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Angel Investor Tax Deduction Scheme

Singapore is the leader in most of the trade related indices in entire word today. In fact, experts believe that Singapore is the world capital as far as business is concerned. Singapore is the first choice for setting up business by the entrepreneurs today. In 2011 alone, more than 55000 business entities started working in Singapore after incorporation. More and more companies with state of the art technology and innovative business models are setting up businesses in the country.

In its bid to encourage trade and trade related activities even further, government has come up with a unique scheme called Angel Investors Tax Deduction Scheme. The important role played by Angel investors in the setting up of high potential ventures is no secret, especially during initial stages. These investors provide their invaluable experience as well as the seed capital that works like a tonic for a startup. At present there are over 100 such investors in the country that are ready to pump in S$30000 to S$500000 in businesses that they deem as promising. Though the activities of these angel investors are pretty high in Singapore, they are yet much less in comparison to Europe and US.

An angel investor, by putting in his own money and time in a new company is a far better prospect for an entrepreneur than a capital venture investor who mostly gambles upon other’s money. This article intends to educate readers about Angel Investors Tax Deduction Scheme, its eligibility criteria, features, application process and other important terms and conditions.

What and why of AITD scheme

Initiated in March 2010, AITD stands for Angel Investors Tax Deduction scheme and it was introduced by the government with the objective of boosting investment by angels and attracting them to Singapore corporate world. To be eligible for tax deductions under this scheme, an angel investor has to invest at least S$100000 in a business venture that qualifies under this scheme. The angle has to hold on to his investment in a business venture for a period of at least two years to be able to avail a tax deduction that is nearly half of his investment. There is a cap on this tax deduction that stands at S$250000 and it is subtracted from the taxable income of the angel.

Length of the scheme

AITD is a scheme that is available to angel investors who invest in qualifying business ventures in Singapore between 1March 2010 till 31 March 2015.

Qualifying for AITD scheme

There are certain eligibility criterions that an angel investor has to qualify to avail tax deductions.

Investor has to make investment in his individual capacity and not through business entities such as corporations, institutions and other tools or mechanisms. The investor should have the ability to nurture the company he is investing in. He must have experience in investing in business startups or must have been an experienced entrepreneur with a proven track record. He could even be a senior level executive in a large company with sufficient experience of management. In addition to these criterions, he must also possess certain qualities such as sharp insight into business, ability to give advice, making growth strategies, understanding industry trends, ability to do in depth technical analysis, etc. He must have lots of contacts in the industry and a strong network.

Angel investor must not hold more than 25% of the equity of the company at least for a period of 2 years from the date of first investment in the company. There are conditions and requirements not only for investors but also for investee companies. At the time of the first investment made into the company, such a company should be a private limited company in existence in Singapore for not more than three years. It should not have its shares listed in a stock exchange in Singapore. There should be a maximum of 20 shareholders having at least 50% of the paid up capital of the company. None of the shareholders should be related with the angel investor.

In addition to the above requirements, the investee company should be doing business entirely in Singapore and treated as a tax resident by the authorities. The company should not be involved in undesirable business activities such as gambling, prostitution, nightclubs, massage parlors, etc. It should also not be involved in speculative trade such as betting or property investment.

Applying under AITD scheme

There is an agency called SPRING Singapore that regulates AITD scheme. Any angel investor desirous of qualifying under AITD must be approved by SPRING. It has to submit many documents and facts to SPRING before it becomes eligible under AITD. It has to give a completed form application form to SPRING along with its resume, proof of its investment record, and any other information that bolsters its chances of securing a place under AITD scheme. Once all the relevant information has been submitted, the investor is called for an interview. The entire procedure takes 3-4 weeks for completion and if the process is a success, the investor receives the letter of approval from the agency that certifies him as an Approved Angel. This certification remains valid for a length of 1 year after which the investor has to renew the status.

Terms and conditions

An investor can invest money in a company only after it has been approved and given the status of Approved Angel by SPRING. The money spent by the angel investor must fulfill the following criteria. Once an investor has got the approval, he has to invest S$100000 in a Singapore company within 12 months. He should not own more than 50% of the paid up capital of the company. Funds that are made available by SPRING SEEDS or BAF are not considered under AITD scheme. What this means is that investments arranged through these vehicles do not qualify for tax exemptions under any circumstances.

The investments made by the angel investor are not meant to replace the paid up capital of the company. Investments in preference shares that have been newly issued do not qualify under the AITD scheme. The same is the case with redeemable preference shares that have been newly issued.

The angel investor has to hold on to his investment in the Singapore Company for a time period of at least years from the time of the first investment made by him in the company. If the angel investor is given shares by the investee company prior to completion of this 2 year holding period, the investor will not get exemption under AITD. The companies that get merged, acquired, or liquidated before the completion of this 2 year holding period are not eligible for approval by SPRING.

Reporting requirements from angel investor

There are certain reporting requirements from the angel investor and he has to stick to these requirements. He has to keep updating SPRING about all investments made in an investee company make use of a prescribed format to give an annual report in this regard to SPRING.

Claiming tax deduction under AITD

Investors who have been approved by SPRING as such under AITD scheme have to present their claim for tax deduction in a claim form and forward it to IRAS. Such investors must present their certificate provided by SPRING along with this claim form. There is a cap on deduction that stands at 50% of the investment. So the maximum deduction is S$250000 if the investment made by the angel investor is S$500000 in an investee company. This deduction is adjusted when the total taxable income of the investor is taken for assessment purposes. If a deduction has been utilized in a particular year, it is not possible to take it forward into another year. Let us understand this through an example.

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