Memorandum on Singapore Variable Capital Companies

The regulatory framework underpinning VCC has been specially designed by legislators for investment funds and enhances Singapore's position as a leading financial centre.

VCC will complement Singapore's fund management capabilities by diversifying fund structure options available here, allowing both fund management and fund domiciliation to take place locally.

Fund establishment in Singapore via the use of VCCs will enjoy the following benefits:

Cost-efficiencies through economies of scale.
Tax benefits.
Access to a network of Avoidance of Double Taxation Agreements between Singapore and other jurisdictions.

In this article, we will explain key characteristics of VCC that have been announced and disclosed to the financial community by the Monetary Authority of Singapore (MAS).

Formation

1. VCCs will have to be registered with the Accounting and Corporate Regulatory Authority of Singapore (ACRA), which is the governmental agency responsible for administering the Act, with the exception of anti-money laundering and counter terrorism financing obligations of VCC's which will be overseen by the MAS.
2. VCCs may only be established for Collective Investment Schemes (CIS) and no other purpose.
3. This is in line with the government's stated aim of introducing VCC to strengthen Singapore's established position as a global fund management hub.
4. VCCs can be constituted for both open-ended (i.e. traditional) funds, and close-ended (i.e. alternative) funds.

Shares, Redemption and Valuation

5. The share capital of a VCC may be varied without having to obtain shareholder approval, but its shares must be redeemed and issued at their net asset value (NAV) in order to protect shareholders. This simplifies the redemption process and allows an investor to exit or manage their investments efficiently. This simplified process will also theoretically save administrative costs for the fund.
6. A VCC may also issue dividends out of its own capital. This will allow for timely dividend payments to its investors if there are agreed dividend payment schedules[3].

Non-Public Register of Members

7. The register of members of a VCC will not need to be lodged with the registrar of VCCs. Share issuances and allotments also need not be lodged.
8. Instead, the VCC is tasked with maintaining a private register of its own shareholders.
9. The list of shareholders only needs to be disclosed to regulatory and law enforcement authorities, if requested.
10. The constitutive documents of the VCC, although required to be lodged with the registrar for formation purposes, will not be publicly available.

Governance of VCCs

11. A fund manager is required to be appointed to manage the assets or property held in a VCC.
12. Generally, the fund manager must be one that is regulated and registered as such with MAS, but may also be: (a) a registered fund management company with the MAS, or (b) entities engaged in fund management but exempted from the requirement to hold a fund management licence, provided they are a bank, merchant bank, finance company or insurance fund and licensed as such by the MAS under section 99(1)(a) to (d) of the Securities and Futures Act (Cap 289 of Singapore).
13. The fund manager requirement for VCCs stems from the regulatory intent to ensure that VCCs are not used for unlawful purposes or just as an offshore vehicle without actual investment management activities carried out in Singapore.
14. VCCs must have at least one director: provided that such person: (a) is ordinarily resident in Singapore, and (b) a director or qualified representative of the fund manager. Practically, since the fund manager must be registered and regulated by MAS anyway, it is likely that a single VCC director will be able to fulfil both requirements. Alternatively, if the director or qualified representative of the fund manager is not a Singapore resident, the VCC must have at least two directors, each fulfilling the requirements (a) or (b).
15. As an added safeguard to retail investors, VCCs constituted for funds or sub-funds offered to retail investors must have at least three directors, one of whom must be an independent director[4].
16. Just like directors of private limited or other companies, directors of VCCs are fiduciaries of the VCC and will be required to act in the best interest of the VCC. Existing principles of common law pertaining to the acts and duty of care of directors will apply to directors of VCCs in Singapore.

Flexible Structure: Allows for Stand Alone and Umbrella Fund Structures

17. The proposed VCC model in Singapore should not be an unfamiliar concept to fund practitioners as it is based on a structure that has been widely adopted and utilised in many foreign jurisdictions that have been a popular domicile for funds. For example, the Société d'investissement à capital variable in Luxembourg, Irish Collective Asset-management Vehicle in Ireland, the Open-Ended Investment Company in UK, or Investment Company in USA.[5]
18. In terms of the proposed structure, the VCC may operate either on a standalone or umbrella basis.
19. A standalone structure is straightforward and would consist of one collective investment scheme constituted as a VCC.
20. The umbrella structure would be more cost efficient with multiple collective investment schemes (sub-funds) existing within a single registered VCC. Each sub-fund may be independent from another sub-fund with different investment objectives, investors, assets and liabilities. In order to protect against cross-contamination of liabilities between sub-funds, the Act will provide that the assets and liabilities of each sub-fund under an umbrella VCC must be segregated regardless of any contrary term in its constitution or in private agreements entered into by the VCC. Each sub-fund must also be wound up separately in the event of insolvency. The assets of each sub-fund are protected and cannot be used to pay off liabilities of another sub-fund even under the same umbrella VCC.

Cost-Efficiencies

21. Umbrella funds constituted as a VCC can share the same board, fund managers, custodian of assets, auditors and administrative agents.

Re-domiciliation

22. Foreign entities registered as VCCs in their originating jurisdictions can re-domicile to Singapore easily by registering with the Accounting and Corporate Regulatory Authority (ACRA), following which they will be required to comply with the Act.
23. Foreign entities not registered as VCCs in their originating jurisdiction can also re-domicile as a similar entity type (e.g. private limited company)[6] in Singapore, restructure and convert into a VCC in Singapore.

Audit and Accounting

24. VCCs may elect to comply with prevalent accounting standards in Singapore, or, any other prevalent international accounting standard e.g. IFRS or GAAP.
25. VCCs constituted in Singapore may not apply different accounting standards to sub-funds. All sub-fund accounts must comply with the same accounting standards as for the VCC itself.
26. Annual returns of VCCs must be laid before the VCC at its annual general meeting, but the Act expresses that these returns will not be publicly searchable.

Tax Benefits[7]

27. Approved fund managers of incentivised VCCs will enjoy a 10 per cent concessionary tax rate under the Financial Sector Incentive – Fund Management scheme.
28. Existing Goods and Services Tax (VAT) remission for funds will encompass incentivised VCCs.
29. Tax exemption under s13R and 13X of the Income Tax Act (Cap. 134 of Singapore) will be extended to include incentivised VCCs.
30. More details on tax treatment of VCCs are expected by end 2018.

Conclusion

Assets under management in Singapore have grown an average of 15 per cent annually during the 2013 to 2017 period and stood at S$3.3 trillion by the end of 2017. Singapore remains a strong fund management hub, with global talent and institutions tapping on Singapore's value proposition by locating and engaging themselves here. The introduction of VCCs to the Singapore fund management landscape will allow fund management and domiciliation to be co-located meaningfully in one jurisdiction within Asia and will be an important milestone for Singapore's funds industry.

[1] Note from Indranee Rajah S.C. Minister in the Prime Minister's Office, Second Minister for Finance and Education dated 2 October 2018. Retrieved from http://www.singaporelawwatch.sg/Portals/0/Indranee%20Rajah%20Note%20on%20Variable%20Capital%20Companies%20Bill.pdf on 10 October 2018.

[2] References in this memo to sections of the Act refers to sections of Bill No. 40/2018 of the Singapore Parliament 2018. Retrieved from https://www.parliament.gov.sg/docs/default-source/default-document-library/variable-capital-companies-bill-40-2018.pdf on 11 Oct 2018.

[3] Para 19 of Speech by Indranee Rajah S.C. Minister in the Prime Minister's Office, Second Minister for Finance and Education on 1 October 2018. "Variable Capital Companies Bill (2018)" – second reading speech in parliament. Retrieved from http://www.mas.gov.sg/News-and-Publications/Speeches-and-Monetary-Policy-Statements/Speeches/2018/Variable-Capital-Companies-Bill-2018.aspx on 10 October 2018.

[4] Section 286 of the Securities and Futures Act will be amended by adding a new subsection (2A) on this point.

[5] Sue-Ann Tan (2018, September 10). Parliament: Proposal for a new corporate structure for fund managers. The Straits Times. Retrieved from www.straitstimes.com/politics on 10 October 2018

[6] Companies (Amendment) Act 2017 (No. 15 of 2017) Date of Commencement: 11 October 2017.

[7] See Annex 3 of Note from Indranee Rajah S.C. Minister in the Prime Minister's Office, Second Minister for Finance and Education dated 2 October 2018. Retrieved from http://www.singaporelawwatch.sg/Portals/0/Indranee%20Rajah%20Note%20on%20Variable%20Capital%20Companies%20Bill.pdf on 10 October 2018.

Eef Gerard Van Emmerik
Associate

Yap Teck Chai
Teck Chai is Managing Counsel at Legal Ink LLC and his practice covers a broad spectrum of financial and regulatory transactions. Teck Chai was focusing on banking and finance, corporate, and securities law before expanding his practice to cover payment services and financial regulation. Prior to his current role, he was a senior associate at an international law firm.

Ow Kim Kit
Kit is a Partner at Legal Ink and has over 20 years of legal experience in leading local and international law firms as well as at leading international banks. Kit was also Senior Legal Counsel at the Monetary Authority of Singapore where she was involved in calibrating and drafting Singapore’s banking laws and regulations and the development of wealth management, financial intermediaries, and trust industry in Singapore.