Financially savvy: ‘VCC could raise Singapore’s profile as fund management hub
Singapore’s position as a fund management and wealth management centre was further enhanced this year with the launch of the variable capital company (VCC) structure by the Monetary Authority of Singapore (MAS) and the Accounting and Corporate Regulatory Authority (ACRA). A VCC is a bespoke corporate structure that is tailored specifically for investment funds and offers fund managers cost savings and operational flexibility. According to MAS, a VCC structure facilitates the issuance and redemption of shares without having to seek shareholders’ approval. It can also be used for both open-ended and closed end investment funds across traditional and alternative strategies. An open-ended fund allows investors to redeem investments at their discretion, while a closed-end fund does not permit investors to do so. Finally, it can be structured as a standalone or umbrella fund with multiple sub-funds.
An umbrella VCC with multiple sub-funds can benefit from economies of scale and cost efficiencies that could be provided by using a single set of service providers and board of directors. This also allows fund managers to enjoy cost economies. Sub-funds may also be wound up independently of each other, ensuring the ring-fencing of assets and liabilities between sub-funds. VCCs will also be allowed a flexible capital structure. For instance, their share capital can change without having to seek investors’ approval. Unlike companies which usually pay dividends out of profits, VCCs would be able to pay dividends out of capital. As a corporate entity, a VCC has access to Singapore’s network of over 80 double-tax treaties. This simplifies its investment holding structure, resulting in cost-savings and a reduction of the administrative burden.
“Singapore’s various tax incentives also play a big role in the attractiveness of its VCC. Tax exemptions and incentives as per Sections 13(R) and 13(X) will be applicable to funds under the VCC, but what further boosts its attractiveness compared to other jurisdictions is the wide network of double tax agreements (DTAs) already in place, currently at 88 DTAs as per latest Inland Revenue Authority of Singapore figures,” says Patrice Lo, commercial director for fund services at TMF Group.
A VCC may make an election under the US “check the box” rules to be treated as a “passthrough” entity for US federal tax purposes. This makes it a more attractive proposition for US taxable investors, notes a Baker Mackenzie press release. Foreign corporate entities set up as funds can be inward re-domiciled as VCCs. As certain offshore domiciles are coming under greater scrutiny from regulators, re-domiciliation may prove advantageous for certain Singapore managers.
“As at July 15, 86 VCCs have been launched. More than half are operational, while the rest are currently in the middle of fund raising,” says a MAS spokeswoman. Initially, a group of 18 fund managers participated in a VCC pilot programme initiated by MAS and ACRA in September last year. All of these fund managers have today incorporated or re-domiciled a total of 20 investment funds as VCCs. These investment funds comprise venture capital, private equity, hedge fund and environmental, social and governance (ESG) strategies, demonstrating the viability of the VCC framework across diverse use cases. The list of fund managers include Heliconia Capital Management, Aggregate Asset Management, Meilun Asset Management, Chartered Asset Management and Tembusu Partners.
VCC grant scheme to accelerate industry adoption
To further encourage industry adoption of the VCC framework here, MAS has also launched a Variable Capital Companies Grant Scheme to 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 $150,000 for each application, with a maximum of three VCCs per fund manager. The grant scheme will be funded by the Financial Sector Development Fund (FSDF) for a period of up to three years. The FSDF was established in 1999 under the MAS Act to promote Singapore as a financial centre and to develop and upgrade skills, expertise to build up the infrastructure required by the financial services sector.
Lo says the VCC structure and its overall framework has very similar characteristics to those in other established fund domiciles such as the Cayman Islands, British Virgin Islands and Mauritius. “For instance, the VCC legislation provides for the segregation of assets and liabilities for umbrella structures similar to the Segregated Portfolio Company (SPC) structure in the Cayman Islands, the Protected Cell Company regime in Mauritius and the SIF/SICAR/ RAIF regimes in Luxembourg. Hong Kong also embarked on the “onshorisation” trend with the open-ended fund companies (OFC) regime in 2018 and its new Limited Partnership Fund Bill which is due to take effect in August this year,” he adds. “While each of these fund jurisdictions have their own merits, Singapore with its long history of economic and political stability aims to shine in areas beyond just the investment vehicle structure, which is a relief to asset managers and their investors. They are assured of a continual balance of policies and infrastructure essential to keep a constant business-as-usual environment. Based on the World Bank’s Doing Business 2020 report, Singapore was ranked second globally for its ease of doing business.”
Singapore maintains its position as one of the simplest places to do business worldwide, according to the Global Business Complexity Index (GBCI) from the TMF Group. The GBCI 2020 ranks 77 jurisdictions across the world in order of ease of doing business, and placed Singapore as the 18th simplest globally. This ranks the nation ahead of most other APAC jurisdictions including Indonesia (first in complexity), China (sixth most complex), Malaysia (ninth), Taiwan (16th), South Korea (17th) and India (18th), which are amongst the most complex globally. Hong Kong is ranked ahead of Singapore at 12th simplest in the world.
The Republic also scored exceptionally well in its accounting and tax standards, ranked 10th simplest in the world, due to its alignment with International Financial Reporting Standards (IFRS), tax clarity and relative ease of filing requirements. Other favourable considerations, according to the TMF survey, are Singapore’s competitive corporate tax rate of 17% and Double Tax Agreements (DTAs) signed with over 80 different countries. Additionally, the government’s continued focus on digitisation has resulted in simplified e-filing processes, the TMF Group says.
In terms of human resources and payroll, Singapore ranks above average at 28th simplest globally, due to its transparent employment and payroll guidelines, as well as its ease of hiring and focus on talent. For rules, regulations and penalties, Singapore averages at 36th simplest globally. While its laws are based on a common law framework allowing for transparency and consistency, Singapore continues to step up enforcement action on basic compliance obligations such as convening AGMs and filings, giving rise to business complexity. Moreover, Singapore remains one of a club of nine AAA rated countries by Moody’s Investors Service, Standard & Poor’s and Fitch Ratings, an indication of a sound financial system.
Over the years, MAS has also implemented strong frameworks that make Singapore stand out on the international scene. The city-state’s strong regulatory environment provides investors, especially large institutions, with the assurance that their investments will be safe-guarded, Lo notes. “This is in contrast to other jurisdictions, where tough sanctions have been imposed recently. For instance, the Cayman Islands was added to the EU list of non-cooperative jurisdictions in tax matters in February 2020 while in May this year, Mauritius was added to the EU money laundering blacklist,” he says.
Asset management continues to gain ground
According to the 2018 Asset Management Survey by MAS, published annually in the second half of the year, total assets managed by Singapore-based asset managers grew by 5% y-o-y to reach $3.4 trillion in 2018, up from $3.3 trillion in 2017. Over the last five years, the industry’s AUM expanded at a 14% compound annual growth rate (CAGR).
Singapore also remains a conducive place to conduct portfolio management activity with the share of discretionary assets under management (AUM) rising from 53% in 2017 to 58% in 2018, the survey found. The city-state also continues to serve as the Global-Asia gateway for asset managers and investors to tap the region’s growth opportunities, with 75% of AUM sourced from outside of the Republic in 2018. 67% of total AUM was invested in the Asia Pacific, of which more than a third of Asia Pacific AUM were investments into Asean countries.
But would the VCC attract more funds to the Republic? “The VCC is still in its initial stage as most of the registered VCCs have not been officially launched yet. It also remains unclear as to the actual interest of managers to consider re-domiciliation to Singapore. Although it is too early to tell whether the VCC initiative will directly contribute to further increase of AUMs into Singapore, TMF Group remains very optimistic as to the success of the VCC in positioning Singapore as a preferred jurisdiction in the region. TMF Group has indeed received increasing enquiries about the setup and ongoing maintenance of the VCC, as well as the administration of the investment vehicle across various strategies,” Lo says.