Singapore Funds Industry Anticipates Robust Growth Following Variable Capital Company (VCC) Implementation and its Incentives for Managers

Despite the global COVID-19 pandemic, the Singapore funds industry has experienced robust growth this year in large part due to the implementation of the Variable Capital Company (VCC) structure for managers and investors alike and its tremendous benefits. EisnerAmper sat down with Jimmy Leong, Chief Commercial Officer, Asia at IQ-EQ and Saw Meng Tee, Managing Partner, EisnerAmper Singapore, who shared their insights on the state of the industry.

Leong said Singapore has seen an influx of sizable fund launches across all alternative asset classes ranging from hedge funds, private equity, venture capital, private debt and real estate.

“Many of these funds are launching to take advantage of the market downturn and acquire assets at more attractive prices,” Leong noted. “In addition, we are seeing prominent U.S. and European real estate and private equity firms set up funds domiciled in Singapore due to demand from Asian investors.”

Leong further specified that due to the fundraising challenges posed by COVID-19 - which are delaying start-up or smaller fund launches - of the prominent fund launches in the city-state, sector-specific venture capital ones with a focus on health care, AI, technology and deep technology have been increasingly popular and achieved an edge among allocators. Meanwhile, in the hedge fund space, there has been an influx of credit strategies to capitalize on the market volatility.

The implementation of Singapore’s VCC structure and its numerous benefits is one of the main reasons that the city-state is seeing more launch activity. VCC structures, which became available to investors in January, are more operationally- and tax-efficient; exempting “designated investments” including shares, bonds and derivatives from taxes.  They are available to both traditional and alternative strategies, and open- and closed-end funds.

“Due to its tremendous benefits, while the majority of managers setting up VCCs are based in Singapore, we are also seeing a lot of foreign interest in Singapore as a funds domicile,” Leong said. “In addition, we have seen an uptick in queries from managers in the U.S. and Europe who work with large Asian investors. If these international managers have a Singapore office, they are considering a VCC to accommodate Pan-Asia investments.”

VCCs also provide fund managers greater operational flexibility and cost savings. “Managers will have greater flexibility in share issuance/redemption and the payment of dividends,” Meng Tee said. “Managers will also be able to incorporate multiple funds in a single VCC and achieve cost efficiencies.”  

VCCs can be set up as a single standalone fund or an umbrella fund with two or more sub-funds, each holding a portfolio of segregated assets and liabilities. For fund managers that structure their funds as umbrella VCCs, there may be cost efficiencies from using common service providers across the umbrella and its sub-funds.

“Fund managers may incorporate new VCCs or re-domicile their existing overseas investment funds with comparable structures by transferring their registration to Singapore as VCCs,” Meng Tee said. “They must maintain a register of shareholders, which need not be made public. However, this register must be disclosed to public authorities upon request for regulatory, supervisory, and law enforcement purposes.”

The VCC structure and its various benefits have strengthened Singapore’s position as the Asian gateway for funds. Leong noted that Singapore is part of the Association of Southeast Asia Nations (ASEAN) and the wider Asian region concurred the continent needs a center of influence for asset management. Currently, these regions are undertaking two initiatives to make this happen: the ASEAN Collective Investment Scheme (ASEAN CIS) among Singapore, Malaysia and Thailand; and the Asia Region Funds Passport (ARFP), which encompasses Australia, Japan, Korea, New Zealand, and Thailand.

“These initiatives will provide tremendous benefits to asset managers to treat the approved jurisdictions as a single market, making it much easier to market their funds cross-border,” Leong said.  “If a global manager sets up a VCC in Singapore, they will be able to market it to the other markets signed up to the ASEAN CIS and ARFP schemes without the need to separately register the fund in those jurisdictions.”

Finally, the VCC structure has tremendous tax incentives and there are key tax considerations, Meng Tee noted.   

“A VCC is not burdened by the same capital requirements of a typical Singapore company and further, has access to the Singapore’s more than 80 tax treaties,” he noted.

He further specified that an umbrella VCC would only need to file a single corporate income tax return (CIT) to the Inland Revenue Authority of Singapore (IRAS). Also, income from a VCC can be exempt from tax if it qualifies for the government’s Enhanced-Tier Fund (ETF) Scheme or Onshore Fund Tax Exemption Scheme (Onshore Scheme). He noted there are two criteria for this: 1) the VCC must have a minimum fund size of S$50 million (U.S. $36 million) for the ETF Scheme and/or the VCC can also apply for the Onshore Scheme if the AUM is less than S$50 million but there will be certain tax obligations for the investors; and 2) the VCC must have a business spend of S$200,000 (US$144,000) and the business spend must be local for approved fund.

“For funds that have U.S. investors, a key benefit of the VCC is its eligibility for the U.S. ‘check-the-box’ election, which allows a fund to be treated as transparent for the purposes of U.S. federal income tax.”

Simcha David, Tax Partner in EisnerAmper’s Financial Services Group based in New York, added: “If one sets up a VCC as an umbrella fund, it can work like a Cayman Segregated Portfolio Company (SPC) which would allow a U.S. entity to check-the-box on one portfolio and not on another if it chooses to do so for tax purposes.  As with a Cayman SPC, the U.S. would view each segregate portfolio as its own entity and disregard the umbrella entity.”