It used to be called the Open-End Investment Company ("OEIC"), before it was renamed as the Singapore Variable Capital Company ("S-VACC"). Now, it has been renamed again, as the Variable Capital Company ("VCC") (which we shall affectionately call "Vic" in this update).

The road thus far

Back in 2016, the Singapore government announced that a new flexible investment fund structure called OEIC will be introduced. On 23 March 2017, the Monetary Authority of Singapore ("MAS") issued a consultation paper to seek public feedback on the proposed framework and draft bill for the S-VACC. On 10 September 2018, MAS issued its response to the feedback received and a revised draft Bill for the VCC was presented for First Reading in Parliament on the same day.

Key features and benefits of the VCC

The VCC is an entirely new legal structure that provides an attractive alternative to existing fund or collective investment scheme ("CIS") structures, which are currently the corporate, limited partnership and unit trust structures.

The following are key features of a VCC:

(a) it is governed by a new piece of legislation called the Variable Capital Companies Act;

(b) it is regulated by the Accounting and Corporate Regulatory Authority (for establishment and administrative purposes) and MAS (for anti-money laundering and countering the financing of terrorism purposes);

(c) it must be used as a fund. The offering of shares in a VCC and all other aspects concerning the VCC as a fund will be governed by the Securities and Futures Act;

(d) it can be used as a traditional fund or alternative fund;

(e) it can be used as a retail fund (for retail investors), or restricted fund (for restricted class of investors like accredited investors);

(f) it can be used as a standalone fund, or an umbrella entity with multiple sub-funds with segregated assets and liabilities;

(g) it is able to redeem shares and pay dividends using its net assets. This allows a VCC to be flexible in distributions and return of capital (in contrast with a corporate fund);

(h) it must appoint a fund management company ("FMC") that is licensed or registered by MAS, or is an exempt financial institution in Singapore;

(i) it must have sufficient mandatory Singapore substance (ie A Singapore registered office, a Singapore resident company secretary and auditor, and at least one resident director);

(j) it must have minimum regulatory compliance, ie:

  1. at least one director must be a director or registered representative of the FMC;
  2. all directors must be fit and proper persons; and
  3. compliance with anti-money laundering and countering the financing of terrorism requirements;

(k) retail investors must meet additional requirements, ie:

  1. there must be at least three directors, including at least one independent director;
  2. a prospectus for the offer of the VCC must be filed with MAS prior to the offer of shares in the VCC;
  3. the VCC must be authorised by MAS; and
  4. an approved trustee must be appointed as the custodian of the VCC assets;

(l) it can dispense with the holding of annual general meetings of its shareholders, subject to certain conditions;

(m) it does not need to disclose its register of shareholders to the public;

(n) a foreign corporate fund (eg a Cayman Segregated Portfolio Company or a BVI Protected Cell Company) that is similar to the VCC can be converted or re-domiciled into a VCC, subject to certain inward re-domiciliation conditions; and

(o) it will be able to enjoy tax incentives available to funds, subject to certain conditions.

The Ministry of Finance announced in the 2018 Singapore Budget Statement, that a VCC will be treated as a company and a single entity for the purposes of tax. In addition, tax incentives applicable to funds under sections 13R and 13X of the Income Tax Act will be extended to VCCs. The Financial Sector Incentive for fund management and GST remission for funds will also be applicable to VCCs, provided that all applicable incentive conditions are met.

Key refinements or clarifications by MAS in its response to feedback received

After reviewing the feedback received, following its consultation, MAS made various key refinements and clarifications. These include:

(a) VCCs can only be used as a fund, but MAS has indicated that it may consider allowing VCCs for other usages in future;

(b) VCCs cannot be used as an investment vehicle of a single family office, but MAS has indicated that it may revisit this in future;

(c) Singapore funds cannot be converted into a VCC, but MAS has indicated that it may revisit this in future;

(d) VCCs must have a minimum of one shareholder, instead of two shareholders;

(e) VCCs can have open ended and closed ended sub-funds within the same VCC umbrella unit. However, we believe that there will be practical challenges and hazards and this should be avoided;

(f) when VCCs offered to retail investors, invests in assets situated in foreign jurisdictions, the VCC (through the FMC) must ensure that there are sufficient safeguards to protect the segregation of assets and liabilities. This may require proper legal advice, structuring and possible legal due diligence and foreign legal opinions;

(g) VCCs offered to restricted investors (like accredited investors), can adopt various prescribed internationally accepted accounting standards like US GAAP, ASC Standard or IFRS;

(h) VCCs' obligations on anti-money laundering and countering the financing of terrorism can be outsourced to its FMC or a regulated financial institution;

(i) VCCs offered to retail investors must appoint a custodian that is an approved trustee in Singapore, instead of an approved custodian in Singapore. Approved trustees in Singapore are institutional trust companies regulated by MAS. VCCs offered to restricted investors (like accredited investors), will not need to comply with this requirement; and

(j) foreign corporate funds that are structured similarly to a VCC can convert to or re-domicile as a VCC without complying with the "small company" requirements under the Companies Act.

How the VCC differs from other open ended funds domiciled in tax havens

There is debate on whether the VCC is different from other open ended fund structures typically domiciled in tax havens. In our view, the key features of the VCC and those of existing open ended fund structures in tax havens are not substantially different. The main differences lie in:

  1. the substantive legal and regulatory requirements imposed on the VCC; and
  2. the benefit of using a genuine leading international financial centre with more than 80 double tax treaties ("DTAs").

The substance and governance requirements inherently require the VCC and the fund management team to be anchored in Singapore and fully compliant with international best practices, governance and regulations on anti-money laundering and countering the financing of terrorism as administered by MAS. This is precisely why we have observed a growing trend of genuine and large investors, especially large fund-of-funds, institutional investors and investment advisers, sovereign wealth funds, state owned enterprises and large family offices making the obvious choice of Singapore as a structuring venue, investment fund and asset/wealth management jurisdiction. The DTAs are also especially useful when the investment funds invest in private equities, venture capital, and infrastructure and property portfolios situated in countries that have existing DTAs with Singapore.

The next steps

A VCC can be used by fund managers and multi-family offices launching traditional or alternative funds, and venture capital fund managers. It can also be used by fund managers that wish to offer a retail VCC as an additional product in their stable of retail unit trust funds. Wealth managers and multi-family offices managing multiple managed accounts of their high net-worth clients can consolidate multiple investment accounts with similar investment strategies into a VCC and enjoy economies of scale and lighten their administrative burden.

We now await the next milestones for the development of the VCC. It is expected that the government will clarify the tax treatment for VCCs in the coming weeks. Next, we should have the second and third reading of the VCC Bill in Parliament. We expect this Bill to garner little or no debate, as compared to more contentious Bills or legislative amendments. This process could still take weeks to months. Once the VCC Bill is passed, the new VCC Act must be assented and a commencement date will be set for the new law to become operational.

Practically, we anticipate a significant take up rate for the VCC, both for traditional and alternative fund strategies. We expect a shift from conventional retail unit trust structures to the new retail VCC, and a shift from conventional tax haven segregated portfolio company fund and protected cell company fund structures to private VCC funds in Singapore.

Vic is coming to town and he will be shaking things up.

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