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Singapore will soon introduce new body corporate legislation akin to SICAV, ICAV and OEIC in other fund jurisdictions that will be utilised for investment funds business only. The Variable Capital Company is a potential game-changer for the asset and wealth management industry, both within the city-state and across the Asia-Pacific region. The new vehicle will enhance the asset and wealth management’s ecosystem of Singapore and the value proposition Singapore offers to the industry.
1. Asset and wealth management in Singapore
Singapore is a leading asset and wealth management hub in Asia. Total assets managed by Singapore-based asset managers grew on average by 14% over the last five years and reached USD 2.5 trillion by the end of 2018. Approximately 67% of the assets managed by Singapore-based asset managers are invested in the Asia Pacific Region. Only 25% of the assets managed in Singapore are sourced from Singapore-based investors. The remaining investors are domiciled all over the world.[1]
Investment vehicles currently set up in Singapore have the legal form of companies, limited partnerships and unit trusts. However, a substantial proportion of investment funds that are managed by fund managers in Singapore are domiciled abroad, for example in Luxembourg, Ireland or the Cayman Islands. These locations offer corporate structures that are more flexible than the vehicles that used to be available in Singapore.
2. Features of the VCC
In order to encourage fund domiciliation activities, Singapore will soon bring into effect the Variable Capital Company (hereinafter “VCC”), a new body corporate legislation specifically for investment funds. The VCC is a new type of corporate entity, tailor-made for investment funds, and is comparable to that of other international fund domiciles. The VCC has the following features:
- VCCs can be open-ended or closed-ended and are therefore suitable for traditional and alternative fund strategies.
- VCCs are able to vary their share capital, without having to provide company registrar’s intimation. They are therefore flexible for redeeming investments and pay distributions out of capital. VCC shares must generally be issued and redeemed at their net asset value.
- VCCs can be set up as stand-alone or as umbrella entities with multiple sub-funds. In the latter case, the sub-funds can share a common board of directors and use the same service providers, including the same fund manager, custodian, auditor and administrative agent. The assets and liabilities of each sub-fund are statutorily segregated by law, such that the assets of one sub-fund cannot be used to discharge the liabilities of the umbrella fund, or of another sub-fund.
A VCC must appoint a fund manager that is regulated by the Monetary Authority of Singapore (MAS) or that is expressly exempted from holding such a license.
3. Taxation of the VCC
3.1 Income tax
The VCC will be treated as a company and a single entity for tax purposes. Consequently, the VCC is generally subject to income tax in Singapore. However, the tax exemption under the sections 13R (Singapore Resident Fund Scheme) and 13X (Enhanced Tier Fund Scheme) of the Income Tax Act of Singapore will be extended to VCCs. Under these tax incentive schemes, most income from so called “designated investments” is exempted from income tax. In practice, most of the income derived by funds applying one of the tax incentive schemes is typically tax exempt.
Under the 13X Scheme, the fund has to fulfil (among other things) the following economic conditions:
- The applicant fund must have a minimum fund size of SGD 50 million (roughly USD 37.5 million) at the point of application.
- The fund must have an annual local business spend of at least SGD 200,000 (roughly USD 150,000).
In contrast to the 13X conditions, the first criteria mentioned above is not relevant for the 13R scheme. On the other hand, there are certain restrictions regarding Singapore non-individuals investing into the fund under the 13R Scheme. It will need to be analysed on a case-by-case basis which tax incentive scheme is more suitable for a specific fund.
3.2 Double tax treaty eligibility
A VCC will receive a Singapore Certificate of Residence, provided that it is controlled and managed from Singapore. In the case of an umbrella VCC, the Certificate of Residence will be issued on the VCC, with the names of the sub-funds receiving the same nature of income from the same treaty country included in the Certificate of Residency.
Based on this, the VCC should be eligible to apply double tax treaties. Singapore has double tax treaties with 86 jurisdictions.
4. Timing
In October of 2018, the parliament passed the Variable Capital Companies Bill and will soon pass the “regulations” that will bring the Act in effect along with tax framework. The MAS invited initial applicants to participate in the pilot programme of the VCC launch. Within five days of the application being kept open, the pilot programme was oversubscribed two times over. This will allow these pilot applicants to go live on the Day One of the effective date of the legislation. The launch of this framework is expected for Q1 2020.
5. Relevance for European-based asset and wealth managers
The new VCC will also provide new opportunities for European-based asset and wealth managers to structure their investments:
- From the perspective of European-based asset managers, the VCC will in particular be of interest as an investment vehicle for investments in the Asian Pacific Region or to seek capital from APAC investors. A VCC may be used as a newly established investment vehicle, or existing Singapore funds may be restructured or offshore funds may be re-domiciled into Singapore as VCCs.
- In particular due to the possibility to establish an umbrella structure with multiple sub-funds, VCC may also be interesting for private wealth structures and family offices.
- In order to apply the 13R/13X tax incentive schemes at the level of the VCC and therefore obtain most of the income free of income tax, the fund management/wealth management will have to be located in Singapore.
[1] Monetary Authority of Singapore, 2018 Singapore Asset Management Survey
