The Mergers and Acquisitions (M&A) Scheme
Introduced in 2010, the Mergers & Acquisitions (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 who wish to grow through acquisitions. Acquisition is the process by which one company (“acquiring company”) acquires ownership in another company (“target company”). The acquiring company either acquires the business and assets or the majority of shares of the target company. Usually, the main reason for an acquisition is to increase the acquiring company’s market share or technology capabilities and thereby enhance its overall growth.
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The M&A scheme encourages companies, especially Small and Medium Enterprises (SMEs) in Singapore to internationalise and grow. This article will explain the benefits of the scheme and the conditions that companies must fulfill to avail these benefits.
Introduced in the Budget 2010, the M&A Scheme extends benefits to companies that acquire shares in a target company. The scheme is applicable to Singapore registered companies that acquire the ordinary shares of a target company either directly or through a wholly-owned subsidiary (subject to qualifying conditions). The 2010 Budget initially stated that the M&A scheme would be applicable only for the Mergers & Acquisitions executed between April 1, 2010 up to March 31, 2015. However, the scheme is now extended until March 31, 2020 and the government has recently made enhancements to it. The current scheme is explained below.
According to the M&A scheme the government will grant the following benefits to an acquiring company:
- An M&A allowance (explained below) which is calculated on the total cost of the acquisition of shares in the target company;
- A stamp duty relief; and
- Double Tax Deduction (DTD) on the transaction cost.
The M&A allowance is a tax allowance granted to the acquiring company for each year of assessment (YA). The allowance is a certain sum (as calculated below), granted by the government which the acquiring company can claim as a tax deduction.
According to the M&A scheme, the allowance granted is equal to 25% of the total acquisition value for each YA, with a purchase consideration cap fixed at $40 million.
The M&A allowance is calculated as:
25% (the allowance rate) X acquisition value (subject to a purchase consideration cap of $40 million).
This implies that the acquiring company can claim a maximum deduction of $10 million in each YA (i.e. 25% X $40million).
As stated by the Inland Revenue Authority of Singapore (IRAS), the allowance is allowed over a five-year period on a straight-line basis which is explained here.
Stamp Duty Relief
According to the scheme the acquiring company is granted a stamp duty relief capped at $80,000 for each financial year. The relief is granted on any contract, agreement or transfer documents pertaining to the acquisition of the ordinary shares in the target company.
Double Tax Deduction on Transaction Costs
The M&A Scheme provides a Double Tax Deduction (DTD) on transaction costs that are incurred during the share acquisition process. These transaction costs include legal fees, professional fees, valuation fees, etc. To claim the deduction, the acquisition must be completed between February 17, 2012 to March 31, 2020. For this deduction, the cap on the transaction cost is $100,000.
There are specific qualifying conditions for the acquiring company, the acquiring subsidiary, the target company and the share acquisition process as explained below:
The acquiring company must:
- 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 entire 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 two years prior to the acquisition date.
The target company must:
- Execute trade and business activities either in Singapore or any other country on the acquisition date.
- Have a minimum of 3 local employees during the entire 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 cases where the shareholding was less than 20% before the acquisition date) or
- More than 50% of the ordinary shares in the target company (in 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 the acquisition.
Acquisition through an acquiring subsidiary
When an acquisition is made through an acquiring subsidiary, the subsidiary must be incorporated in the country mainly for the purpose of acquiring shares in the target company. Where the acquisition of the shares is made by an acquiring subsidiary, the subsidiary company must :
- Not execute any trade or business activities in Singapore or any other place
- Be wholly owned (i.e.100% of its shares are owned) by the acquiring company either directly or indirectly.
Additional Eligibility Conditions
Where an acquiring company claims benefits of the scheme based on the 20% shareholding in the target company, to remain eligible for M&A allowance for the five-year period, the company must fulfill the following conditions:
- On the completion of share acquisition, the target company should be considered as an associate of the acquiring company or the acquiring subsidiary.
- At least 1 director of the acquiring company must be represented on the target company’s board of directors.
The Mergers & Acquisitions scheme is an attractive incentive for companies who wish to expand through acquisitions. The M&A scheme along with the other tax schemes available in the country makes Singapore a very attractive place for companies to set up their business. To understand how your company can avail the benefits of this scheme, it is best to engage a corporate services provider who can explain the exact requirements and tax deductions, relief, etc that this scheme offers.