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The Mergers And Acquisitions Incentive Scheme For Singapore Companies
March 2012 | Corporate | Business Bulletin

Background

The mergers and acquisitions ("M&A") allowance and stamp duty relief schemes together form the M&A Scheme. This scheme was introduced to encourage companies in Singapore to grow their businesses through mergers and acquisitions. The M&A Scheme is limited to the acquisitions of shares only. It is not applicable to the acquisitions of the assets or business of another company (including as a going concern)¹.

Overview of the M&A Scheme

M&A allowance

Under the M&A Scheme, subject to conditions, a company ("acquiring company") that acquires the ordinary shares of another company ("target company") during the period between 1 April 2010 to 31 March 2015 (both dates inclusive) is granted an M&A allowance, up to 5% of the value of the acquisition for each year of assessment ("YA"), capped at S$5 million for each YA. The M&A allowance is allowed over 5 years on a straight-line basis ("5-year write-down period") and cannot be deferred.

Stamp duty relief

Under the M&A Scheme, subject to conditions, stamp duty relief is granted on any contract or agreement for sale of equitable interest in ordinary shares or on any transfer documents for the acquisition of ordinary shares under an M&A deal. The instrument must be executed during the period 1 April 2010 to 31 March 2015 (both dates inclusive) to be eligible for the relief. The amount of stamp duty relief which is granted to the acquiring company is capped at S$200,000 for each financial year ("FY")² .

Where both stamp duty relief and M&A allowance are claimed on the same qualifying share transaction, the FY or elected 12-month period for the purpose of stamp duty relief must be identical to the basis period or elected 12-month period for the purpose of claiming M&A allowance.

Qualifying conditions

The M&A allowance and stamp duty relief are given only if the following conditions are met:

(1)

the acquiring company:-

	(a)	is incorporated and tax resident in Singapore. Where the acquiring company belongs to a corporate group, its ultimate holding company must also be incorporated and tax resident in Singapore. However in the Budget 2012, the government announced that the requirement for the ultimate holding company to be a Singapore company may be waived by the Economic Development Board on a case-by-case basis;
	(b)	is carrying on a trade or business in Singapore on the date of the acquisition of the ordinary shares of a target company;
	(c)	Has in its employment at least three local employees (i.e. Singapore citizens or Singapore permanent residents who and whose employer make CPF contributions), excluding company directors, throughout the period of 12 months prior to the date of acquisition of the ordinary shares of the target company; and
	(d)	is not connected to the target company for at least two years prior to the date of acquisition of the ordinary shares³;

(2)

where the acquisition is made through an acquiring subsidiary, the acquiring subsidiary:-

	(a)	does not carry on a trade or business in Singapore or elsewhere on the date of the acquisition of ordinary shares of the target company;
	(b)	is directly and wholly-owned by the acquiring company or may also be indirectly held by the acquiring company on the date of the share acquisition; and
	(c)	does not claim any deduction for M&A allowance and stamp duty relief under the M&A Scheme.

(3)

the target company:-

	(a)	carries on a trade or business in Singapore or elsewhere on the date of share acquisition; and
	(b)	has at least three employees working for the company throughout the period of 12 months prior to the date of share acquisition⁴.

(4)

In addition, the share acquisition must result in the acquiring company or the acquiring subsidiary (as the case may be):-

	(a)	owning more than 50% of the ordinary shares of a target company if the company or subsidiary owns 50% or less of the ordinary shares of the target company before the date of the share acquisition; or
	(b)	owning 75% or more of the ordinary shares of a target company if the company or subsidiary already owns more than 50% (but less than 75%) of the ordinary shares of the target company before the date of share acquisition⁵.

Eligibility conditions during the 5 -year write-down period

To remain eligible for M&A allowance for each of the YA during the 5-year write-down period, the acquiring company must meet conditions 1(a), (b) and (c) and the acquiring subsidiary must meet conditions 2(a) and (b) throughout the basis period relating to the YA in which the deduction is claimed. If any of the eligibility conditions is not met for any YA, the M&A allowance ceases to apply from that YA onwards.

Stamp duty relief given may be clawed back if the acquiring company fails to meet conditions 1(a), (b) and (c) or the acquiring subsidiary fails to meet conditions 2(a) and (b) for two years from the date of share acquisition or, in the case of a step-acquisition, from the date of the last share acquisition. In addition, interest at the rate of 6% per annum shall apply on the stamp duty recovered.

Forfeiture or reduction of M&A allowance and/or stamp duty relief

Events which may result in the forfeiture or reduction of either the M&A allowance or the stamp duty relief, or both, are:-

	(1)	divestment of ordinary shares acquired pursuant to a qualifying share acquisition; or
	(2)	dilution of ordinary shareholding in target company; or
	(3)	substantial change of shareholders in acquiring company.

Transaction Costs

To further support companies carrying out M&A, the government has announced in the Budget 2012, a 200% tax allowance on the transaction costs incurred, such as legal due diligence costs and tax advisory fees, subject to a cap of S$100,000 per YA. This is in addition to the M&A allowance and stamp duty relief.

Conclusion

The implementation of the M&A Scheme comes at an opportune time when the global economy is facing a downturn. Companies which are eligible for the tax relief under the M&A Scheme will be more willing to consider acquisitions during the downturn, which might otherwise not happen if there is no such M&A incentive in place to motivate them.

¹ A company in such a case may claim various allowances or deductions relating to the assets acquired under current tax rules such as capital allowance on plant and machinery, tax deduction of interest on financing of the assets purchased.

² This relates to the same basis period for the YA for which the M&A allowance is granted for income tax purposes. For stamp duty purpose, where there is a change in accounting period, the Commissioner of Stamp Duties may also, at his discretion, use any other period as reference in applying the cap.

³This condition does not apply during a period when an acquiring company or an acquiring subsidiary, as the case may be, is acquiring a target company’s ordinary shares cumulatively over a period of time (“step-acquisition”).

⁴A target company may be incorporated in Singapore or elsewhere. Where it is not able to meet the conditions in paragraph 3, the conditions may be satisfied by a subsidiary directly and wholly-owned by the target company or a wholly owned subsidiary indirectly held by the target company.

⁵M&A allowance or stamp duty relief is not applicable to share acquisitions made by an acquiring company which already owns 75% of the ordinary shares of a target company (e.g. to increase the ordinary share ownership to 100%).