enterprise Singapore:
  • Completed AITD Scheme application form;
  • A detailed resume or curriculum vitae
  • Documentary evidence of investment track record
  • Any other relevant information to demonstrate the individual’s ability to value-add as an investor without a formal director/advisor role.
• The applicant may have to attend an interview following documents submission.
• It takes approximately 3-4 weeks to process applications.
• On successful processing of the application, the investor will receive an approval letter from Enterprise Singapore, certifying him/her as an ‘Approved Angel Investor’.
• The ‘Approved Angel’ certification is valid for a one year period, after which the status will have to be renewed.

Terms and Conditions of AITD Scheme

Investment

• Investments made by the approved angel must be in compliance with the following criteria:
• The investor can make investments in an investee company only after (s)he is accorded with the ‘Approved Angel’ status.
• The first investment must be made within 12 months from date of approval of ‘Approved Angel’ status. Thereafter, the approved investor will need to make up at least S$100,000 of qualifying investments within 12 months from date of first investment in the investee company.
• The approved investor cannot own more than 50% of the issued shares or loans in any investee company within the two-year holding period. Note that this also includes the potential shareholding should a convertible loan be converted into shareholding.
• Investments that are co-funded by other schemes such as the Enterprise Singapore's SEEDS Capital or Business Angel Funds (BAF) do not qualify for the AITD Scheme. In other words, there will be no tax deduction allowed for such investments. However, the investor can still enjoy tax deduction on any portion of the investment that is not matched by other schemes.
• The investments made must meet the following conditions:
  • Cash investment in newly issued shares for raising fresh capital. It other words, it should not be for the replacement of capital;
  • Cash investment in newly issued preference shares: No fixed or guaranteed dividend payment on the preference shares for the two-year holding period;
  • Cash investment in newly issued Redeemable Preference Shares : No fixed or guaranteed dividend payment on the preference shares and no right to redemption during the two-year holding period;
  • Convertible Loans: No interest payment on the convertible loans and no principal repayment of the loan by the start-up company during the two-year holding period.

Holding Period

According to Enterprise Singapore:

• The investor must hold any investment he makes for a continuous period of two years from the date of last qualifying investment;
• The two-year holding period will be clocked from the date of last investment tranche;
• Shares transferred prior to the two-year holding period will not be eligible;
• Investee companies that are liquidated, merged or acquired within the two-year holding period will not be eligible unless otherwise approved by SPRING.

How to Claim Tax Deduction under AITD Scheme?

According to Singapore’s tax department, IRAS:

• Individuals who qualify as approved investors under the AITD Scheme can claim a tax deduction for qualifying angel investments in a qualifying start-up company by completing the Claim Form and submitting the same to the Singapore Tax Department, (IRAS). The claim form must be accompanied by the approval letter issued by SPRING, certifying the individual as an approved investor.
• The amount of tax deduction for each YA is based on 50% of the cost of qualifying investment, subject to a cap of S$500,000 of investment costs i.e. a deduction cap of $S250,000.
• The qualifying deduction will be offset against the individual’s total taxable income.
• The tax deduction is given for the Year of Assessment (YA) relating to the basis period in which the last day of the 2-year period falls.
• Any utilized deduction in any YA cannot be carried forward and will be disregarded.

Example:

An approved angel invested S$2,000,000 in a qualifying investee company in September 2011. On completion of the two-year holding period (i.e June 2013) (s)he can claim a tax deduction of S$ 250,000 (i.e 50% of the S$500,000 cap) in his/her tax return for YA 2014.

On a Final Note

Start-ups often face a cash crunch during the initial stages of their growth. By introducing a timely tax incentive scheme, the Singapore government hopes to attract more angel investors who can offer value-add to innovative enterprises that are seeking to commercialise their business ideas.