A significant driver of the assets under management (AUM) here in Singapore in the past year or so can be attributed to a new structure: Variable Capital Companies (VCCs).
The VCC Act was implemented only last January but as of 1Q2021, some 250 VCCs have already been incorporated here. Despite the pandemic, some 300 VCCs could be set up by 3Q2021.
During an RHT Law webinar briefing back in July, Yang Eu Jin, partner at RHT Law, said during a “stocktake” in 3Q2020, some 100 VCCs had been established here. By 1Q2021, that number had more than doubled to 250. And by the end of 3Q2021, he assumes there could be as many as 300 VCC.
A VCC is a flexible and efficient fund structure for either traditional or alternative assets. They can be close-ended or open-ended. A VCC can be an umbrella entity, with various sub-funds within it. VCC structures are used by accredited investors (AI), institutions, multi-family offices and other types of institutional investors. They are not designed for retail investors.
Increasingly, investors are looking for jurisdictions where they can “onshore” their capital. “Most clients prefer a jurisdiction where capital is onshored and where they would like to reside. Most people like to spend time here [in Singapore],” notes Velverne Yuen, partner at Blauwpark Partners, at the RHT Law webinar. Blauwpark Partners is a family office.
There is a notable shift to onshore structures from offshore structures because clients prefer to have fund management capabilities where the family office is structured, Yeun adds. One of the requirements of a VCC is to have a local licensed fund manager sponsoring and managing the fund, which the Monetary Authority of Singapore (MAS) holds accountable for the VCC. This requirement is not present in other jurisdictions and is a comfort to investors in the event of adverse developments.
“The product is designed to be user friendly and flexible. The key features are the ability to distribute returns out of more than just accounting profits although offshore jurisdictions do this; and the ability to segregate the portfolio,” says Yang.
A VCC can comprise an umbrella portfolio with sub-funds within the umbrella where the sub-funds assets and liabilities are segregated and insulated from each other.
While VCC can stand on its own as an attractive product, tax incentives make it doubly attractive. Sections 13R and 13X of the Income Tax Act to include VCCs were announced in Budget 2018. These sections provide tax exemptions on specified income from designated investments derived by funds managed by a Singapore-based fund manager.
To recap, VCCs approved under the 13R Scheme or 13X Scheme will qualify for withholding tax exemptions on interest and other qualifying payments. 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 subfunds under the umbrella VCC.
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. Singapore has DTAs with around 90 other countries. Moreover, Singapore is not a tax haven.
Meanwhile, the Cayman Islands, British Virgin Islands, Isle of Man, Jersey and Guernsey are no longer part of the European Union following Brexit, hence losing the advantage of recognition as part of the EU.
Fund managers can re-domicile their funds to Singapore-based VCC with no minimum requirement for AUM. The key minimum requirement for re-domiciliation is that the fund seeking re-domiciliation is solvent and an MAS-licensed fund manager has to manage the fund. The re-domiciled entity can claim a credit for exit taxes paid to the exited jurisdiction, to encourage re-domiciliation in Singapore.
The VCC Act serves to position Singapore as a full-service Asian hub for fund management and domiciliation under the Industry Transformation Map (ITM) for Financial Services. The aim of VCC is to allow Singapore to capture a greater share of the fund management and fund domiciliation value chain. More funds being set up in Singapore would inevitably lead to more high-quality jobs. Setting up VCC requires lawyers and because fund sizes are likely to be at least $50 million and fund administrators are needed, as will be auditors and accountants.
If the average size of VCC is $50 million — the largest VCC has AUM of more than $500 million — then VCC AUM could be as high as $15 billion as at 3Q2021.
Observers expect VCC regulations to be tweaked in a so-called VCC 2.0. For instance, while assets and liabilities of sub-funds are segregated, the investors of sub-funds can view each other’s financial reports. This is likely to be changed. In addition to multi-family offices, single-family offices are likely to be able to structure VCCs.
All in, Singapore is not just an attractive place to work, live and play — it is also an attractive jurisdiction for VCCs.
