Singapore is well known as having a good reputation for economic growth in Southeast Asia, and even around the world. It is no surprise to us that many foreign companies want to enter the market in the country. One of the strategies that can be used is through Mergers and Acquisitions (M&A). This article will introduce you to all about M&A in Singapore and how to set up M&A there!
Overview of Mergers and Acquisitions in Singapore
Speaking about M&A, it somehow can be a useful tool for corporations that are seeking the way to enter the market in a foreign country by having a company’s market share or technology capabilities or to enhance its overall growth. Not only that, but M&A can also be a tool to navigate the new normal due to COVID-19 situations.
Back to 2008 when there was a great recession, companies that undertook strategic M&A during the economic downturn, and their recovery phase exceeded those that stayed the safe and stagnant path.
The M&A can also be a smart strategy to branch into correlated business segments and target SMEs, small brands, also start-ups with innovative offerings, or reshape the ecosystem through large scale consolidation.
Having the M&A strategy in the midst of the on-going COVID-19 pandemic may make a good business sense for some companies, but may need a huge effort to do that. However, it should be fine if you have a scheme to strengthen your M&A strategy.
The M&A scheme offers several benefits to Singapore-based companies to help with their acquisition strategies. The scheme provides an M&A allowance, a stamp duty relief and a double tax deduction on transaction costs. The M&A scheme is targeted at companies that want to grow through acquisitions.
The acquisition is the process by which one company (the acquiring company) acquires ownership in another company (target company), either acquires the business and assets or the majority of shares of the target company.
The Benefits of Mergers and Acquisitions in Singapore
Based on the M&A scheme, the government will grant benefits to an acquiring company, which has 3 benefits. They are:
1. Mergers and Acquisitions Allowance
The M&A allowance is a tax allowance granted to the acquiring company for each year of assessment (YA). The allowance is a certain amount of value granted by the government which the acquiring company can claim as a tax deduction.
The allowance granted is equal to 25% of the total acquisition value for each YA, with a purchase consideration cap fixed at $40 million. This implies that the acquiring company can claim a maximum deduction of $10 million in each YA.
According to the Inland Revenue Authority of Singapore (IRAS), the allowance is allowed over a five-year period on a straight-line basis.
2. Stamp Duty Relief
The acquiring company is granted a stamp duty relief covered at $80.000 for each financial year. The relief is allocated on any contract, agreement of transfer documents referring to the acquisition of the ordinary shares in the target company.
3. Double Tax Deduction on Transaction Costs
The M&A scheme provides a Double Tax Deduction (DTD) on transaction costs that are earned during the share acquisition process. These transaction costs include legal fees, professional fees, valuation fees, and so on. For this deduction, the cap on the transaction cost is $100.000.
How To Set Up Mergers and Acquisitions in Singapore?
Before getting into the mergers and acquisitions process, you must know the qualifying conditions for the acquiring company, the target company, and the share acquisition.
For The Acquiring Company
The acquiring company must do:
- Be a Singapore-incorporated company and a tax resident of Singapore
- Execute trade and business activities in Singapore
- Have a minimum of 3 local employees during the 12-month period before the acquisition date. This number does not include the directors of the company.
- Not be connected with the target company for 2 years prior to the acquisition date.
For The Target Company
The target company must:
- Do the trade and business activities either in Singapore or any other country on the acquisition date.
- Have a minimum of 3 local employees during the 12-month period before the acquisition date.
Share Acquisition Process
To claim the M&A allowance, the acquiring company after the acquisition date must own:
- At least 20% of the ordinary shares in the target company, in the cases where the shareholding was less than 20% before the acquisition date
- More than 50% of the ordinary shares in the target company, in the cases where the shareholding was less than or equal to 50% before the acquisition date.
As outlined by the Inland Revenue Authority of Singapore (IRAS), the 20% threshold will encourage SMEs to grow locally or offshore through acquisition.
Acquisition Through an Acquiring Subsidiary
When an acquisition is made through an acquiring subsidiary, the subsidiary must be incorporated in the country for the purpose of acquiring shares in the target company. If the acquisition of the shares is made by an acquiring subsidiary, the subsidiary company must:
- Not conduct any trade or business activities in Singapore or any other place.
- Be wholly owned by the acquiring company either directly or indirectly.
There are some Singaporean companies that have successfully acquired foreign companies. For example, on 1 February 2008, Shining Prospect Pte Ltd acquired the United Kingdom company Rio Tinto PLC, another company is Petrol Complex Pte Ltd acquired the Indian company called Essar Oil Ltd.
However, a foreign company from China called Nesta Investment Holdings Ltd acquired a Singaporean company Global Logistic Properties Ltd on July 14, 2017.
In conclusion, the M&A scheme is an interesting incentive and strategy for the companies that want to expand through acquisitions. However, there are some necessary points that you need to pay attention to, and you can prepare things while reading this article. If you are still unsure about stuff, you can contact us below. Viettonkin is always ready to assist you!