This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.
Summary and implications
Singapore is on the verge of introducing the S-VACC, a one-size-fits-all fund regime that may finally create a practical domestic structuring option for Singapore funds. Here we discuss the context and characteristics of the new vehicle, before pointing to a couple of potential hurdles on its path to success.
Time to walk the talk
Singapore has long been touted (and has fervently touted itself) as a global asset management centre to rival London, New York and Hong Kong. The city state's claims are by no means without merit of course; the Monetary Authority of Singapore's (MAS) most recent asset management survey reporting that Singapore managers' AUM increased by 9% in 2015 to reach a high of S$2.6 trillion (US$1.9 trillion) by the end of the year.
Whilst impressive, these figures hide the fact that whilst the managers may be based in Singapore, the funds they manage are generally not, with a significant proportion of Singapore's AUM held in funds set up in Luxembourg, the Cayman Islands and other well-established fund domiciles.
It is easy to see why: for years Singapore's Big Talk in funds and asset management has not been backed up by a flexible, fund-specific corporate vehicle. Instead, Singapore-domiciled funds have been forced to shoehorn themselves into generic vehicles such as unit trusts and private limited companies that are ill-suited to sophisticated 21st century fund products.
The Singapore Variable Capital Company (or “S-VACC”) sets out to change all that.
A genuine funds multi-tool
The S-VACC promises to be all things to (almost) all people: a new funds-specific vehicle to be established under standalone legislation that will:
- work for both open and closed-ended funds; - accommodate umbrella funds, including on a segregated liability basis;
- offer flexible distributions and capital reduction, in both cases by reference to an NAV-based share capital;
- allow foreign funds to re-domicile in Singapore; and
- have access to Singapore's network of more than 80 tax treaties.
- More details of the S-VACC regime are set out in this summary table [click here].
However, before we celebrate a legislative slam dunk for the Singapore funds industry, there remain a couple of issues to be ironed out.
Might real asset funds miss out?
Firstly, under the draft S-VACC bill, an S-VACC will have to have a Singapore-based fund management company that is licensed or regulated by MAS (or exempt from licensing or regulation under section 99(1)(a),(b),(c) or (d) of the Securities and Futures Act (SFA)). This is in itself an understandable requirement – fund managers are generally regulated. However, it is a quirk of Singapore’s funds legislation that managers of funds investing in “immovable assets” (i.e. real estate and infrastructure) are not required to be licensed or registered by MAS. In light of this, as the legislation is currently drafted, the S-VACC will not be available to real asset fund managers in Singapore, unless the fund manager in question is licensed for other fund management activities. This is likely to dissuade many new entrants to the Singapore real assets market who may not operate a multi-sector strategy.
O tax exemptions, where art thou?
Secondly, it is not yet clear whether the various tax incentives currently available to certain types of investment funds in Singapore will be extended to the S-VACC. The growth of Singapore as a fund management centre can be attributed in no small part to the favourable tax regime and in particular schemes such as the Onshore Fund Tax Exemption Scheme and the Enhanced Tier Fund Tax Exemption Scheme. It would clearly be counter-productive for Singapore to launch a new all singing, all dancing funds vehicle that didn't link into these incentive schemes, but there is no indication so far that these two regimes will dovetail on launch of the S-VACC. We await further announcements in this respect.
A giant leap all the same
Immovable assets and tax incentive issues aside, there is no doubt that the S-VACC represents a monumental step forward for the Singapore funds industry. For Singapore, having achieved so much so quickly and having done so with one hand tied behind its back (i.e. without a funds-specific vehicle), the S-VACC could genuinely be the development that takes its asset management industry to the next level.
The MAS consultation closes on 24 April 2017.