("ais") incentive - Watson, Farley & Williams

APPROVED INTERNATIONAL 

SHIPPING ENTERPRISE ("AIS") 

INCENTIVE 

Watson, Farley & Williams 

April 2009 

18093869 v3

Contents 

INTRODUCTION...................................................................................................................3 

THE INCENTIVES ................................................................................................................4 

GUIDELINES FOR GRANTING OF AISE STATUS ............................................................6 

COMMENTS .........................................................................................................................8 

SCHEDULE ........................................................................................................................11 

ANNEX A ............................................................................................................................13 

OUR OFFICES....................................................................................................................15

WATSON, FARLEY & WILLIAMS LLP 

Introduction 

Since 1969, profits from the operation of Singapore flag ships in international waters have 

been exempt from income tax in Singapore. This exemption assisted in the substantial 

expansion of the Singapore fleet during the 1970s and 1980s. However, in many cases 

there was little further benefit to Singapore and its economy, since a large part of that fleet 

was operated, both commercially and technically, outside Singapore. 

In order to help develop Singapore into a truly international maritime centre and to 

encourage major shipowners (both local and foreign) to increase the use of Singapore as 

a base for the management and control of their shipping operations, Singapore introduced 

in 1991 a tax incentive under the Approved International Shipping Enterprise ("AISE") 

Incentive Scheme to exempt shipping companies awarded AISE status from tax on the 

income from vessels operated by them, whether registered under Singapore flag or 

elsewhere. 

3


The Incentives 

1 Under this incentive, companies granted AISE status essentially obtain tax 

exemption on the following income: 

(a) 

(b) 

(c) 

income from the operation or charter of non-Singapore flagged ships in 

international waters (income from the operation of Singapore flagged ships is in 

any event exempt from Singapore income tax under long-standing legislation, 

whether or not the owner/operator has been granted AISE status) which includes 

time and voyage charter hire, freight income and pool distributions for such ships, 

as well as foreign exchange gains and gains from risk management activities i.e. 

derivatives (that are not excessive compared to freight revenues) - please see 

also paragraphs 11 and 12 below; 

qualifying dividends from approved subsidiaries and associated shipping 

companies; and 

gains from the sale of vessels owned by the AISE company (or by an approved 

subsidiary or approved shipping company). 

2 Further: 

(a) 

(b) 

the AISE company (or approved subsidiary or approved shipping company) may 

pay dividends from its tax-exempt income to its shareholders (whether foreign or 

local) without deduction/imposition of any tax in Singapore; and 

certain additional tax benefits (e.g. withholding tax exemption on charter hire) are 

available and there are referred to in paragraphs 13 to 16. 

3 Thus, a company granted AISE status need not itself directly own the vessels, 

which may be owned by overseas companies provided that the overseas ship 

owning companies qualify as approved subsidiaries or associated shipping 

companies under the AISE Incentive Scheme. The AISE company may be 

required to be an active, operating company rather than merely an investment 

holding company and, if it does not own any vessels at all, it may be required to 

4


be actively engaged in commercial operations (e.g. as the charterer of one or 

more of the relevant vessels) - however, whether these requirements are imposed 

depend on the individual circumstances of the case. 

4 Under the AISE Incentive Scheme, in order to provide tax certainty for shipping 

operations in Singapore, AISE status will be granted on a case-by-case basis to 

qualifying shipping companies for an initial period of ten years (subject to review 

after five years) and may be extended thereafter for up to a further ten + ten year 

period. In his 2006 Budget Speech, the Minister of Finance extended the 

maximum period of the incentive from 20 years to 30 years (with effect from 

2007). 

5 Originally the AISE Incentive Scheme was only available to shipping companies 

which owned and/or operated cargo vessels but: 

(a) 

(b) 

(c) 

(d) 

from the year of assessment 2000, it was extended to cover floating storage and 

offloading vessels as well as floating production storage and offloading vessels; 

from the year of assessment 2003, it was extended to cover towage vessels or 

salvage ships 

from the year of assessment 2005, it was extended to cover dredgers, seismic 

vessels and oil rigs (as well as any other vessels used for offshore oil and gas 

activity); and 

in his Budget speech on 18 February 2005, the Minister for Finance announced 

that the Incentive Scheme would be expanded to ship leasing companies. 

Currently, this extension is limited to operating leases; it does not extend to 

finance leasing arrangements. 

6 In line with Singapore’s overall strategy of striving for quality, it is stated policy that 

only established international shipping companies with “worldwide networks” and 

“a good track record” will be considered under the AISE Incentive Scheme. 

5


Guidelines for granting of AISE 

status 

7 The government body which administers the AISE Incentive Scheme is the 

Maritime Port Authority of Singapore (the “MPA”). Currently the following 

guidelines will be applied in determining whether a company qualifies for AISE 

status: 

(a) 

It must be a tax resident Singapore company (i.e. a Singapore incorporated 

company which is managed and controlled in Singapore). 

(b) 

It must own and/or operate a significant fleet of vessels. 

Although a "significant" owner or operator is not defined, we are given to 

understand that this refers to a company which owns and/or operates a specific 

number vessels in Singapore (which must be owned by other companies in the 

same group if chartered in by the AISE company). We believe, however, that a 

degree of flexibility will be exercised in the context of FPSOs, FSOs and semisubmersibles. 

If the proposed AISE company is a joint venture between two companies, both 

shareholders must be "significant" shipowners, each of which would qualify 

separately for AISE status. 

(c) 

Its shipping operations must be controlled and managed from Singapore. 

(d) 

It must have directly attributable business spending in Singapore of a specified 

S$ amount per annum - expenses can include manpower costs, rental, utilities, 

repairs, bunkers, stores, spares, fees on professional services and financial costs 

(for which caps may apply and which caps will vary from time to time subject to 

prevailing policy). However, we understand that companies that are already 

established with an operation in Singapore must have a business spending of 

more than the required minimum of $4 million per annum. 

6


In particular, we understand that such spending can include: 

(i) 

(ii) 

(iii) 

(iv) 

(v) 

(vi) 

(vii) 

management fees paid to a Singapore resident manager; 

salaries (other than crew salaries); 

bank charges (including interest on loans used to purchase vessels); 

interest on loans used to purchase property in Singapore for use in the 

approved business of the company (i.e. not property purchased for 

speculative investment); 

insurance premiums paid to Singapore insurers and commissions payable 

to Singapore insurance brokers; 

repairs and maintenance carried out in Singapore yards; and 

the purchase of supplies (e.g. bunkers and lube oils) from Singapore 

suppliers, including the Singapore sales offices of multinational 

companies. 

If the applicant for AISE status already has attributable business spending in 

Singapore in excess of S$4 million per annum, such spending will be expected to 

be increased, but no specific guidelines are published on the quantum of the 

increase, as the preference is to evaluate applications on a case by case basis. 

(e) 

It used to be a general requirement that at least 10% of the relevant fleet must be 

registered under Singapore flag, but this requirement was lifted on 3 May 2002. 

8 The Minister for Finance also stated in his Budget speech on 3 May 2002 that the 

qualifying criteria under the AISE Incentive Scheme would “be harmonised to 

make the scheme more user-friendly and help ship operators to expand their 

operations in Singapore”. It should be emphasised that considerable discretion is 

exercised with respect to the above criteria, which should therefore be considered 

as guidelines only. 

7


Comments 

9 The Income Tax Act defines a company to be resident in Singapore if the control 

and management of its business is exercised in Singapore. Under normal 

circumstances, the management and control of a company's business is deemed 

to be vested in its board of directors and the place where the board meetings are 

held is therefore the place where the company is resident. 

10 As it is a requirement that the AISE company be resident in Singapore, the 

company can utilise Singapore's network of double-tax treaties and (amongst 

other benefits) enjoy either full or partial exemption from foreign income tax on the 

freight income derived from these treaty countries (which would otherwise be 

subject to full taxation in those countries). In addition, the shareholders of the 

AISE company may be able to utilise these tax treaties to obtain either full or 

partial exemption from income tax imposed in their jurisdiction on the dividend 

income which they receive from the AISE company. The list of relevant treaty 

countries is attached as a schedule hereto. 

11 The vessels need not be directly owned by the AISE company or a Singapore 

incorporated subsidiary. As long as the overseas shipowning company qualifies 

as an approved subsidiary or an associated shipping company under the AISE 

Incentive Scheme, a vessel may be owned by such an overseas company. 

For the purposes of the AISE Incentive Scheme, an "associated company" is one 

in which the AISE company owns not less than 25% of the equity and preferably is 

the single largest shareholder and for which maintenance of control is evidenced. 

The exemption from tax of qualifying dividends received from approved associated 

and subsidiary companies stems from a recognition of the general practice 

amongst shipowners of incorporating single purpose subsidiaries or associated 

companies to own vessels. 

8


12 Income such as agency fees, third party ship management fees and investment 

and other non-shipping income (including interest - other than those derived from 

derivative gains) would not constitute qualifying income. 

13 Exemption from withholding tax on charter hire of vessels chartered in for the 

qualifying activities of the AISE company (including those operated under finance 

leases) will be given in the following circumstances: 

- vessels chartered in from approved subsidiaries and associated companies; 

- vessels chartered in from non-related, non-resident companies and which 

have been declared; and 

- vessels chartered in for "pooled" arrangements and which have been 

declared. 

14 If a Singapore resident company obtains offshore loans, then the company will 

remain obliged (subject to the terms of any relevant double tax treaty or other 

specific exemption) to withhold tax on interest payments to the foreign lender. 

15 Exemption from withholding tax on interest referred to in paragraph 14 will be 

given on a case by case basis, but will usually be subject to the following 

conditions: 

- the loan shall be used solely for the purchase of a vessel; 

- there shall be no change in the basic terms and conditions of the loan without 

the prior written approval from the Ministry of Finance; 

- the vessel purchased and financed from the loan shall not be disposed of 

during the loan period without the prior written approval from the Ministry of 

Finance; 

- there should be no tax-sparring benefits or debt for equity swaps; and 

- the vessel will be registered in Singapore. Should the vessel leave the 

Singapore registry, exemption will be withdrawn. 

9


Utilisation of the Block Transfer Scheme, currently due to expire on 31 December 

2013, is also a potential alternative for utilisation by AISE companies, details of 

which at Annex A. 

16 For a period of five years with effect from year of assessment 2009, vessel sales 

by AISE companies will continue to be treated as tax exempt capital gains, so long 

as there is ownership and trading/operation of the relevant vessel(s). In his Budget 

speech on 15 February 2008, the Minister for Finance expanded the concession 

to apply to gains from both the sale of ships which are subsequently leased back 

and the sale of shares in a special purpose vehicle which holds the vessels, as 

well as to foreign exchange gains, and gains from risk management activities. 

With effect from year of assessment 2009 (for a five year period), gains from the 

sale of shares in a special purpose vehicle which holds vessels will also be 

exempt. 

For further information, please contact any of the following: 

Chris Lowe (email clowe@wfw.com) / Ken Cheung (email kcheung@wfw.com) / 

Goh Mei Lin (email mlgoh@wfw.com) / Damian Adams (email dadams@wfw.com) at: 

Watson, Farley & Williams LLP 

16 Collyer Quay 

#12-02 Hitachi Tower 

Singapore 049318 

Tel: + 65 6532 5335 

Fax: + 65 6532 5454 

10


Schedule 

Exemption from Income Tax on Shipping Income 

derived by Singapore Residents in Treaty Countries 

Full Exemption 

Australia, Austria, Bahrain, Belgium, Bulgaria, Canada, Chile, Cyprus, Denmark, Egypt, 

France, Germany, Hong Kong, India, Israel, Italy, Japan, Korea, Kuwait, Latvia, 

Lithuania, The Netherlands, Mongolia, New Zealand, Norway, Papua New Guinea 

(subject to certain conditions), People's Republic of China (subject to certain 

conditions), Portugal, Romania, South Africa, Taiwan, United Arab Emirates, United 

Kingdom, United States (subject to certain conditions), Vietnam. 

50% Exemption 

Bangladesh, Czech Republic, Finland, Hungary, Indonesia, Luxembourg, Malaysia, 

Mauritius, Mexico, Myanmar, Pakistan, Poland, Sri Lanka, Sweden, Switzerland, 

Thailand, Turkey. 

11


Up to 2% of Gross Revenue 

Republic of China (Taiwan) 

Lower of 1-½% Gross Revenue 

and tax imposed on similar profits of non-residents 

Philippines 

. 

12


Annex A 

THE BLOCK TRANSFER SCHEME 

INTRODUCTION 

1. On 7 January 2004 the Permanent Secretary of the Ministry of Finance, Singapore, 

published the Income Tax (Exemption of Interest and Other Payments on Economic and 

Technological Development Loans) Notification 2004 (the “Notification”). 

2. The Notification introduced a Block Transfer Scheme (the “BTS”), which provided that 

the interest payable under a loan by a shipping enterprise to a lender outside Singapore 

would be exempt from withholding tax in respect of any ship registered by the shipping 

enterprise as a Singapore ship if: 

(a) the purpose of the loan is to finance the acquisition of the ship; and 

(b) the shipping enterprise satisfied certain requirements specified in the 

Schedule under the Block Transfer Scheme administered by the Maritime and 

Port Authority of Singapore (the “Authority”) and such terms and conditions as 

the Authority may choose to impose. 

RECENT CHANGES 

3. In February 2009 it was announced in the Singapore Budget 2009 that the BTS would 

be extended for a further five years until 31 December 2013. 

4. From 1 January 2009, the BTS has been enhanced to allow a waiver of withholding tax 

on interest payable on a loan taken by a shipping enterprise from an overseas lender for 

the purpose of acquiring 100 per cent of the shares in a Special Purpose Company 

(“SPC”) that wholly-owns a Singapore-flagged vessel. The main caveat is that the vessel 

must be a new entrant to the Singapore Registry of Ships which was registered between 1 

January 2009 and 31 December 2013 (inclusive). 

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WITHDRAWAL OF EXEMPTION 

5. The Minister may withdraw the exemption granted to a shipping enterprise in respect of 

any Singapore ship, if: 

(a) the ship ceases to be registered as a Singapore ship; or 

(b) the certificate of registry of the Singapore ship is suspended for any reason. 

6. Any withdrawal of the exemption shall not affect the exemption granted in respect of any 

other ships that are registered as Singapore ships by the shipping enterprise. 

FURTHER REQUIREMENTS UNDER THE BLOCK TRANSFER SCHEME 

7. 

Number of Ships Registered as Singapore- 

Flag by shipping enterprise 

Aggregate Net Tons of those Ships 

2 40,000 

3 30,000 

4 20,000 

5 or more Any Amount 

8. As outlined in the table at paragraph 7 above, BTS criteria currently requires that an 

entity make a minimum purchase of two Singapore flagged vessels before it can take 

advantage of the withholding tax exemption. In a speech by the Minister for Transport on 

8 January 2009, it was announced that this criterion will be reduced to ensure that the BTS 

will be available for the purchase of a single Singapore flagged vessel, or of the shares in 

an SPC owning a single Singapore flagged vessel, provided that the vessel has a 

minimum net tonnage of 40,000 tons. 

14


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