On August 29 2022, the Monetary Authority of Singapore (MAS), Singapore’s central bank and financial regulatory authority, organised a dedicated green shoots seminar to share its strategies to showcase a synergetic and holistic approach to develop Singapore as an innovative and responsible global digital asset hub.
The MAS intends to take a four-pronged approach to building the digital asset ecosystem, which comprises:
Exploring the potential of distributed ledger technology in promising use cases;
Supporting the tokenisation of financial and real economy assets;
Enabling digital currency connectivity; and
Anchoring players with strong value propositions and risk management.
This is one of several engagements, announcements, and actions taken by the MAS in response to the evolving and emerging global digital assets landscape. The Inland Revenue Authority of Singapore (IRAS), Singapore’s authority in charge of tax administration, has issued two publications (Income Tax Treatment of Digital Tokens and GST: Digital Payment Tokens) that state its views as to how digital tokens should be treated for income tax and goods and services tax (GST) purposes.
The authorities in Singapore have adopted a conservative stance as they closely watch the digital assets space unfold. Key players in this space – including fund managers, fund administrators, custodians, and exchanges – would do well to follow a similar approach.
The fear of missing out, perhaps, has led venture capital investors to varied crypto projects such as blockchain-based apps and platforms fuelled by cryptocurrencies that are native to the virtual economies of the metaverse and Web3. The digital assets fund management space is already home to a number of licensed and unlicensed fund managers, managing a wide variety of strategies.
The digital assets industry globally is still evolving, and regulations are still catching up with industry trends. Reviews and public consultations are under way, among international standard-setting bodies and regulators, to strengthen the legislation in these areas.
While there are various tax incentives for traditional and alternative investment funds managed by fund managers, there is a lack of clarity and certainty as to whether such tax incentives cover investments in digital assets and the broader ecosystem, including derivatives of such asset class.
Digital assets have clearly entered the mainstream. Business and investment communities around the world are buzzing at the social and economic prospects of blockchain projects. Financial institutions across the globe have either been working to integrate and expand their offerings and investments related to digital assets or have realised that they can no longer adopt a ‘wait and watch’ approach. As they formulate their strategies, they still are seeking the benefits of disintermediation that digital assets offer.
In a short period, the nature of investments in this space has evolved from trading in popular cryptocurrencies, to exploring alternate tokens, to applications involving stablecoins, to digital representations of financial and non-financial assets.
It is fair to say that we are witnessing a rapid increase in interest to invest in digital assets across geographies and industries. Each day, blockchain technology, the metaverse, and Web3 are involved in more business models and use cases in our day-to-day life, inspiring innovative forms of fundraising, providing access to platforms, facilitating new payment methods, verifying virtual identities, and enabling hybrid types of commerce.
Venture capital investments in such projects totalled $10 billion globally in the first quarter of 2022, the largest quarterly sum ever and more than double the level seen in the same period a year ago, according to data from Pitchbook.
Yet even as digital asset use cases grow in number and transaction volumes increase, there is less tax guidance on this point; in particular, when investments are made by investment fund houses and managed by fund managers.
A trickle has become a torrent
The details surrounding a digital asset greatly impact what that asset represents under various regulatory frameworks, especially tax. With innovative business models, it is important to think uniquely about the various asset types and the corresponding tax treatment.
In October 2020, the members of the OECD/G20 Inclusive Framework on BEPS prepared and submitted a report to the G20 finance ministers and central bank governors on Taxing Virtual Currencies: An overview of tax treatments and emerging tax policy issues. This report provides a comprehensive analysis of the approaches and policy gaps across the main tax types for various jurisdictions.
The report also analyses the tax policy considerations for a number of emerging issues related to the taxation of virtual currencies, including the rise of stablecoins and central bank digital currencies, as well as the evolution of the consensus mechanisms used to maintain blockchain networks (for example, the increasing use of proof-of-stake rather than proof-of-work) and the rise of decentralised finance (DeFi). Finally, the report also highlights insights that policymakers worldwide may wish to consider in strengthening their legal and regulatory frameworks for taxing virtual currencies, thus improving certainty for tax administrations and taxpayers.
The Law Commission of England and Wales has published a consultation paper on digital assets that contains provisional law reform proposals to ensure that the law recognises and protects digital assets (including crypto-tokens and crypto-assets) in a digitalised world. The consultation paper contains explanations of the characteristics of certain categories of digital assets. It also sets out the reasoning and justification for the existing legal analysis in respect of those digital assets, and commentary on current market practice in relation to them.
In the words of Sir Geoffrey Vos, the chancellor of the High Court and chair of the UK Jurisdiction Taskforce (UKJT), speaking extra-judicially: “We should try to avoid the creation of a new legal and regulatory regime that will discourage the use of new technologies rather than provide the foundation for them to flourish.”
There are certain judicial pronouncements from the English courts that have treated cryptocurrencies as a form of property, meaning that various forms of interim relief to freeze, preserve, or identify such crypto-assets are potentially available to claimants, amongst which is the landmark judicial pronouncement in the case of AA v Persons Unknown  EWHC 3352 (Comm).
The Emirates of Dubai has established a Virtual Assets Regulatory Authority (VARA), which has issued Law No. 4 of 2022 (the ‘Dubai Virtual Assets Law’), aiming to regulate the global virtual asset industry in the Emirate of Dubai. While the law, which came into effect on March 11 2022, applies to free zones and special development zones, it does not apply to the Dubai International Financial Centre.
The Dubai Virtual Assets Law, under Article 2, defines virtual assets as follows: “A digital representation of value that may be digitally traded, transferred, or used as an exchange or payment tool, or for investment purposes. This includes Virtual Tokens, and any digital representation of any other value as determined by VARA.”
It provides a separate definition, which is also set out in Article 2, for virtual tokens: “A digital representation of a set of rights that can be digitally offered and traded through a Virtual Asset Platform.”
In May 2022, the MAS announced the commencement of a collaborative initiative by partnering with leading players within the Singapore financial industry to explore the economic potential and value-adding use cases of asset tokenisation.
The initiative intends to test the feasibility of applications in asset tokenisation and DeFi, while managing risks to financial stability and integrity. With such projects, the MAS aims to develop and pilot use cases in the following four main areas, among others:
Explore the use of public blockchains to build open, interoperable networks that enable digital assets to be traded across platforms and liquidity pools;
Establish a trusted environment for the execution of DeFi protocols through a common trust layer of independent trust anchors;
Examine the representation of securities in the form of digital bearer assets and the use of tokenised deposits issued by deposit-taking institutions on public blockchains; and
Study the introduction of regulatory safeguards and controls into DeFi protocols to manage against market manipulation and operational risk.
Corporate tax landscape in Singapore for investment funds and fund managers
Singapore is a location of strategic importance for investment funds and fund managers, especially for investments into the Asia-Pacific region. The outstanding growth of the wealth and asset management industry in Singapore can be attributed to several factors, including the ease of doing business in Singapore and attractive tax incentives for investment funds and fund managers.
Outside the international offshore fund centres such as the Cayman Islands and the British Virgin Islands (BVI), which are widely used by Asian fund managers, Singapore is regarded as having one of the most attractive corporate tax regimes for investment funds and fund managers.
Corporate tax considerations for funds managed by a Singapore-based fund manager
Investment funds that are managed by a Singapore-based fund manager may be liable to tax in Singapore due to activities undertaken by the fund manager in managing the investments of the investment fund. This may create a taxable presence in Singapore for the investment fund (whether onshore or offshore) and, thus, corresponding income and gains derived by the investment fund may be considered as Singapore sourced and may be chargeable to corporate tax in Singapore. However, such tax liability could be managed under Singapore’s tax incentive schemes for investment funds provided that certain conditions are met.
Amongst the key tax incentive schemes available to investment funds managed by Singapore-based fund managers, specified income (including realised/unrealised gains) derived by investment funds from designated investments should be considered exempt from tax in Singapore. The list of designated investments covers a wide range of investments – including stocks, shares, and securities – but excludes unrealised/realised gains arising from the stocks/shares of an unlisted company that is in the business of trading or holding of Singapore immovable properties (other than one that is in the business of property development).
There is a lack of clarity as to whether investments in digital assets are included in the list of designated investments. All investment funds that qualify for relevant tax incentive schemes as at December 31 2024 (tax incentive schemes are available until that date, unless further extension is granted) may enjoy the tax exemption for the life of the investment fund, subject to the investment fund continuing to meet the relevant conditions at the end of each basis period.
Against the above backdrop, Singapore-based digital asset fund managers (licensed and unlicensed) have established funds outside Singapore and seek to use commercially acceptable operational models and protocols to manage the corporate tax risk in Singapore for the investment fund or seek to rely on a tax treaty between Singapore and the domicile of the fund, to reduce the corporate tax exposure. The former is often more challenging to implement than the latter.
Of course, the choice of a fund domicile is never based on tax alone. A host of other factors – such as investor preferences, location of the sponsor/anchor, location of the team, availability of a financial ecosystem suitable to funds, and the reporting obligation of the fund to the local financial authority – are equally important to be kept in mind amongst other considerations.
As an example, Jersey is being used as an offshore fund location by Singapore-managed digital asset funds.
Jersey is one of the world’s major international finance centres, with a successful combination of stability and reliability combined with tax neutrality that has kept Jersey at the forefront of global finance for almost half a century. It has gained a strong reputation as a suitable location to establish investment funds dealing with digital assets, blockchain and related distributed ledger technology, metaverse platforms, and Web3-related aspects. However, one would need to balance the benefits of establishing a digital assets fund in Jersey with the costs and timelines associated with such a venture.
Under the Singapore–Jersey double tax avoidance agreement, Singapore-based fund managers are able to manage Jersey investment funds without risking a taxable presence for the Jersey investment fund in Singapore to the extent that the fund manager is independent of the investment fund legally and economically and is acting in its ordinary course of business, subject to the fulfilment of other conditions, such as general anti-tax avoidance and the principal purpose test. Generally, where the services performed for a principal are unrelated to, or are not customarily carried out within, the agent’s ordinary trade or specialty, the agent may not be considered as independent.
The Jersey Financial Services Commission, the regulatory body for financial services in Jersey and the registrar of companies in Jersey, approved the launch of the world’s first regulated Bitcoin investment fund in 2014. It has also been ‘whitelisted’ for OECD and EU tax transparency and economic substance compliance.
Legislative developments and corporate tax guidance should be actively monitored to manage tax risks and exposure.
The digital assets industry continues to evolve at great speed, resulting in uncertainty. With tax authorities maintaining a conservative viewpoint, careful analysis is required as tax is a fact-specific subject. The increased volume of transactions enabled by digital assets is creating a complex world of barter transactions and causing entire ecosystems to come into existence without ever reverting back to fiat currency. The specifics of the digital asset could also drive structuring considerations using partnerships, corporations, and trusts, as well as cross-border transactions.
David Wren, a UK tax associate partner, financial services, at Ernst & Young LLP, says “whatever your involvement in digital assets, the starting assumption should always be that income and gains are taxable. Don’t assume otherwise until you’ve checked. Digital assets service providers’ mandated role may be relatively light at the moment, but that lack of accountability is likely to be short-lived” (see How taxes on cryptocurrencies and digital assets will soon take shape).
The speed of innovation and growth within the digital assets industry has outpaced regulatory frameworks, especially tax. For investment funds managed by Singapore-based fund managers investing in digital assets, there is a lack of clarity on whether their investments would be covered under Singapore’s relevant tax incentive schemes. However, alternatives exist.
Investment funds, fund managers, and related service providers should adopt a wait and watch approach to embrace a fluid landscape of existing and developing tax policies, protocols, and related tax treatments.
The views reflected in this article are the views of the authors and do not necessarily reflect the views of the global EY organisation or its member firms.
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