Singapore Variable Capital Company
To further develop Singapore as a full-service international fund management hub, the Monetary Authority of Singapore (MAS) and the Accounting & Corporate Regulatory Authority (ACRA) launched the new Variable Capital Companies framework in January 2020.
The new Singapore Variable Capital Company (VCC) is a corporate vehicle specifically tailored for investment funds that will enhance the options available for Singapore fund managers to structure and establish funds in Singapore. It is designed to offer more flexibility to investment funds than standard vehicles – Singapore companies, limited partnerships and unit trusts – through the use of an umbrella-sub-fund structure and less rigid capital maintenance requirements.
Some traditional fund structures can be hindered in respect of diversification because they are constrained by a single investment objective. One of the VCC’s key features is that it can be set up either as a stand alone single fund or as an ‘umbrella entity’ with multiple sub-funds that may have different investment objectives, investors and assets and liabilities. The VCC is therefore similar to the ‘protected cell’ and ‘segregated portfolio’ structures in offshore jurisdictions such as the Cayman Islands, the British Virgin Islands and Guernsey.
Subject to qualifying conditions, foreign corporate entities may be permitted to redomicile as a VCC in Singapore. Fund managers will be able to save costs by centralising their fund management activities in Singapore and structuring their funds more efficiently.
The uses of a VCC
The VCC is a corporate structure that can be used for a wide range of investment funds and provides fund managers with greater operational flexibility and cost savings. Specifically, the VCC offers greater flexibility in respect of share issuance/redemption and the payment of dividends, and cost efficiencies can be achieved where sub-funds share the same service providers and custodians but have segregated assets and liabilities.
Fund managers are able to constitute investment funds as VCCs across both traditional and alternative strategies, and as open-ended or closed-end funds. Open-ended funds – typically used by hedge funds – allow investors to redeem investments at their discretion, while close-end funds – typically used by private equity funds – restrict an investor’s ability to redeem investments during the life of the fund.
Fund managers can incorporate new VCCs or re-domicile existing investment funds with comparable structures by transferring their registration to Singapore as VCCs. The Singapore VCC will become the preferred vehicle for attracting investments not just within Asia but globally.
A VCC has the ability to fit into almost all corporate group structures given, at its core, it is a Singapore company. A VCC provides a strong governance and operational framework and therefore may be useful for large families with multiple stakeholders to pool resources for inter-generational legacy planning purposes. The Singapore government has clearly demonstrated its intent to attract and anchor large businesses and wealthy families in Singapore through active management of their family offices.
Key features of the VCC
1. VCC structure
A VCC can be set up as a standalone entity (similar to a company) or as an umbrella entity with multiple sub-funds.
In the umbrella structure, each sub-fund of the VCC can have different shareholders and investment objectives, and is completely segregated from other sub-funds in respect of its assets and liabilities, thereby preventing any contagion issues. Sub-funds can hold shares in other sub-funds of a VCC, which gives the ability for investors or family members to invest into parts of the structure as they see fit.
This sub-fund structure enables a single VCC to be used in place of multiple companies and trusts typically found in a group structure. The VCC can share a board of directors, a fund manager, auditors and other administrative agents, which provides significant economies of scale. The VCC can begin as a standalone fund with one pool of shareholders and assets, and further sub-funds can be added later.
To ensure that a Singapore VCC is considered to be tax resident in Singapore by both the Inland Revenue Authority of Singapore (IRAS) and other relevant international tax authorities, it must be managed and controlled in Singapore by a licensed Singapore fund manager.
A VCC will be treated as a company and a single entity for tax purposes, enabling VCCs to access Singapore’s substantial network of treaties and double tax agreements (DTAs), which will mitigate the impact of taxes, including withholding taxes applied by other jurisdictions. This is one of the key differences between a Singapore VCC and a structure set up in offshore jurisdictions like the Cayman Islands and the British Virgin Islands, which have no access to DTAs.
Tax incentives available to Singapore-based funds – notably the Singapore Resident Fund Scheme and Enhanced Tier Fund Scheme – are extended to VCCs, together with the Financial Sector Incentive Scheme for fund managers and the remission for funds from goods and services tax (GST).
3. Relevant service providers
The following services providers are required to be appointed for VCC set-up and administration:
- A Singapore-licensed fund manager to manage the VCC and a portfolio manager to make the investment decisions. Please note that some fund managers can perform both these functions
- A Singapore fund administrator to conduct required valuations of the fund (NAV calculations), provide reporting to investors and conduct purchases and sales
- A Singapore corporate secretary to set up the VCC, act as company secretary and provide a registered office, and to set up any other corporate entities required in the group structure
- A Singapore auditor to present the financial statements in accordance with the relevant Singapore standards; Singaporean service providers
4. Re-domiciliation of other structures to a Singapore VCC
There has been a recent and pronounced global shift towards ‘onshore’ structures to places like Singapore at the expense of traditional offshore jurisdictions like the BVI and Cayman Islands. This shift has arisen as a result of the recent introduction of global regulations creating more transparency and substance in financial structures. This includes: the Common Reporting Standard (CRS), the US Foreign Account Tax Compliance Act (FATCA) and the OECD’s Base Erosion and Profit Shifting (BEPS) Action Plan.
The VCC legislation provides for the re-domiciliation of structures to Singapore. Some key reasons to consider redomiciling structures to Singapore include:
- Bringing the structure onshore into a robust and regulated jurisdiction for investors
- Accessing Singapore’s extensive network of DTAs, which are helpful for withholding tax purposes when exiting international investments made by the fund
- Creating economic substance and/or establishing tax residency of the fund in Singapore.
5. The assets that can be held by a VCC and the investors that can invest into a VCC
There is no restriction on the type or location of assets to be held by a Singapore company or the location or type of investors, subject to standard anti-money laundering (AML) and compliance considerations.
Further entities can be incorporated to aid in the holding of assets by the VCC or to aid investors to invest into the VCC. This can be achieved through ‘special purpose vehicle’ (SPV) companies, trusts or fund of funds. For example, it may be useful to hold assets in a VCC through a holding company, so that those assets can be sold or transferred in due course at the holding company level without affecting the shareholding of the VCC. Furthermore, investors may choose to hold their shares in a VCC via another structure, like a trust, to provide for succession, or in a company if there is a need to ring-fence investors from high tax jurisdictions.
The cost to setup a VCC
The costs to set up a VCC will vary from client to client, and we encourage clients to contact us to receive an indicative quote.
To further encourage industry adoption of the VCC framework in Singapore, MAS has also launched a Variable Capital Companies Grant Scheme for a period of up to three years. The grant scheme will help defray costs involved in incorporating or registering a VCC by co-funding up to 70% of eligible expenses paid to Singapore-based service providers. The grant is capped at S$150,000 for each application, with a maximum of three VCCs per fund manager. As a result, it is considerably cheaper to set up a VCC in Singapore than in other jurisdictions.
Sovereign can provide a full consultation service to clients looking to set up a VCC in Singapore. Sovereign will project manage the entire process from providing guidance on set-up, introducing the client to key service providers from its panel for further professional assistance and with the establishment and administration of the VCC itself.