Announced on 23 March 2017, the Singapore Variable Capital Company (S-VACC) is a new type of legal entity that can be used to structure investment funds in Singapore. This new entity takes the form of a corporation, but is exempt from certain restrictions which made corporations less efficient as vehicles for funds.
As of 2015, Singapore had S$2.6 trillion assets under management, with over 82 percent originating outside Singapore. It is also the largest center for funds denominated in renminbi (Chinese yuan). However, while the funds are managed in Singapore, a significant percentage of the fund entities are located offshore. One of the reasons for this is that the current legal framework does not provide a corporate vehicle with the flexibility found in certain other jurisdictions, including the Cayman Islands, Luxembourg and Ireland. The S-VACC is Singapore's answer to the entities available in said other jurisdictions.
Through the S-VACC, Singapore hopes to attract global asset managers to not only manage their Asian funds in Singapore, but to also set up their Asian fund entities in Singapore. This new entity takes the form of a corporation, but is exempt from certain restrictions which made corporate vehicles less efficient as vehicles for funds. The S-VACC is set to be implemented by the end of 2018 through an “S-VACC Act,” and may be used for both open- and closed-end funds. This article will set out the salient features of the S-VACC and what is impact on Singapore will be.
Features of an S-VACC
Issuance of Shares
S-VACCs may issue shares of varying amounts and may accept new members without having all shares fully paid up. The liability of members of the S-VACC will be limited to the amount unpaid on the shares they hold. S-VACCs may also issue debentures, bonds or other securities, which may be listed on a stock exchange.
Even though an S-VACC is a corporate entity, the process by which shares can be redeemed, capital reduced and dividends paid is markedly different from regular companies. To begin with, an S-VACC’s share capital is the same as its net asset value (NAV). Furthermore, unlike a traditional company, an S-VACC will be able to freely redeem shares and pay dividends using its capital, whereas traditional companies may only pay dividends out of their profits.
S-VACCs are free to redeem shares, but all valuations must be based on the NAV. An exception to this is where a closed-end fund is listed on a stock exchange, in which case the valuation will be based on the listing rules of the relevant exchange.
Use as an Umbrella Entity
A major benefit of the S-VACC vehicle is the ability to set up various subfunds without the need to incorporate special-purpose vehicles (SPVs) for each subfund. This means that the S-VACC and its subfunds will be treated as a single corporate entity, but the assets and liabilities of each subfund will remain segregated, even in insolvency. This makes an S-VACC a more efficient entity for holding various funds.
S-VACCs will not have to disclose their register of shareholders to the public. Instead, they must maintain their shareholder register at their registered offices in Singapore, and make the register available to supervising authorities (such as ACRA and the MAS) and law enforcement agencies. S-VACCs will need to maintain information on beneficial owners of its shares, and nominee directors will continue to be obliged to disclose their status as nominees and the identity of their nominator to the S-VACC.
Fund Manager and Approved Custodian
An S-VACC will require a licensed or regulated fund management company that is based in Singapore, unless the S-VACC falls under an exemption. Currently, only financial institutions are exempt from this requirement. Other funds which may be currently exempted from having a licensed and regulated fund manager (such as a real estate fund or a self-managed fund), cannot use the S-VACC vehicle.
S-VACCs which fall under an authorized or restricted scheme and are not otherwise exempted require the appointment of an approved custodian, who will have a duty to safeguard the assets of the S-VACC and the rights and interests of its shareholders. In addition, authorized funds will require that the approved custodian be independent of the fund manager.
Board of Directors
S-VACCs will be governed by a board of directors. There are three main requirements for the composition of this board. First, it must have a minimum of one director who is ordinarily resident in Singapore, who may also be a sole shareholder of the company. Second, it must have at least one director who is also a director of the fund management company.
If the fund falls under an authorized scheme, it will be required to have at least three directors, at least one of which is independent of the S-VACC’s business relationships, the fund manager and all substantial shareholders of the S-VACC.
Anti-Money Laundering and Combating the Financing of Terrorism
The S-VACC will be subject to Singapore’s anti-money laundering and combating the financing of terrorism requirements (AML/CFT). The fund manager will be responsible for the performance of AML/CFT duties, but ultimately the S-VACC itself will be responsible for compliance with these requirements. The S-VACC will be monitored by the Monetary Authority of Singapore in order to ensure compliance with the AML/CFT requirements.
On 19 February 2018, the Singapore Ministry of Finance announced the tax framework which would apply to S-VACCs. Under this framework, S-VACCs will be treated as a company and a single entity for tax purposes. Furthermore, certain tax exemption rules available to funds under the Singapore Income Tax Act (ITA) will be applicable to S-VACCs.
Furthermore, under the Financial Sector Incentive-Fund Management Award (FSI-FM), approved fund managers managing an incentivized S-VACC will be eligible for a 10 percent concessionary tax rate.
Impact on Singapore
The creation of the S-VACC vehicle aims to promote Singapore as a domicile for investment funds in the region. Through the features described in this article, the S-VACC is designed to compete with similar existing structures in place in other hubs, like the segregated portfolio company in the Cayman Islands, for the domiciling of investment funds. Together with access to Singapore's wide network of tax treaties, particularly in Asia, the introduction of the S-VACC hopes to assist in Singapore's development not only as a centre for fund management activities, but also as a centre for investment fund domiciliation.