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Variable Capital Companies: The right structure at the right place, right time

The Edge Singapore
The Edge Singapore  • 16 min read
Variable Capital Companies: The right structure at the right place, right time
VCC could be game changer for Singapore's fund management industry, cementing Singapore as a key wealth management hub in Asia
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Picture this: A tropical island where its citizens have one of the highest stand-ards of living and also one of the highest per capita GDPs globally; is politically stable, has the highest sovereign rating globally of AAA from the three major ratings agencies, and now has a new fund structure that makes its wealth management hub as at-tractive as jurisdictions such as the Cayman Islands, British Virgin Islands (BVI) and Luxembourg but without the downsides.

In 2018, the Singapore parliament passed the Variable Capital Companies (VCC) Act (see sidebar), a more flexible corporate structure for funds to be domiciled in Singapore, and the VCC was launched in January this year. The VCC Act serves to position Singapore as an even more viable wealth management hub for the 21st century.

“In the next phase of growth, we seek to position Singapore as a full-service Asian hub for fund management and domiciliation under the Industry Transformation Map (ITM) for Financial Services. This will allow Singapore to capture a greater share of the fund management and fund domiciliation value chain, and will provide new business collaboration and job opportunities within the funds ecosystem,” says Gillian Tan, executive director, financial markets development department, the Monetary Authority of Singapore (MAS).

More funds being set up in Singapore would inevitably require more high quality jobs. Setting up a VCC may require a fund manager to engage fund service providers including lawyers, fund administrators, auditors and accountants.

“The growth of fund domiciliation activities will create opportunities for a wide range of service providers such as lawyers, accountants, fund administrators, and fund custodians,“ Tan says. Since the VCC is a dedicated investment fund vehicle for both closed-end and open-ended funds, it can be used across a range of investment strategies. That in itself could encourage fund managers to launch new funds as VCCs, and manage funds across strategies and diverse use cases in a single investment fund vehicle, Tan points out. For instance, the largest VCC to date has AUM of $500 million, she reveals.

Re-domiciliation, attracting funds

To be sure, one of the observations — as seen by both lawyers and fund managers, and confirmed by MAS — is to attract fund managers to re-domicile their funds to Singapore, through something called a statutory re-domiciliation mechanism. One of the requirements for re-domiciliation is that the fund seeking re-domiciliation is solvent.

The Accounting and Corporate Regulatory Authority (ACRA) will not approve the application of a proposed VCC which satisfies all of the prescribed requirements where: the person named as manager of the proposed VCC does not satisfy the regulated fund manager requirement and/or is not a “qualified representative”; none of the directors of the proposed VCC is a “qualified representative” of the manager; the proposed VCC is likely to be used for an unlawful purpose or for pur-poses prejudicial to public peace, welfare or good order in Singapore; or it would be contrary to national security or the national interest for the proposed VCC to be registered.

Re-domiciliation can take as long as three months if the fund is to be transferred from a Cayman SPC (Segregated Portfolio Company) to a VCC. Lawyers and fund administrators point out that the exit from another jurisdiction takes time, such as winding down the SPC in Cayman, and moving the capital.

Under the VCC Pilot Programme, which culminated in 20 VCCs being incorporated and redomiciled in Singapore at the launch of the VCC framework in January, a number of funds were from the Cayman Islands, Mauritius and the Bahamas. “This is testament to the appeal of the VCC framework to Singapore-based fund managers seeking to enhance the substance of their activities locally. A benefit is that these re-domiciled funds will keep their corporate history, branding and investment track record, following the re-domiciliation,” Tan says.

Another aim of the VCC framework is to attract fund managers that do not have an existing presence in Singapore to set up here and therefore manage funds out of Singapore. “We have received a strong pipeline of interest from global and regional fund managers wanting to set up in Singapore, citing the VCC as a strong motivating factor,” Tan says.

According to MAS, the total number of VCCs incorporated are at around 109, as at August this year. Of these, more than half are operational and the rest are in the middle of fund-raising. A particular attraction to large fund man-agers is flexibility and efficiency.

“A majority (>80%) of the VCCs incorporated to date are structured as umbrella funds, to take advantage of economies of scale and cost efficiencies of adding new sub-funds, while the remaining have been set up as standalone funds,” Tan says. “The umbrella structure allows fund managers to manage different strategies or investment objectives and investors under a single corporate structure, and creates economies of scale as sub-funds can share the same board of directors and common service providers and consolidate some administrative functions,” she details.

Terence Wong, founder and CEO of Azure Capital, says: “We’ve six sub-funds under one umbrella fund and we’ve found it more cost effective.” In his experience, setting up new funds can cost $100,000 in legal and fund ad-ministration fees, excluding taxes.

“This umbrella fund can defray a lot of costs over a number of companies because you can have many sub-funds under one umbrella,” he points out. “The VCC is the best of both worlds. It followed the Cayman Islands structure of SPC and we don’t need another set of administrators,” he adds.

VCCs popular with multiple family offices

Jaydee Lin, managing partner at Raffles Family Office which set up an office in Singapore in 2018 and was awarded a capital market services (CMS) licence, started a VCC as part of a pilot test by MAS on Jan 15. “Before the VCC was introduced, investors in Asia typically go for the Cayman SPCs. Since the VCC [Act], we’ve set up two new funds under the VCC,” Lin says. “We chose not to redomicile the Cayman funds because certain clients in Taiwan and Hong Kong remain more familiar with the SPCs. In fact, we give our clients an option to choose between the VCC or SPC.”

Raffles Family Office, which has AUM of US$1.8 billion ($2.5 billion), is a multi-family office licensed by MAS. “As a multi-family office, we wear multiple hats. We act as a gate-keeper. We are able to consolidate and man-age the entire book of clients’ assets to provide maximum value to each client or family,” Lin says.

The VCC allows for consolidation and segregation. Family assets can be consolidated under an umbrella VCC, yet divided into sub-funds for different members of the family, Lin details, as assets and liabilities of each sub-fund are ring-fenced. “In wealth management privacy is very important. The VCC’s register of shareholders will not be made public,” Lin adds. Only regulated fund managers are permitted to set up VCCs.

Currently, single family offices may not set up their own VCCs as they are exempted from holding a fund management licence. “The requirement to have a fund manager that is regulated by MAS was proposed to mitigate the risk of abuse of the VCC structure for illicit and fraudulent purposes. Expanding the scope of fund managers that are currently allowed to set up VCCs to include entities not subject to MAS’s oversight could therefore introduce additional risks to the VCC framework and the overall financial system,” Tan says.

Still, Lin reckons that the take-up rate for VCCs has been very good. “When we did our [VCC] webinar [on Aug 7], 94 VCCs had been incorporated within seven months. We are aware of the investment climate because of Covid-19.,” he says.

Similarly, Petrus Huang and Ron Cheng, co-heads of the alternative investment funds practice group at Drew & Napier LLC, one of Singapore’s leading and largest full-service law firm, indicated that VCCs have rapidly become the investment fund vehicle of choice, particularly among Asia-based fund managers and leading Asian sponsors, wealth advisers and investors. “More than a hundred VCCs have been registered to date and the pipeline for new VCCs remains strong,” the Drew & Napier duo says.

Tax benefits

“Lately, traditional tax havens have come under increasing pressure, such as measures im-posed by the OECD. With the VCC, investors now have an excellent option of setting up funds in Singapore to enjoy the transparency of operating in a well-established market, and benefit from the double tax agreements with more than 80 jurisdictions, an advantage that comes with VCC’s status as a single legal entity,” Lin of Raffles Family Office notes.

The expansion of scope of sections 13R and 13X of the Income Tax Act to include VCCs was announced in Budget 2018. In a presentation to its clients, WMH Law points out that Sections 13R and 13X of the Income Tax Act provide tax exemptions on specified income from designated investments derived by funds managed by a Singapore-based fund manager. The tax incentives under the 13R and the 13X have been extended to VCCs.

Accordingly, VCCs approved under the 13R Scheme or 13X Scheme will qualify for withholding tax exemptions on interest and other qualifying payments currently avail-able to funds approved under the 13R Scheme or 13X Scheme. The 13R Scheme requires, among other things, the applicant fund to have annual business expenses of at least $200,000 (local or otherwise), while the 13X Scheme requires the applicant fund to have annual local business expenses of at least $200,000 and a minimum fund size of $50 million at the time of application.

In the case of umbrella VCCs, the tax incentives under the 13R Scheme and the 13X Scheme are granted at the umbrella level. Practically, this means that the requirements for these tax incentive schemes, including the requirements pertaining to AUM (in the case of Section 13X) and annual business expenditure (in both cases), can be aggregated across all of the sub-funds under the umbrella VCC.

“In addition, unlike a private limited company in Singapore, the VCC does not have a limit on the number of shareholders that it can have. As a corporate structure, unlike LPs (limited partnerships), it can also access Singapore’s extensive Avoidance of Double Taxation Agreements (DTAs) networks. IRAS will also grant a Certificate of Residence to support a VCC’s claims for tax benefits un-der the Avoidance of Double Taxation Agreements concluded by Singapore with our treaty partners,” Tan says.

VCCs versus other fund structures and jurisdictions

Singapore is very different from traditional tax havens which have similar fund structures. Both Cayman Islands and the BVI adopt the SPC structure where an umbrella company holds sub funds. “Cayman lacks regulator vigour. Singapore falls into the right place at the right time,” says Wong of Azure Capital. “Even before Brexit and the Panama Papers, these jurisdictions lost a lot of lustre.”

In its presentation, WMH Law points out that the structural efficiencies of the VCC are also significant in the light of economic sub-stance requirements that several jurisdictions such as the Cayman Islands, the BVI, the Isle of Man, Jersey and Guernsey have put in place in response to the European Union’s blacklisting of these jurisdictions for not cooperating with economic substance requirements.

Both The Financial Times and The Guardian reported that the Cayman Islands was added to the EU list of non-cooperative jurisdictions in tax matters in February, while in May this year, Mauritius and the Bahamas were added to the EU money-laundering blacklist.

Jurisdictions such as Cayman, BVI, Isle of Man and the Channel Islands have lost a voice in the EU when Britain left the European Un-ion on Jan 31. Britain is still negotiating withdrawal and trade agreements with the EU, and that creates uncertainty for British Crown Dependencies and Overseas Territories (CDOTs) which include Cayman, BVI, the Bahamas, the Channel Islands and Isle of Man. The Chan-nel Islands and Isle of Man are governed by slightly different laws with regard to the EU. The CDOTs will no longer have the UK cham-pioning them within the EU. CDOTs have a unique relationship with mainland Britain, and through Britain, the EU. The EU is the largest single market in the world.

With the UK leaving the EU, the passporting of financial services including fund management from the UK including its CDOTs is now in question. The key principle of a passport regime is to allow the marketing of funds formed in a particular jurisdiction into another jurisdiction with minimal regulatory hurdles.

Within the EU, passporting allows EU-based banks to sell products and services across EU borders and to easily establish branches in oth-er EU countries. Brexit will therefore naturally have some implications for the CDOTs due to their legal relationships with the UK and the EU. The passporting system has been extended to cover the European Economic Area (EEA), which comprises the EU states and Norway, Iceland and Liechtenstein.

Since the UK has left the EU, and the EEA, UK and the CDOTs will no longer be covered by the passporting frameworks established by EU directives or the freedoms for trade guaranteed by the EU treaties. This would have important potential implications for banks and financial services firms in both the UK and other EU states.

“Even If Brexit results in the UK losing its passporting rights, the UK should still be able to secure a third country equivalence status for the purposes of both management and marketing passports,” says Brandon Tee, head of corporate law practice at WMH Law Corp.

Not just a structure, domicile is important

A trade agreement on goods and services is currently being negotiated between the UK and the EU. Singapore, on the other hand, signed a free trade agreement with the EU — the EU Singapore Free Trade Agreement or EUSFTA and the EU Singapore Investment Protection Agreement or EUSIPA — in November last year. The agreement covers a wide range of services sectors including financial services.

Singapore is also an active observer of the Asia Region Funds Passport (ARFP), which was launched on Feb 1, 2019, The agreement allows an operator of a foreign passport fund established and regulated in one participating home economy to offer interests to persons in another participating host economy, subject to the Passport rules and any additional requirements that a participating economy may impose.

According to a report published in April by PwC, the ARFP could transform the in-vestment fund sector in Asia, much like how UCITS or the Undertakings for Collective In-vestments in Transferable Securities trans-formed the investment fund industry in Europe. “Another future opportunity in Asia, as well as Singapore, is the potential passport marketing of alternative investment funds into Europe,” PwC adds.

VCCs can access the European market through a master fund with European feeder fund pooling assets into it or a VCC feeder fund feeding into a European master fund. Having a feeder fund structure in Europe would then allow cross border access to investors. “When we developed the VCC framework, we incorporated best-in-class features that are on par with other similar corporate structures in other international fund jurisdictions to better serve the needs of global and local manag-ers based in Singapore. In addition, we care-fully considered the needs of the investment funds industry and incorporated features that best meet their needs,” Tan says. This includes VCCs the option to prepare financial statements in US GAAP, or IFRS (International Financial Reporting Standard).

When structuring funds, fund managers look to domiciles that have investment fund vehicle structures with features that best suit their needs — this could be companies, limited partnerships, unit trusts or flexible corporate structures such as the ICAV (Irish Collective Asset Management Vehicle), and Luxembourg’s UCITS and SICAV (Société d’Investissement à Capital Variable).

“In addition to the availability of strong structuring options for investment funds, fund managers also consider the fund domicile where their investment fund vehicle is based,” Tan indicates. “In this regard, many of fund managers are attracted by Singapore’s value proposition as a trusted and credible fund domicile, with strong rule of law, robust regulatory standards, ease of doing business, excellent global connectivity (an extensive network of over 20 implemented FTAs and over 80 Avoidance of Double Taxation Agreements (DTA)), as well as our highly skilled and cosmopolitan work-force,” Tan concludes.


What is a Variable Capital Company?

The Variable Capital Companies Act was passed in 2018 and came into operation on January 15. Essentially, the VCC is a corporate structure for investment funds that can be used across a wide range of fund strategies, and as an open-ended or a closed-end fund. The Inland Revenue Authority of Singapore has a succinct summary of VCCs under its tax framework for VCCs.

IRAS says besides the incorporation of new funds, the VCC framework also allows fund managers to redomicile existing overseas investment funds with structures comparable to that of a VCC, by transferring their registrations to Singapore as VCCs.

A VCC may be set up as a single fund structure or an umbrella fund that consists of, or is to consist of, two or more sub-funds (i.e. an umbrella VCC).

The VCC can also be used for all types of collective investment schemes in Singapore, be it closed-end funds (typically venture capital funds and private equity funds) or open-ended funds (typically mutual funds and hedge funds), and a VCC can be structured either as a single standalone fund or an umbrella fund.

A VCC can also have a single shareholder and therefore be utilised in master-feeder structures or a single family office managed by a licensed or registered fund manager or ex-empted financial institution. Despite having multiple sub-funds, an umbrella VCC has only one board of directors. For cost efficiencies, a common set of service providers may serve the umbrella VCC and all its sub-funds.

A sub-fund of an umbrella VCC is not a legal person separate from the VCC. However each sub-fund may have different investment objectives and shareholders, and hence different risks and exposures.

To prevent cross contagion, a legal segregation of assets and liabilities is imposed on each sub-fund and the umbrella VCC. This means that the creditors’ claims of a sub-fund can only be settled using assets of that sub-fund, and not assets of the umbrella VCC or other sub-funds within the same VCC. It follows that an umbrella VCC is required to keep separate accounting and other records and present separate accounts for each sub-fund in its financial statements.

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