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Singapore variable capital company at a glance
THE recent introduction of the Singapore Variable Capital Company (VCC) is intended to further enhance Singapore’s appeal as an international fund management hub. It expands Singapore’s suite of domestic vehicles and brings it into closer alignment with competitor jurisdictions.
Simplistically, a VCC is a body corporate with two main defining features. The first is the ability to establish segregated cells, while the second is the concept of variable capital.
A cell is a notional segregation of assets and liabilities within the same entity. This segregation is established by way of statutory provisions which protect against liabilities crystallising in one cell from being recoverable against the assets held in a different cell. If a cell represents a particular investment strategy, then investors in that cell do not need to be concerned about the performance or solvency of another cell.
While cellular companies are well-known within the financial services industry, what is less well-established is the robustness of this internal segregation from a foreign insolvency perspective. This is a standing question and one that is not unique to the VCC.
The other defining feature of the VCC is the concept of variable capital. Under existing Singapore corporate law, it is only possible for a company limited by shares to pay dividends out of profits. Buying back shares or otherwise returning capital to shareholders is not always straightforward. These complexities do not arise for a VCC. Shareholder capital is taken to align with net asset value and it is at this price which a VCC can redeem or buyback shares. Creditors are indirectly protected in this process as the computation of net asset value should take account the liabilities represented by creditor claims.
Somewhat uniquely, the VCC is currently only available for use as a fund vehicle. This is evidenced by some of the most basic requirements. A VCC must be a collective investment scheme and there is a need to appoint a Singapore fund manager and in some cases a custodian as well. The VCC is therefore not available for use within the insurance industry which was one of the earliest adopters of cellular companies.
The taxation of investment funds is a critical structuring concern and it is from this perspective that the VCC is a particularly timely addition to the local landscape. Fund managers and their tax advisers are driven by a few key considerations when structuring a fund. They ideally want access to a wide network of double tax treaties – these can reduce the imposition of foreign taxes on the income and gains of a fund. They also want to use a structure which can operate as an efficient and tax neutral platform for the pooling of investor capital.
In terms of the first consideration, Singapore has an expansive network of over 80 double tax treaties. Asserting benefits under these treaties requires a level of economic substance which is consistent with genuine economic activities being undertaken here. Quite rightly, the Inland Revenue Authority of Singapore has protected the integrity of Singapore’s double tax treaty network by requiring evidence of economic substance before granting a certificate of residence (which is often requested by a foreign tax authority).
The global tax paradigm is increasingly focused on economic substance as part of a broader debate about inappropriate tax treaty claims. In a fund management context, the question of substance is mostly addressed by looking at the activities of the fund manager in addition to the internal governance of the fund entity itself.
One of the basic requirements of a VCC is that a Singapore manager must be appointed. To operate as a registered or licensed fund manager in Singapore, or to come under one of the limited exceptions which may be relied upon by a VCC manager, is itself a substantive undertaking. This fundamental requirement of a VCC buttresses its ability to assert tax treaty benefits.
A related consideration when it comes to tax treaty access by investment funds is the existence of layers within a structure. It is still not uncommon to see companies which may be sufficiently resident of a tax treaty country being held by a master pooling vehicle in a tax haven jurisdiction.
The ultimate pooling vehicle operates as the master fund and the subsidiary is often referred to as a sub-fund. In such structures, there is a real risk that a foreign tax authority may deny treaty benefits to a sub-fund on the basis that it is a mere pass-through. An ideal solution – but one that is not always available – is to compress a structure into a single vehicle which both directly receives and deploys investor capital. This type of structuring is of course possible with the VCC given its suitability as a collective vehicle in its own right.
The last part of structuring for investment funds is reducing the taxation of income as it is derived by a fund and upstreamed to investors. The Monetary Authority of Singapore has now confirmed the way in which Singapore’s existing fund incentives will apply to VCCs. With some limited exceptions, a VCC that is invested into traditional financial assets should not pay Singapore tax on its investment income and gains.
It will also be interesting to see how the VCC is received by the international fund management community. Realistically, it may take a while for international players to embrace this as an alternative to established structures which are based on Cayman limited partnerships or Luxembourg or Ireland entities which are favoured by European managers. There will always be a fundamental concern around investor familiarity, and the potential downsides of presenting a new vehicle during a fund-raise are self-evident.
That said, the VCC is a very positive development for the local ecosystem. It plays to Singapore’s strong reputation as a financial services and dispute resolution hub, and as a key member of regional initiatives which are designed to simplify and harmonise the process for fund distribution. W