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Tax incentive scheme for angel investors in Singapore
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Raising start-up capital is one of the key challenges facing start-up entrepreneurs and owners of small businesses. It has become an ever bigger challenge in the current economic environment where the global economy is showing signs of slowing down. The most common sources of business funding are personal finances, loans from friends and family, and loans from banks and financial institutions. However, these traditional sources of capital are often limited and do not suffice for fast-growing start-ups. This is where angel investors play a crucial role in offering access to equity funding.
A recent report by the Organization of Economic Cooperation and Development also reaffirms that angel investors are an important source of capital for early stage companies. The OECD also recommends that policy makers should focus on providing tax incentives for angels and angel groups, co-investment programs, or even public funding for national angel associations. It is heartening to note that the Singapore government has already implemented such measures in a bid to attract business angels to invest their time and resources in promising Singapore-based start-ups.
Angel investors and entrepreneurs saw a reason to cheer when the Singapore government announced the introduction of a new tax break for angel investors – The Angel Investors Tax Deduction Scheme (AITD) – in 2010.
Under the scheme, approved angel investors who make qualified investments of at least S$100,000 in eligible start-ups in a given year will qualify for a tax deduction equal to 50% of the 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.
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 2015.
Both angel investors and the investee companies must satisfy the eligibility criteria in order to qualify under the scheme. For instance, the investments must be made at the individual level. Business angels must also prove their ability to nurture the companies they are investing in and must possess relevant entrepreneurial or business experience. The investee company must be a Singapore private limited company that has been incorporated for less than three years, with business operations in Singapore. Moreover, the start-up must be a Singapore tax resident for the holding period of investment and must engage only in permissible activities. Other terms and conditions apply.
Commenting on the scheme, Ms. Jacqueline Low, Director of Singapore corporate services agency Janus Corporate Solutions said,
“Singapore has been building a strong network of angel investors. The country boasts of more than 100 angel investors who offer their invaluable expertise and provide funding for promising start-ups. However, if Singapore is to nurture more innovative entrepreneurs to setup high growth start-ups it needs to attract more angel investors. Now the challenge is that most business angels are only willing to invest if they are assured of a significant return on their investment. By offering a tax break, angel investors will definitely find it advantageous to invest in Singapore’s promising start-up landscape. After all, it gives them more access to capital which in turn will make them more willing to take risks. Besides, the minimum investment requirement of S$100,000 is not a very big amount for most business angels. It is a win-win situation for both the investors as well as the investee companies.”
The AITD scheme aims to catalyse close to S$600 million worth of angel investments in Singapore by 2015. As of August 2011, about 30 angel investors are reported to have been approved under the scheme. The scheme is administered by SPRING Singapore, a national enterprise development agency.
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