The VCC has been designed to overcome the limitations or inflexibilities of the investment vehicles traditionally available in Singapore. It will be particularly appropriate for housing investments, and for families of high-net worth individuals (HNWIs) seeking to consolidate, on-shore or re-position their asset holding structures.
The Variable Capital Companies Act was enacted in October 2018. The full VCC framework is expected to come into force later in 2019, and we expect to see a large take-up in the structure once available.
Flexibility of VCCs
Singapore's wealth and asset management industry has experienced a boom in recent years, with assets under management expanding at 15% per annum over the past five years to reach $2.4 trillion in 2017.
Traditionally, private wealth solutions in Singapore typically involved the setting up of structures involving trusts, companies, limited partnerships and/or offshore fund vehicles. There are a number of features which make a VCC a more flexible choice of investment vehicle than these more traditional structures.
A VCC may be established as a standalone structure, or as an 'umbrella' structure with multiple sub-funds whose assets and liabilities are segregated and ring-fenced. Each sub-fund will be able to set its own investment strategy, risk appetite, shareholder rights and dividends policy, different to other sub-funds under the VCC.
This will allow high-net worth individuals (HNWIs) to consolidate and manage multiple classes of assets under a single VCC. Corporate management and compliance can also be consolidated: only one set of board members will have to be appointed in respect of all sub-funds; and only one set of tax returns prepared.
As the name suggests, the capital structure of a VCC can be varied without cumbersome procedures. The VCC can freely issue and redeem shares out of its capital, provided that the capital of the VCC is always equal to its net asset value. This can be contrasted with the traditional private limited company, where changes to capital are contingent on shareholder approval. The result is that investors can redeem, receive distribution of or otherwise participate in the investments held under a VCC with greater flexibility than with previous options.
Substance, treaty access and tax incentives
A VCC has other benefits over a traditional offshore structure: economic substance; access to Singapore's 80-plus double tax agreements (DTAs) with other jurisdictions; and tax incentive schemes.
A VCC is required to engage a Singapore-licensed or regulated fund manager. This effectively means that key activities related to every VCC will be performed in Singapore, helping to establish economic substance in Singapore.
Engaging a Singapore-based fund manager also fulfils one of the main conditions of access to Singapore's fund management tax incentives. If the VCC qualifies, these will exempt its income from tax on a broad range of financial assets. The presence of economic substance in Singapore through the Singapore fund manager, coupled with proper planning at the VCC level, can bring the structure within the ambit of Singapore's DTAs.
The Monetary Authority of Singapore (MAS) has indicated that it will look into expanding the scope of permissible fund managers, and widening the scope of use of the VCC in general, in subsequent reviews.