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Singapore Offers Tax Break for Angel Investors

Fifty percent of the amount that Singaporean angel investors invest in local startup companies will be tax deductible under a new government program announced Tuesday.

Under the Angel Investors Tax Deduction Scheme, approved investors who invest S$100,000 (US$72,148) or more in qualifying start-up companies can deduct 50 percent of the value of their initial investment from their taxes after a two-year holding period, according to Spring Singapore, a government agency set up to support the development of startups and small businesses.

Angel investors provide initial funding, or seed capital, for startup companies. Because most startup companies fail, these investments are particularly risky. The tax deduction plan seeks to encourage angel investments, effectively doubling the potential return on an investment and limiting the losses an investor may suffer.

The Singaporean government has worked hard to cultivate local startups and attract entrepreneurs, particularly those focused on high technology and biotech. Many government groups, including Spring, offer grants to help start-up companies find their feet. For example, Spring's Young Entrepreneurs Scheme for Startups offers grants up to S$50,000 to first-time entrepreneurs under the age of 26, matching every S$1 they raise for their company with S$4 in grant funding. The funds provided can be used to hire staff, acquire intellectual property or promote their products.

The tax deduction plan does contain some fine print. Investors must be approved by Spring as angel investors before any investment is made and they must not own more than 25 percent of the startup company's debt or equity prior to the investment. They must also have a track record as an angel investor, entrepreneur, or held senior company management positions, and must take a seat on the startup's board of directors or act as an advisor — conditions that should give start-up companies access to valuable business experience and advice.

The maximum deduction permitted under the program is S$500,000 for any single tax year.

There are also limitations on the type of companies that angel investors can invest in under the program. For example, companies that invest in property, hold investment assets, or engage in "speculative activities" are excluded from the plan. Companies that engage in "undesirable activities," including gambling, escort services and nightclubs, are also excluded.

The tax deduction for angel investors will last for five years, from March 1, 2010, to March 31, 2015, Spring said.

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