Out-Law News | 02 Sep 2020 | 10:52 am | 2 min. read
Variable capital companies (VCCs) and its sub-funds will need to be controlled and managed from within Singapore to benefit from the city state's low tax regime, according to new guidance issued by the Inland Revenue Authority of Singapore (IRAS).
Legislation was introduced in 2018 to provide for VCCs in Singapore, and it is underpinned by a regulatory framework overseen by the Monetary Authority of Singapore (MAS). VCCs are a corporate structure that support the management of investment funds either as standalone structures or under an 'umbrella' structure where the multiple sub-funds' assets and liabilities are segregated and ring-fenced.
VCCs allow high-net worth individuals (HNWIs) to consolidate and manage multiple classes of assets under a single VCC, with each sub-fund having the freedom to set its own investment strategy, risk appetite, shareholder rights and dividends policy. Corporate management and compliance can also be consolidated: only one set of board members has to be appointed in respect of all sub-funds; and only one set of tax returns prepared.
In its new e-tax guide on the tax framework for VCCs, the IRAS set out the tax considerations applicable at different stages of the life cycle of a VCC, including potential liabilities for income tax, goods and services tax and stamp duty in the case of property investments.
In the context of income tax, the IRAS explained that the VCCs will be treated as being "resident in Singapore" only where the funds under the structure are controlled and managed in Singapore.
"A VCC is considered a tax resident in Singapore for a calendar year if the control and management of the VCC’s business is exercised in Singapore for that year," the IRAS said in its guide. "In determining where the control and management is exercised, the location where the board of directors of the VCC meet to make strategic decisions is often a key factor. The tax residence of a sub-fund follows that of its umbrella VCC. This means that a sub-fund is a resident in Singapore if its umbrella VCC is a resident in Singapore. Conversely, a sub-fund is a non-resident if its umbrella VCC is a non-resident."
The IRAS explained that VCCs can apply for a certificate of residence in Singapore. This has potential advantages for VCCs as Singapore has more than 80 double tax agreements (DTAs) with other jurisdictions, meaning VCCs certified as resident in Singapore can avoid being taxed on their income in those other jurisdictions.
Private wealth expert Valerie Wu of Pinsent Masons MPillay, the Singapore joint law venture between MPillay and Pinsent Masons, the law firm behind Out-Law, said: "In the context of onshoring and consolidation in view of the need for economic substance, the VCC is the perfect vehicle for housing investments – its design facilitates the creation of economic substance which, in turn, enables access to Singapore’s 80-plus DTAs and tax incentives."
"The VCC’s cellular structure is also important – it enables consolidation of multiple asset classes while ensuring segregation of risk, investment strategy, dividend policy and shareholder right," she said.
20 Jan 2020
17 Sep 2019