The Singapore variable capital company: A new flexible business vehicle tailored for investment funds

4 December 2019

Introduction

The new Singapore variable capital company (“VCC”), a corporate vehicle tailored specifically for investment funds, will enhance the options available for Singapore fund managers to structure and establish investment funds in Singapore and promote Singapore as a wealth and fund management hub. With Singapore’s growth in assets under management (“AUM”) increasing by 5.4% to S$3.44 trillion in 2018 and with reports estimating AUM in Asia-Pacific to almost double from US$15.1 trillion in 2017 to US$29.6 trillion in 2025, the introduction of the VCC structure is timely.

While Singapore already has an extensive array of possible business vehicles which can be used as funds, such as Singapore companies, limited partnerships and unit trusts, the VCC plugs a gap in the Singapore fund ecosystem. Its features are designed to cater for greater flexibility required by investment funds (as compared to a traditional corporation), through the use of an umbrella-sub-fund structure and less cumbersome capital maintenance requirements. This is similar to other segregated portfolio / protected cell structures in offshore jurisdictions such as the Cayman Islands, British Virgin Islands (“BVI”) and Guernsey.

With greater scrutiny on tax haven jurisdictions and enhanced regulatory and reporting requirements of investors and lenders, it is hoped that the VCC proves to be an attractive alternative structure for fund managers and encourages more funds to be established and domiciled in Singapore.

Overview and key features

The following is a snapshot of some of the key features of VCCs:

• VCCs are corporate entities regulated by the Variable Capital Companies Act (“VCC Act”) which was passed in October 2018 but which has yet to come into effect. 
• The VCC Act will be administered by the Accounting and Corporate Regulatory Authority (“ACRA”), Singapore’s corporate registry and regulator which also administers the Companies Act of Singapore.
• The only purpose for which a VCC may be used is as one or more collective investment schemes, either as a standalone entity or as an umbrella structure with multiple sub-funds with segregated assets and liabilities.
• VCCs may be used for different fund strategies, including open-ended and closed-ended funds and retail funds and funds offered to only qualified investors.
• As its name suggests, a VCC can vary its capital structure easily through redemption of its shares and payment of dividends from out of its capital.
• VCCs must be managed by a fund manager that is licensed or registered by the Monetary Authority of Singapore (“MAS”) or exempted from such requirements by the MAS.
• A VCC can dispense with holding of annual general meetings.
• A VCC’s register of members is not required to be open for inspection by the public. Its constitution is also not publicly available.
• A VCC must have at least one Singapore-resident director who is also a director or a qualified representative of the VCC’s fund manager, and all directors must be fit and proper persons.
• VCCs are subject to compliance with anti-money laundering / countering the financing of terrorism (AML/CFT) requirements of the MAS.

These features lend themselves to VCCs being an attractive proposition for funds and fund managers and some of the benefits are further elaborated below.

Capital structure and capital maintenance

One of the main benefits of a VCC from an investment fund perspective is that members can easily redeem their shares in order to realise their investments without having to be subject to the stringent capital maintenance requirements of companies such as shareholder approvals. The VCC Act provides that:

• the value of the paid-up capital of the VCC shall be at all times equal to its NAV; and
• the shares of a VCC are to be issued, redeemed or repurchased at the price equal to the proportionate amount of the VCC’s NAV, subject to adjustments for any fees and charges provided for in its constitution.

Unlike companies which can only pay dividends out of profits, VCCs are also able to pay dividends out of capital.

These are important features for investment funds which need to have the flexibility for their investors to exit and to be able to pay out regular returns to their investors.

Umbrella-sub-fund structure, segregation of assets and liabilities and ring-fencing 

With their umbrella-sub-fund structure, VCCs also provide fund managers with the flexibility to pursue multiple strategies and segregate investments between different pools of investors, while maintaining a single legal entity and thereby reducing costs. For example, an umbrella VCC will be able to share a common board of directors and services providers, such as the fund manager, custodian, auditor and administrative agent, across its sub-funds. A fund manager would be able to establish a sub-fund with different investment strategies, assets and investors, simply by registering the sub-fund with the ACRA, when previously it would have had to structure and set up an entirely new fund. The directors of the VCC can even amend the VCC’s constitution for the purpose of forming a sub-fund without member approval if the constitution provides for this, again reducing the administrative and procedural requirements.

To mitigate the risk of cross-cell contagion arising from the above, the VCC Act provides safeguards, including prohibiting the assets of a sub-fund from being used to discharge the liabilities of or claims against the VCC or any of its other sub-funds and requiring that any liability incurred on behalf of or attributable to any sub-fund must be discharged solely out of the assets of that sub-fund.

Other than restricting the commingling of assets and liabilities between sub-funds, the VCC Act provides that each sub-fund can be wound-up singly and separately from each other as if it were a separate legal entity. This ensures ring-fencing of each sub-fund’s assets and liabilities in the event of insolvency.

Corporate governance and Singapore substance 

To ensure that a high standard of governance and oversight is maintained, the VCC Act requires VCCs to be managed by a fund manager that is either regulated or exempted by the MAS. However, currently this does not include fund managers which rely on the licensing exemptions for managing funds investing only in real estate and managing assets on behalf of their related corporations, and it is hoped that these exempt fund managers may be permitted to manage VCCs in the future.

VCCs must also have at least one Singapore-resident director, a Singapore-resident company secretary and auditor and a registered office in Singapore. These requirements, coupled with the fact that the day-to-day fund management and operations would likely be carried out by Singapore-based MAS-regulated fund managers, would lend to VCCs having Singapore economic substance. This may be harder to satisfy in offshore jurisdictions such as Cayman Islands and BVI where it is unlikely that the day-to-day fund management activities will take place, even if the fund itself may be domiciled in such jurisdiction.

Tax treatment and incentives 

A VCC will be treated as a company and a single entity for tax purposes and would therefore give it access to Singapore’s numerous tax treaties and double tax agreements with other jurisdictions. Tax incentives available for Singapore-based funds, such as the Singapore Resident Fund Scheme and Enhanced Tier Fund Scheme, as well as the Financial Sector Incentive Scheme for fund management and goods and services tax (GST) remission for funds, will also be extended to VCCs, subject to the applicable qualifying conditions being met.

Redomiciliation of foreign funds to VCCs 

Foreign corporate entities which are domiciled in other jurisdictions with structures similar to the VCC, such as Cayman segregated portfolio companies and BVI protected cell companies, and which meet other qualifying conditions may redomicile as a VCC in Singapore by transferring their registration to the ACRA. It is hoped that the benefits of the VCC structure will attract more funds to be domiciled in Singapore and grow the entire fund ecosystem in Singapore.

Conclusion

Having been designed to overcome the limitations of traditional Singapore fund vehicles, it is hoped that the VCC structure will be embraced by fund managers and fund professionals. Its flexibility will bring benefits across the fund ecosystem for both fund managers and investors and across fund strategies, including private equity, retail and venture capital funds, and it represents a significant development in Singapore’s funds industry.

This is the first article in our “Trilogy on Private Funds”, a series of articles covering a comprehensive range of private fund vehicles, including the various fund structuring options available and some of the key legal, regulatory and tax considerations. To read more, please refer to our articles titled “The increasing popularity of private funds” for an overview of private funds and the available fund vehicles in Singapore and “Limited partnerships: Why are they used for private funds?” for an overview of the common features found in limited partnerships which make them suited to be used for private funds and key considerations when structuring private funds as limited partnerships.

Note: Since the date of this article, the Variable Capital Companies Act has come into force and the framework for VCCs was launched by the Monetary Authority of Singapore and Accounting and Corporate Regulatory Authority on 15 January 2020. For more details, please access our article titled “Framework for variable capital companies tailored for investment funds launched on 15 January 2020.