Q3 2019 - The Singapore Variable Capital Company (“VCC”)
September 19, 2019
The VCC is a new Singapore fund structure that will go live by the end of 2019. The VCC Act was passed in October 2018 and the draft regulations were released on 30 April, 2019 for public consultation.
Key Features & Benefits of a VCC
There are many benefits of a VCC. It is an entirely new legal structure that provides an attractive alternative to existing fund or collective investment scheme (“CIS”) structures (i.e., corporation, limited partnership and unit trust).
Key features of a VCC:
- It can only be used as one of the following funds (although it may be extended to other uses in future):
- traditional or alternative fund;
- retail or restricted fund; and
- standalone fund, or an umbrella entity with multiple sub-funds with segregated assets and liabilities;
- It is able to redeem shares and pay dividends using its net assets. This allows a VCC to be flexible in distributions and return of capital (in contrast with a corporate fund);
- It must appoint a fund management company (“FMC”) that is licensed or registered by the Monetary Authority of Singapore (“MAS”), or is an exempt financial institution in Singapore and it must have sufficient mandatory Singapore substance (i.e., a Singapore registered office, Singapore resident company secretary and auditor, and at least one resident director);
- It must have minimum regulatory compliance, i.e.:
- at least one director must be a director or registered representative of the FMC;
- all directors must be fit and proper persons; and
- it must comply with Anti-Money Laundering/Countering Financing of Terrorism requirements (“AML/CFT”) requirements, although these can be outsourced to the FMC of the VCC or a regulated financial institution in Singapore;
- It can dispense with annual general meetings of its shareholders; and
- It can maintain only a private register of shareholders.
Redomiciliation of Foreign Funds to VCC
Foreign corporate funds (e.g., a Cayman segregated portfolio company or a British Virgin Islands protected cell company) may redomicile to a VCC if they have positive net assets and remain solvent within 12 months from the date of application. The applicant must submit the requisite forms and documentation for inward re-domiciliation.
VCC Offered to Retail Investors
VCCs can also be offered to retail investors. However, they must meet additional requirements, including operational requirements for custodians and certain mandatory provisions in the constitution, VCC contractual agreements, and the prospectuses. The custodian must safeguard the rights and interests of the VCCs’ shareholders and ensure the disclosure of the risk of cross-cell contagion to shareholders of VCCs. The custodian must also notify the MAS within three business days upon knowing of any breaches of the VCC or the FMC, in relation to laws or regulations relating to the VCC or the FMC. The custodian must take custody and control of all VCC assets, ensure all VCC assets are accounted for, and ensure all VCC assets are distinct from its own and those of its clients.
A VCC will be treated as a company and a single entity for the purposes of tax but Sections 13R and 13X Income Tax Act incentives will be extended to VCCs. The Financial Sector Incentive Scheme for fund management and GST remission for funds will also be applicable to VCCs.
Comparison with Tax Haven Funds
In our opinion, the VCC’s structure and features are very similar to the Cayman segregated portfolio company (“SPC”). However, we expect it will be easier, faster, more convenient, and less expensive to operate and maintain the VCC. In addition, much of the regulatory (including AML/CFT requirements and Common Reporting Standards) and substance requirements are already fulfilled by the Singapore regulated fund management company and the relevant financial institutions servicing the funds. The additional benefits are:
- having everything (including the process, documentation and professionals) located in one central business district in Singapore, a safe, stable and reputable international financial centre and asset and wealth management hub;
- availability of a tax-neutral fund structure pursuant to tax incentives approved in writing by the local regulators;
- availability of the benefits of more than 80 double tax agreements; and
- substantial cost savings (e.g., offshore directors, offshore agents, offshore registered offices, offshore shell fund managers, hefty CIMA registration fees and annual fees).
We have observed a growing trend of clients making the choice of Singapore as a structuring venue, investment fund and asset/wealth management jurisdiction.
The next steps
VCCs can be used by fund/asset managers, wealth managers, private equity/real estate/venture capital managers and multi-family offices. VCC funds can be traditional or alternative, including private equity/real estate/venture capital. A VCC can also be used as an alternative to retail unit trust funds. Practically, we anticipate a strong demand for the private VCC and a significant shift from conventional tax haven segregated portfolio company fund and protected cell company fund structures to private VCC funds in Singapore.
Engaging Alternatives – Q3 2019