Singapore has recently seen the introduction of a new corporate structure – Variable Capital Companies (VCCs). VCCs offer added flexibility, greater cost efficiency and an overall more streamlined approach to business operations, making them an attractive proposition for businesses ranging from start-ups to multinational corporations. This Q&A will explore what makes VCCs so appealing and examine how they provide several avenues for investors looking to set up in Singapore or grow their existing portfolio. It will also look at the different tiers available as well as other features and benefits associated with this innovative corporate structure.
Conventus Law: What should our readers be aware of when setting up a VCC in Singapore?
Yang Eu Jin: Readers should be aware of the following:
Firstly, setting up a VCC requires a fund manager. There have been suggestions that this requirement be removed for family offices, but no confirmation has been provided by the authorities on whether this suggestion will be implemented. The fund manager must either be a (a) licensed fund management company or (b) a registered fund management company.
Secondly, there are two types of VCCs, a standalone VCC or an umbrella VCC. A standalone VCC has no sub-funds and only consists of the VCC entity, while an umbrella VCC has sub-funds.
Thirdly, a VCC can be either closed-ended or open-ended. An open-ended VCC allows investors to redeem their investments at their discretion, while a closed-end VCC does not permit investors to do so.
Fourthly, VCCs generally operate as collective investment schemes (CIS) and will be treated as such by the Monetary Authority of Singapore (MAS). A VCC consisting of a CIS that is offered to the public (Authorised Schemes) must have at least 3 directors, including 1 independent director. VCCs that consist of Restricted or Exempted CISs only require a minimum of 1 director.
Finally, to incentivise the setting up of VCCs, MAS had introduced the VCC Grant Scheme, effective 16 January 2020, under which MAS would co-finance up to 70% of qualified expenditures paid to Singapore-based service providers up to a cap of S$150,000. The VCC Grant Scheme expired on 15 January 2023 and there has been no indication that it will be extended beyond this date.
“Instead of structuring and establishing another fund for each investment strategy, using a VCC, a fund manager is able to create sub-fund(s) with different investment strategies, assets, and investors by simply registering the sub-fund with ACRA. If the VCC’s constitution permits, the directors may even create new sub-funds without the consent of its members, which further reduces the administrative and procedural requirements.”
Yang, Eu Jin Partner and Co-Head, Corporate and Capital Markets Practice, RHTLaw Asia
What are the key uses and benefits of Singapore’s Variable Capital Companies?
Key uses/benefits of a VCC:
Members of a VCC have the right to receive dividends and distributions if the VCC generates income from its assets and/or investments. It is possible for a VCC to make distributions based not just on its profits but also out of its capital (without the need for shareholder approval). In addition, there are no obligations relating to capital maintenance for VCCs.
Members of a VCC also have the ability to redeem their shares in the VCC without the requirement for approval from shareholders. VCCs are required to ensure that their paid-up capital is equal to their net asset value (NAV) at all times, with the exception of certain circumstances specified in the VCC Act.
Classes of Shares
VCCs have the ability to issue different kinds of shares, the two most common being Management Shares and Participating Shares. Management Shares typically come with voting rights as well as, if so provided in the VCC’s constitution, the right to receive payments and dividends. Participating Shares are the means through which investors invest in the VCC or sub-funds of the VCC, and they carry with them the right to receive payments and dividends. Participating Shares do not typically come with voting rights. However this might change under certain circumstances (such as when the rights of the holders of Participating Shares are being varied).
In general, the VCC’s constitution is required to lay out all of the rights that are granted to shareholders. Although a copy of the constitution needs to be submitted to the Accounting and Corporate Regulatory Authority (“ACRA”), unlike an ordinary company, the document will not be made public, in order to maintain confidentiality of its terms. Similarly, although VCCs are obliged to record member registrations, again unlike ordinary companies, the register of members of a VCC does not need to be made public. The foregoing also applies to the financial statements of the VCC.
The financial statements of a VCC can be prepared following any number of different accounting standards, such as US GAAP, Singapore Financial Reporting Standards, or International Financial Reporting Standards.
In order to protect investors, the Variable Capital Companies Act 2018 (VCC Act) mandates that the assets and liabilities of each sub-fund must be kept separate from those of all other sub-funds of the VCC. This is because the assets of one sub-fund cannot be used to pay off the debts of another sub-fund and this protects each individual sub-fund from the financial obligations of the other sub-funds. In addition, with respect to liquidation or winding up, each sub-fund will have its own autonomous winding up process.
Economies of Scale
Umbrella VCCs and sub-funds are treated as a single entity in terms of legal personality. Therefore, the board of directors, service providers, and professional services may be the same for all the sub-funds. This should result in cost savings as well as increased economies of scale.
It is possible for already established funds that are domiciled in other countries and have structures that are analogous to those of the VCC to be re-domiciled in Singapore as VCCs. The application for inward re-domiciliation can be submitted to the ACRA. In order to successfully complete the re-domiciliation procedure, the foreign jurisdiction’s requirements for outward re-domiciliation must first be fulfilled.
is taken into account by the SGX which has stipulated in the SPAC framework that there is no need for an independent valuation of the target when a PIPE investment has been conducted.
“ (…) With respect to fund managers, there are some tax savings that they can avail themselves of under the Financial Sector Initiative—Fund Management Award (“FSI-FM Award”). Under the FSI-FM Award, fee income derived by a Singapore fund manager from managing or advising a qualifying fund is taxed at a concessionary tax rate of 10% instead of the prevailing corporate income tax rate of 17%, subject to certain conditions.”
Yang, Eu Jin Partner and Co-Head, Corporate and Capital Markets Practice, RHTLaw Asia
How do Singapore VCCs provide flexibility and savings?
As mentioned above, for an umbrella VCC the master fund vehicle and its sub-funds are regarded as one legal entity. As a consequence, the VCC entity is able to use the same set of board directors, service providers, and professional services across the sub-fund(s), which will likely lower costs and promote economies of scale.
From the standpoint of an investment fund, one of the key advantages of a VCC is that members may simply redeem their shares in order to realize their investments without having to comply with capital maintenance requirements typical of corporations or require separate shareholder approval. Under the VCC Act, shares of a VCC are to be issued, redeemed, or repurchased at a price equal to the VCC’s NAV per share, subject to adjustments for any fees and charges specified in its constitution. VCCs are able to pay distributions out of capital in addition to profits, unlike companies that can only do so out of profits. These are crucial characteristics for investment funds since they need to be able to pay out regular returns to their investors and have the flexibility to allow their investors to cash out.
VCCs also give fund managers the option to pursue alternative strategies and divide assets across different pools of investors while keeping a single legal organisation, thereby lowering expenses through their umbrella-sub fund structure.
Instead of structuring and establishing another fund for each investment strategy, using a VCC, a fund manager is able to create sub-fund(s) with different investment strategies, assets, and investors by simply registering the sub-fund with ACRA. If the VCC’s constitution permits, the directors may even create new sub-funds without the consent of its members, which further reduces the administrative and procedural requirements.
How do VCCs differ from the existing suite of investment fund structures available in Singapore, and in which way do they complement them?
Previously, the location where a fund is established or incorporated (i.e., its domicile) and the location where it was administered often did not coincide. Many of the funds managed out of Singapore had foreign domiciles. This discrepancy is due, in part, to the limited range of corporate structures in Singapore especially as investment fund vehicles (eg. private limited companies, limited partnerships, and unit trusts).
As a result, fund managers opted to create funds using fund structures in other countries while having the funds managed here. The VCC was designed to plug this gap, by being a fund structure that does not have the restrictions of earlier corporate structures. This broadened the selection of available investment vehicles, offering investors additional investment choices.
Can you tell us more about the different VCC Schemes?
Tax exemption schemes
For funds administered by fund managers in Singapore, there are two primary tax exemption programs available under which “Specified Income” (including profits) earned by the fund from “Designated Investments” is free from tax. As long as the funds continue to satisfy the necessary requirements of each scheme, funds that are eligible for one of the tax exemption schemes (further described below) may benefit from the tax exemption throughout the duration of the fund.
With respect to fund managers, there are some tax savings that they can avail themselves of under the Financial Sector Initiative—Fund Management Award (“FSI-FM Award”). Under the FSI-FM Award, fee income derived by a Singapore fund manager from managing or advising a qualifying fund is taxed at a concessionary tax rate of 10% instead of the prevailing corporate income tax rate of 17%, subject to certain conditions.
“ (…) Acceptance of the structure is anticipated to gain pace and VCCs may well be included in international fund structures more frequently as a result. For instance, in a master-feeder structure, the VCC could be the master structure with eg. Cayman SPCs (traditionally one of most popular and preferred offshore fund structures) being the feeders or vice-versa. The increased adoption of VCCs on a global stage may make VCCs as ubiquitous as the Cayman SPC or the BVI company, and this would further promote Singapore as a leading Asian hub for wealth managers, investment managers, and asset owners.”
Yang, Eu Jin Partner and Co-Head, Corporate and Capital Markets Practice, RHTLaw Asia
How are VCCs in Singapore an alternative to other jurisdictions such as Cayman Islands and British Virgin Islands which were typically favoured as fund investment hubs?
Each fund vehicle may have its own distinctive attributes. The type of fund structure being adopted is often driven by three main concerns: (a) tax optimisation, (b) where the investors are from, and (c) cost efficiency. Fund managers must take these into consideration before deciding which structure to adopt. Hence VCCs should not be evaluated by themselves in a vacuum and should be analysed together with factors such as Singapore’s tax framework, regulatory requirements, ease of doing business, and reputation. Given Singapore’s reputation as a financial hub, skilled workforce, impartial and transparent laws, amongst other factors, it is quickly becoming a leading domicile for funds. It is heartening to note that from 2020 to 2022, more than 400 VCCs and 550 sub-funds have been registered.
What role do VCCs play in Singapore’s strategy to position the jurisdiction as a leading Asian hub for wealth managers, investment managers and asset owners?
As mentioned above, the role of VCCs should be taken together with the other “pull” factors that are part of Singapore’s strategy to position itself as a leading Asian hub for wealth managers, investment managers, and asset owners.
So far many of the new VCCs have been set up by small fund managers based in Southeast Asia, with assets likewise situated here. However as the VCC gains more traction in the market, more established asset managers may be starting to show increasing interest in it. Acceptance of the structure is anticipated to gain pace and VCCs may well be included in international fund structures more frequently as a result. For instance, in a master-feeder structure, the VCC could be the master structure with eg. Cayman SPCs (traditionally one of most popular and preferred offshore fund structures) being the feeders or vice-versa. The increased adoption of VCCs on a global stage may make VCCs as ubiquitous as the Cayman SPC or the BVI company, and this would further promote Singapore as a leading Asian hub for wealth managers, investment managers, and asset owners.
Can you tell us more about the 13O, 13U application and the recent changes affecting Family Offices (FO)?
13O Scheme (formerly 13R) and 13U Scheme (formerly 13X)
With respect to the Section 13O Tax Incentive Scheme (“13O Scheme“), the revised requirements stipulate a minimum fund size of S$10 million at the time of application for the 13O Scheme, as well as a commitment to grow the fund’s AUM to S$20 million within a two-year period. There was no AUM requirement under the preceding scheme.
By contrast, the minimum fund size for the Section 13U Tax Incentive Scheme (“13U Scheme”) remains at S$50 million. The point of reference to determine the AUM of the fund is at the time of application for the 13U Scheme (the 13O Scheme and 13U Scheme shall be hereinafter collectively referred to as “Schemes“, and each a “Scheme“).
Minimum Number of Investment Professionals
For a 13O Scheme, the fund must be managed or provided with advisory services by a FO in Singapore throughout each year, and the FO must employ at least two (2) Investment Professionals. An Investment Professional includes, without limitation, (i) research analysts, (ii) traders, (iii) portfolio managers, and they must be engaging substantially in the relevant qualifying activity.
Note: The fund is given a one-year grace period to employ a second Investment Professional if the FO is unable to hire two (2) Investment Professionals at the time of application.
With respect to the 13U Scheme, the fund must be managed or advised directly throughout the year by a FO in Singapore, with at least three (3) Investment Professionals on staff.
Furthermore, at least one (1) of the three (3) Investment Professionals must not be a member of the beneficial owner’s family. Similar to what has been set out above, the fund is offered a one-year grace period to hire one (1) non-family member as an Investment Professional, if at the time of application the FO is unable to hire one non-family member as an Investment Professional.
Note: All Investment Professionals must be Singapore tax residents.
To qualify for the Schemes, the FO must now invest at least 10% of its AUM or S$10 million in local investments at any one time, whichever is the lesser.
Local investments may include the following: (i) Equities listed on Singapore-licensed exchanges, (ii) Debt securities that meet the qualifying criteria, (iii) Funds distributed by licensed/registered fund managers in Singapore, or (iv) Private equity investments into Singapore companies (must be incorporated in Singapore with its operations in Singapore)
This means for the 13O Scheme, a fund must invest at least S$1 million in local assets at the time of application, and at least S$2 million in local investments after the two-year grace period expires.
It is also worth noting that the local investment criterion must be satisfied at any given moment. This means that if the fund’s AUM rises in the future, the FO will have to expand its local investments to meet this requirement, up to $10 million.
What should FOs prepare for in the near future?
Arising from what was described above, FOs should prepare for increase in (i) local investments, (ii) minimum AUM (for 13O Scheme), and (iii) increased employment obligations resulting from the hiring of Investment Professionals.
To manage the enhanced requirements, FOs may need to become more professionally-run and engage more professionals on a full-time basis, as well as make investments in technology, risk management, and governance processes.
Secondly, given the requirement for local investments and higher AUMs, family offices may become more interested in exploring private deals in Singapore, including private equity and private debt deals, investing in Series B and further rounds of start-up or growth companies, right up to pre-initial public offering (IPO) funding rounds.