Singapore is addressing previous concerns over restrictions of the city-state's traditional company structures with the introduction of the new Variable Capital Company (VCC) framework, a move welcomed by asset managers looking to set up fund operations in Singapore.
Tailored for collective investment schemes, the new legal entity structure is designed to help Singapore achieve its vision as a leading Asian hub for fund management.1 In this year's budget, Singapore's central bank, the Monetary Authority of Singapore (MAS), released a range of measures around VCCs, including their tax treatment.
Key insights
- Singapore's central bank has passed into law a new corporate structure to address concerns surrounding restrictions that impede fund operations
- The VCC provides Singapore with a structure that is comparable to that of other international fund domiciles, and will complement existing fund structures
- Fund managers will benefit from the VCC's flexibility, cost efficiencies and improved governance and easier re-domiciliation of foreign funds
- The VCC Act is expected to come into force in 2019
Current frameworks recognized as a deterrent
Singapore is an attractive place to invest, with assets under management over the past five years rising at about a 15 percent compound annual growth rate to SGD 3.3 trillion at the end of 2017.2
As many of the funds distributed and managed from Singapore are domiciled in other jurisdictions such as Luxembourg, the Cayman Islands and Ireland, MAS recognized that the country's restrictive legal and tax framework for investment funds was having an impact on growth. In response, the VCC was introduced.3
MAS' proposal for the VCC framework has now passed into law.4 Through its introduction, the central bank hopes to encourage more fund managers to base their funds and fund management activities in Singapore in order to help build Singapore's prominence as a global fund management centre.5
VCC addresses capital restrictions
VCCs address some of the restrictions found in Singapore's commonly used structures for funds including unit trusts, companies, and limited partnerships. A key restriction for these structures is their limited flexibility around paying dividends and redeeming shares. VCCs offer a clear advantage as they can issue and redeem shares without requiring shareholder approval and investors can enter or exit fund investments on demand. In addition, dividends can also be paid using the fund's capital, which is restricted under Singapore's existing company structure, whereby dividends can only be paid out of profits.
VCCs cover both traditional and alternative assets and can be open-ended and closed-ended. They can also be set up as a stand-alone or an umbrella entity with multiple sub-funds catering to different investment strategies, assets, and liabilities.
The umbrella structure allows for greater economies of scale as administrative tasks such as preparing prospectuses can be consolidated. Cost efficiencies and improved governance can also flow from the sharing of personnel including a board of directors and service providers such as the same fund manager, custodian and auditor.6
The umbrella structure allows for greater economies of scale as administrative tasks such as preparing prospectuses can be consolidated
VCCs do not need to disclose their shareholder register to the public, which addresses concerns of investors where privacy is crucial. VCCs must, however, maintain registers at their registered offices in Singapore and make it available to supervising authorities such as MAS or the Accounting and Corporate Regulatory Authority (ACRA).
Asia-Pacific set to benefit from increased fund flows
MAS notes that Singapore's role as an international financial hub is to connect global investors to Asia and to bring Asian opportunities to global investors.7 VCCs can play a part here as they are allowed to use Singapore and international accounting standards to prepare financial statements to serve the needs of global investor needs.
Fund managers with foreign-domiciled investment funds can also use VCCs for inward re-domiciliation to Singapore. By making it easier for asset managers to set up a base in Singapore, a deeper and more diverse pool of capital will be built in Asia.8
Tax treatment alleviates some concerns
In its February 2018 budget, MAS announced that the tax incentives under 13R and 13X (the Schemes) of the Income Tax Act and the Goods and Services Tax remission for funds approved under these schemes will be extended to VCCs.9 The extension means that under these schemes, VCCs can achieve tax neutrality as long as they only derive "specified income" from "designated investments." The 10 percent concessionary tax rate under the Financial Sector Incentive – Fund Managers scheme, will also be extended to VCCs.
VCCs will be treated as a company and a single entity for tax purposes
As further incentives, VCCs will be treated as a company and a single entity for tax purposes and will only need to file one tax return, even if multiple sub-funds are set up.10
Hong Paterson, Managing Director and Country Head for RBC Investor & Treasury Services in Singapore, says the tax framework aligns the tax treatment for VCCs with that of existing vehicles used for investment funds and is likely to help attract global asset managers to Singapore.
“Overall, VCCs are expected to add to Singapore's attraction as a place for global investment fund domiciliation and as a centre of activity for fund management," she says. “The success and acceptance of VCCs by global asset managers will be largely dependent on their tax benefits. While there have been some positive announcements around their tax treatment I look forward to the additional detail that will be released, including the potential for passportability."
Asset managers keep eye on emerging company structures
The greater flexibility and cost efficiencies offered by the VCC structure will likely appeal to asset managers and enhance Singapore's reputation as an international financial hub, although managers will also be keeping an eye on other new company type funds in the Asia-Pacific region such as Hong Kong's Open-Ended Fund Company and Australia's Corporate Collective Investment Vehicle.
VCCs may well be a game changer for Singapore and Asia-Pacific just as the Undertakings for Collective Investments in Transferable Securities transformed Europe's investment fund industry.11