SINGAPORE SHIPPING “REITS” - Watson, Farley & Williams

WATSON, FARLEY & WILLIAMS LLP(ii)the SIE charters in a vessel from a non-Singapore SPV (which is not a third partyentity) any charter income payable to such an SPV by the SIE will be exempted fromSingapore withholding tax.(k)as in the case of the AISE Scheme, certain requirements will need to be met before MFIstatus is granted e.g. the SIE must have directly attributable business spending in Singaporeof a certain minimum amount and a certain number of personnel should be employed onshoreSingapore. Whilst no details have so far been provided in relation to the requirements thatare likely to be imposed, we have been informed that parties should not expect anything morefavourable than what is currently imposed under the AISE Scheme.(l)where Singapore flagged vessels are owned by the SIE or the SPV under the MFI Scheme,we understand that any S.13(S) tax exemptions which would apply to the income from suchvessels, would apply on an evergreen basis without being subject to the 10-year limit imposedin relation to the MFI Scheme.(m)we understand that there are to be no restrictions under the MFI Scheme relating to the sizeof fund/trust (either in Dollar terms, the number of units, the number of unitholders or thenumber or value of vessels which can be held or the number of SPVs involved) nor doesthere appear to be any such restrictions in the Business Trust Act.3 Benefits to be derived under the MFI Scheme could potentially be enhanced by:(a)the deferral of the tax liability (if any) of investors in respect of income received from the SIE(e.g. through the utilisation by the investors of capital allowances); however, we understandthat anything which could, in the view of the MOF result in a tax erosion, is unlikely to bepermitted by the MOF; and(b)vessel re-registration fees being waived or reduced in relation to vessels already registeredunder Singapore flag however, we understand that it is unlikely that such reduction or waiverwill be granted.subject to the caveat that in the case of purchasing shares in an SPV, the vessel must have beennewly registered at the Singapore Registry of Ships between 1 January 2009 and 31 December 2013(inclusive).5

WATSON, FARLEY & WILLIAMS LLPAn example of a Shipping BusinessTrust Structure4 There are essentially four ways in which a scheme utilising the benefits under the MFIScheme can be structured, i.e. as a sale and leaseback with the ship leasing company, ashipping fund, a shipping trust or a partnership.5 One of the possible ways of structuring a shipping trust which we have identified is set out ina diagram in the Schedule. In essence, this structure contemplates the following:(a)A shipping investment trust would, pursuant to a trust deed, be established as a businesstrust (the “Trust”) under the Business Trust Act - as opposed to a Singapore property REITwhich is regulated by the Code on Collective Investment Schemes (“CIS”) and that Trustwould constitute the SIE for the purposes of the MFI Scheme.(b)Investors would receive units of the Trust in consideration for their investment (whether byway of loan or equity or a combination of the two).(c)A Trustee-Manager (which must be a Singapore company but which cannot be an “exemptprivate company” (as defined in the Companies Act) would be appointed as the responsibleentity to hold legal title to the vessels and manage the vessels and the business of the Truston behalf of the beneficiaries of the trust (i.e. the investors). Among the investors, there maybe a principal investor and whether the principal investor would have a controlling interestover the Trustee-Manager would depend on the circumstances of the individual transaction.Alternatively, an SPV could be set up to own each vessel, all under the umbrella ownershipand management of the Trustee-Manager.(d)The vessels would be employed under a charter or a contract of affreightment and thestronger the credit of the charterer and the better the terms of the charter or, as the casemay be, the contract of affreightment (particularly in terms of duration and hire/freight), themore attractive the structure would be to potential investors.(e)Technical and/or commercial management of the vessels could be sub-contracted by theTrustee-Manager, subject to maintaining compliance with the requirements specified inparagraph 2(b) above.6

WATSON, FARLEY & WILLIAMS LLP(f)Debt finance (by way of loans or bonds) would be raised in order to partially finance the SIE’sor, as the case may be, the SPV’s acquisition of the vessel (with the balance being fundedby funds injected by the investors), which is likely to be secured by security over the vessel,the cash flow and the charter or, as the case may be, the contract of affreightment. Inaddition, funds could be raised from the public through an initial public offering of the Trust.6 There are however, issues which require further consideration and these include thefollowing:(a)Confidentiality. Although details of the investors need not be disclosed in the Register ofRegistered Business Trusts maintained with the Monetary Authority of Singapore, it wouldappear that the Trustee-Manager is obliged to make the register of unitholders available forinspection by any person.(b)Ring-fencing. Further consideration will need to be given to whether, in case of event ofdefault or insolvency:(i)transactions and investments relating to one vessel (or vessels in which an investorhas an interest) should be ring-fenced from transactions and investments relating toanother vessel (or vessels in which another investor has an interest); and(ii)whether the ring-fencing should be done at the Trust level (i.e. with different Trustsbeing set up for different projects) or, where the ownership of the vessel rests withthe SPV, at the ownership level (i.e. with different SPV’s being set up for differentprojects).(c)Conflict of Interest. There is a potential for conflict of interest where:(i)the principal investor in the Trust is also the sole or principal shareholder of theTrustee Manager;(ii)the principal investor in the Trust or the sole or principal shareholder of the TrusteeManager is also the charterer of the vessel;(iii)the principal investor in the Trust or the sole or principal shareholder of the TrusteeManager has an interest in some of the vessels which are owned by the Trust butnot in others;7

WATSON, FARLEY & WILLIAMS LLP(iv)different Trusts are set up for different projects but are managed by the same TrusteeManager.(d)Taxes and duties. Tax liabilities (e.g. GST, import/customs duties and stamp duty) whichcould arise in connection with any vessel transfer (when putting the structure in place orwhen the structure is unwound) will need to be considered. No Singapore capital gains taxor stamp duty would be payable in relation to any disposal of a vessel by the SIE or, as thecase may be, the SPV. A special exemption on stamp duty has been given (with effect from1 March 2006 to 28 February 2011) for the transfer of shares by the shareholder(s) of avessel “warehousing” company to an SIE that is listed on the Singapore Stock Exchange (orwill be within one month of such transfer).(e)Dividends/Distributions. Unlike under the Companies Act, trusts established under theBusiness Trust Act are not restricted to paying distributions out of capital or accountingprofits, although the board of directors of the Trustee-Manager must be satisfied onreasonable grounds that immediately after making the distribution, the Trustee-Manager willbe able to fulfil from the Trust property, the liabilities of the Trust as they fall due. What is notclear at the moment is whether dividends/distributions payable by an SPV to the SIE in sucha structure would be governed by the Companies Act or the Business Trust Act, however,we understand that the likelihood is that payment of such dividends/distributions would begoverned by the Companies Act.(f)Money-Laundering. Thought will need to be given to any anti-money laundering provisionswhich may apply in relation to investments into the Trust.(g)Insurances. Whether the investors and/or the Trust could or should be named as coassuredis a matter which will need to be discussed with insurance brokers, P & I Clubs andunderwriters. In addition, there may be fleet policy issues which need to be considered.(h)Environmental and third party liability. Any potential liability which the Trust and/or theinvestors may have in connection with any environmental and third party claims in relation tothe Trust vessels/business is an issue which will need to be dealt with, especially for vesselstrading to or operating in jurisdictions such as the United States, particularly given that theamount of such claims could easily exceed the insured amount.(i)Trade Routes. Risk that a vessel may become subject to acts of terrorism, piracy orcompulsory acquisition by a state, could increase if the vessel were to trade to certainjurisdictions.8

WATSON, FARLEY & WILLIAMS LLP(j)Additional funding requirements. The inability of the SIE or, as the case may be, the SPVto raise additional funds (whether by way of loan or equity) which may be required to ensurethe continued operation of the vessels and entities concerned, is an issue which needs to beconsidered but which may not be specifically provided for on day 1.(k)Mismatches. A project which involves a charter which is shorter than the:(i)(ii)tenor of the debt financing acquired from a bank or financial institution; ortax exemption/concession period (assuming the project life is of the same or longerperiod);potentially gives rise to a cash flow problem which would need to be dealt with.7 In summary:(a)the qualifying income received by the SPV and the SIE would be tax exempt under the MFIScheme;(b) the qualifying income received by the Trustee-Manager would be taxed at the 10%concessionary rate;(c)the dividends/distributions paid by the SIE to its shareholders/unitholders would be taxexempt under the Income Tax Act and also under the MFI Scheme; and(d)the structure would not be subject to the gearing limits and investment restrictions whichapply to property REITS under the CIS Scheme.9

WATSON, FARLEY & WILLIAMS LLPFor further information, please contact any of the following:Chris Lowe (email clowe@wfw.com) / Madeline Leong (email mleong@wfw.com) /Goh Mei Lin (email mlgoh@wfw.com) / Damian Adams (email dadams@wfw.com) at:Watson, Farley & Williams LLP16 Collyer Quay#12-02 Hitachi TowerSingapore 049318Tel: + 65 6532 5335Fax: + 65 6532 545410

WATSON, FARLEY & WILLIAMS LLPSchedule : Example of a Shipping Business Trust (“SBT”) StructureUNITHOLDERS(Beneficiaries)$ Investmentin SBTUnits$ Distributions (tax exemptunder Income Tax Act - MFI)SBT(unit trust registered underBusiness Trusts Act)Fees (10% taxconcession for qualifyingincome of shipinvestment managerunder MFI*)TRUSTEE-MANAGER - actingon behalf of SBT(Singapore company)Trustee &ManagementServicesSecurity100%$DividendQualifying income of shipinvestment enterprise is taxexempt under MFIFINANCIERDebt Finance -Loans/BondsSPV - OWNER$ RentAssetCHARTERER / LESSEEOwnership11VESSEL

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WATSON, FARLEY & WILLIAMS LLPAll references to 'Watson, Farley & Williams' and 'the firm' in this brochure means Watson, Farley &Williams LLP and/or its affiliated undertakings. Any reference to a ‘partner’ means a member,partner, consultant or employee of Watson, Farley & Williams LLP or an affiliated undertaking.This brochure is produced by Watson, Farley & Williams. It provides a summary of the legal issues,but is not intended to give legal advice. The situations described may not apply to yourcircumstances. If you require advice or have questions or comments on its subject, please speak toyour usual contact at Watson, Farley & Williams.13

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