Singapore's new S-VACC fund structure – worth waiting for?

Singapore

Singapore’s long awaited new corporate structure for investment funds, the Variable Capital Company ("S-VACC") has taken a significant step forwards this week with the Variable Capital Companies Bill ("VCC Bill") being submitted to Parliament on 10 September for its first reading.

This development, together with the recently introduced new venture capital fund manager ("VCFM") regime (see our article on the VCFM rules) promises to further strengthen Singapore's position as a key asset management hub.

Our questions answered

Way back in March 2017, we looked at the likely impact of the S-VACC based on the public consultation in Singapore ("Consultation Paper"). The overall S-VACC framework (as proposed in the VCC Bill) (see summary table) remains largely unchanged, but 18 months on from the Consultation Paper, does the VCC Bill now answer the questions we posed previously?

  1. Might real asset funds miss out?
  2. Yes, this seems to be the position for now. All S-VACCs are required to appoint a "Permissible Fund Manager" to manage their assets. Previously, when examining the Consultation Paper, we noted that a "Permissible Fund Manager" did not include fund managers (including many large fund managers) that were not required to be licensed or registered by the Monetary Authority of Singapore (“MAS”) on the basis that they only managed "immovable assets" funds (i.e. real estate and infrastructure funds).

    Requiring a Permissible Fund Manager to be regulated by MAS is intended to mitigate the risk that the S-VACC structure could be used for illicit and fraudulent purposes. However, for real asset fund managers currently operating on an unlicensed basis, the question will be: do the benefits of the S-VACC outweigh the potential costs and administrative burden of applying for and maintaining a fund management licence?

  3. O tax exemptions, where art thou?
  4. It was previously unclear whether the various tax incentives applicable to certain types of investment funds in Singapore (namely Sections 13X and 13R of the Income Tax Act ("ITA")) would be extended to the S-VACC. The VCC Bill does not directly address this point, as the applicability of the tax exemptions is dealt with under the ITA. Accordingly, the Ministry of Finance ("MOF") announced in its 2018 Budget Statement that these tax exemptions will be extended to S-VACCs. This is a case of common sense prevailing; it would have been counter-productive – and uncompetitive within the global market – for Singapore to launch the S-VACC without the benefit of these exemptions. However, MOF and MAS will now need to work together closely to ensure the necessary work is done to ensure that the S-VACC can truly be a viable alternative fund structure from a tax perspective.

So what's next?

There is no doubt the S-VACC has the potential to attract fund managers to domicile their funds in Singapore, when coupled with Singapore’s favourable and well-tested tax regime. The S-VACC should, in principle, place Singapore on at least an equal footing with other common funds jurisdictions, and has the additional benefits of being onshore and having access to Singapore’s extensive network of tax treaties. For fund managers based in and/or targeting Asian jurisdictions, it also has the benefit of being a ‘local’ structure when compared with, for example, Luxembourg’s stable of fund vehicles.

However, investors will still need to be convinced, and this may prove to be the biggest obstacle to the widespread adoption of the S-VACC when compared to the tried and tested fund structures already in the market. If the big institutional investors can be convinced of the merits of the new structure then there is no doubt that the S-VACC will gain traction.

From a fund manager’s perspective, issues around cost and ease of operation still remain. The S-VACC requirements, for example with regards to the appointment of various service providers, could prove to be too much and/or too costly for smaller managers. We will wait to see how the fund service provider market develops, particularly with respect to pricing.

The VCC Bill represents an important step forward. We remain confident that, over time at least, the S-VACC will take its place as a globally accepted fund vehicle. In the short term however, the potential obstacles to adoption are more likely to be market-driven and therefore out of the hands of the MAS and other industry stakeholders, who have so carefully shepherded this new vehicle (nearly) to market over the past few years. At the top end of the market (as everywhere), investor confidence in the S-VACC will be key. For smaller funds, the cost and ease of implementation may also be a determining factor.