Overview of the VCC
The Singapore Variable Capital Company (VCC), established under the Variable Capital Companies Act that took effect on 14 Jan 2020, represents the latest Singapore’s innovation in terms of corporate structure for investment funds.
Corporate fund structures are not a novelty in Singapore as the city-state already offers a variety of investment fund structures such as limited partnerships, unit trusts, business trusts, and real estate investment trusts or corporations. The addition of VCC in this panorama of legal entities elevates Singapore’s standing as a competitive asset management hub in the region.
Before 2020, there was no corporate structure available in Singapore geared specifically towards investment funds. Most fund vehicles were domiciliated offshore (Luxembourg, Cayman, BVI, or other suitable jurisdictions). If local fund vehicles were preferred, these funds would typically have been structured as a Singapore private limited company or limited partnership. However, each of those vehicles poses constraints to running asset management businesses.
The VCC explicitly addresses this gap in the Singapore jurisdiction. Due to its unique features that offer more operational flexibility than investment fund structures currently available, Singapore-based fund managers now have a compelling reason to domicile their funds in Singapore.
VCCs are incorporated by the Accounting and Corporate Regulatory Authority (ACRA) and supervised directly by the Monetary Authority of Singapore (MAS) and, indirectly, through the supervision of the fund managers.
The VCC Act does not replace Singapore’s existing regulations for investment funds, but it just enhances Singapore’s competitiveness as a perfect venue for investment funds.
Six Benefits of setting up a VCC
1. Umbrella structures
A VCC can be set up as a standalone fund (i.e., single fund VCC) or incorporated as an umbrella structure with multiple sub-funds and share classes.
Although sub-funds do not have separate legal personalities, there are legal provisions for the segregation of assets and liabilities between sub-funds: one sub-fund cannot use the assets of another to cover its liabilities.
The umbrella structure can benefit from economies of scale and cost efficiencies provided by sharing the same board of directors, fund manager, custodian, and auditor. In addition, some administrative functions can also be consolidated, such as the holding of general meetings.
Moreover, a sub-fund of a VCC may be wound up singly, and cross-sub-fund investments are permitted.
2. Open-ended & closed-ended
Another advantage of using VCCs as fund vehicles is that VCCs can be established as open or closed-ended funds.
An open-ended fund allows investors to redeem their investments at their discretion, while a closed-end fund does not permit investors to do so. Closed-end funds also have a fixed number of shares and do not allow new subscriptions after the offering period is over, while open-ended funds are open to new subscriptions by new investors at any time.
As such, they are suitable to be used for traditional as well as alternative investments.
3. Enhanced flexibility in capital structure and redemption of shares
In Singapore, corporations have fixed capital and are subject to burdensome restrictions for the subscription and redemption of shares.
VCCs do not have capital maintenance requirements, and they possess variable capital structures whereby the value of the paid-up capital is at all times equal to the net asset value of the VCCs. They can vary their share capital without shareholders’ approval, and this feature is highly convenient for the entry and exit of investors.
VCCs can also pay out dividends using capital (or profit) freely, and in the case of a share redemption exercise, shares must be redeemed at their net asset value.
Unlike Singapore companies, where financial statements and shareholder lists are made available to the public, VCCs’ shareholder registers are confidential. They can only be disclosed upon request by public authorities for regulatory, supervisory, or law enforcement purposes.
While there is a need to prepare financial statements and tax reporting for filing purposes, this information will not need to be made publicly available.
5. Tax incentives & MAS’ Grant Scheme
VCCs are treated as companies, and they can benefit from tax incentives schemes (such as the Enhanced Tier Fund Scheme and Singapore Resident Fund Schemes) to gain tax exemptions from designated investments under the Singapore Income Tax Act.
Under the VCC Grant Scheme, the MAS will co-fund 70% of the eligible expenses paid by VCCs to Singapore-based service providers capped at SGD 150,000 per VCC. This scheme aims to reduce the burden of incorporation/registration costs of a VCC.
Once incorporated new VCCs, fund managers may re-domicile their existing overseas investment funds by transferring their registration to Singapore.
A re-domiciliation of a foreign corporate entity will not affect its rights, obligations, or liabilities, and it allows it to maintain its corporate history and track record.
Key features of a VCC
A VCC, unless exempted, must be managed by a ‘Permissible Fund Manager”., which generally refers to a fund management company duly licensed by the MAS under the Securities and Futures Act (SFA).
The exemption applies to financial institutions exempted under specific provisions of the SFA, such as banks, merchant banks, or finance companies.
Other key officers
A VCC must have a company secretary, a registered office address, and an auditor based in Singapore.
A VCC must have at a minimum of one shareholder and of one resident director who is ordinarily resident in Singapore (e.i. Singapore citizens, Permanent residents, or holders of EntrePass/Employment Pass). The VCC must also have at least one director (who may be the same person ordinarily resident in Singapore) who is a director of its fund manager.
While authorized VCCs are required to have three director members, and at least one of whom must be independent, non-authorized/restricted VCCS (es. hedge funds, private equity, venture capital, or real estate funds) can have a sole director.
Unless exempted, VCCs must appoint a custodian to safeguard their assets. For VCCs comprised of authorized schemes, the custodian must be an approved CIS trustee under the SFA. Restricted VCCs may be exempted from the custodian requirement.
For VCCs to benefit from tax incentives (13R and 13X) under Singapore Income Tax Act, they need to appoint Singapore-based fund administrators.
Financial Statements & Annual General Meetings
A VCC is subject to audit requirements and must present its financial statements as per the IFRS, Singapore FRS, or US GAAP. Umbrella VCCs must prepare separate financial statements must for each sub-fund.
A VCC must also hold an annual general meeting every year within six months from the end of the financial year and shall lodge its Annual Return with ACRA within seven months from its financial year-end.
Legal status & Liability of Shareholders
The VCC is a legal entity that holds assets in its name and has separate rights and obligations different from those of the directors or shareholders.
The liability of members of a VCC will be limited to the unpaid amount (if any) of their shares.