Singapore has evolved as a prominent global hub for the asset management industry, with its AUM close to $2.4 trillion. The city state has also emerged as one of the top investing countries into India, with a cumulative FDI exceeding $73 billion and portfolio investment exceeding $37 billion.
Despite this, most funds managed by Singapore-based managers are either pooled or domiciled outside of Singapore due to lack of a flexible corporate vehicle. To address this, Singapore is now introducing a new corporate vehicle called the Variable Capital Company (VCC). The VCC framework has been cleared by the Singapore Parliament and is expected to be operational by early 2019.
The corporate framework
The VCC framework is meant only for fund industry since it mandates appointment of a Singapore-regulated fund manager and an independent custodian.
On the basics, a VCC is broadly similar to a conventional company as regards share capital with limited liability, a board of directors and many other features. At the same time, to facilitate entry and exit of investors, the VCC framework provides the following additional flexibility:
* It can make distributions to shareholders out of its capital even if it has no profits or reserves;
* Its shares could be regularly redeemed or bought back without seeking shareholder approval each time;
* The value of its paid-up capital is always deemed equal to its NAV—its shares must be issued, redeemed and repurchased at such NAV; and
* Apart from different classes of shares, VCCs can also issue debentures and bonds, which could be listed on stock exchanges;
VCCs can be set up as a single standalone fund or an umbrella fund. While a standalone fund enjoys all the above features of the VCC framework, an umbrella fund has additional advantage of creating two or more sub-funds whose assets and liabilities are completely segregated, i.e. losses of one sub-fund will not impact NAV of any other sub-fund.
An umbrella fund structure would help a large fund manager attain economies of scale by saving operational and compliance costs associated with setting up multiple corporate vehicles.
The taxation framework
For tax purposes, a VCC will be treated as a single entity, i.e. in case of an umbrella VCC, sub-funds will not need to undertake separate tax compliance. Further, a VCC should be eligible to access Singapore’s tax treaty network where it is considered as a Singapore tax resident based its ‘control and management’ in Singapore.
As regards incentives, a VCC will be eligible to apply for tax exemptions available to other funds managed by a Singapore-based fund manager. Such exempt VCCs will also be eligible for GST remissions reducing the Singapore GST incidence on management fees to a small fraction. Fund managers will be eligible to apply for concessional tax rate of 10% in respect of their fees from VCCs.
Re-domiciliation of existing overseas funds in Singapore
The existing offshore funds with a framework similar to a VCC will be permitted to be re-domiciled in Singapore. Where the overseas fund is not structured similar to a VCC, then restructuring may be explored prior to re-domiciliation.
This feature is expected to give further boost to local domiciliation of investment funds in Singapore.
VCCs in Indian context
While the India-Singapore tax treaty has been revised to do away with the tax exemption of capital gains on sale of shares of an Indian company, the treaty still offers grandfathered exemption for cash equity investments made up to March 31, 2017 (irrespective of when such investments are sold). Further, it continues to exempt gains from other financial instruments (i.e. bonds, debentures, derivatives instruments, etc).
However, the existing Singapore funds with feeder/pooling vehicles outside Singapore could face challenges on the eligibility of the India-Singapore tax treaty benefits due to introduction of Indian General anti-avoidance rule (GAAR) provisions effective from April 1, 2017, and the proposed introduction of treaty anti-abuse provisions under the Multilateral Instrument (MLI).
The VCC framework provides an effective way to deal with the above challenges to investment funds. Once the framework is effective, fund managers will be able to pool funds in Singapore itself.
Further, the VCC will have a Singapore-based investment manager, custodian, administrator, etc. This will significantly strengthen the commercial substance for investment funds and strengthen the case for treaty access in this post-BEPS era. One may also explore re-domiciliation of existing offshore pooling vehicles to Singapore with the similar intention for realignment with commercial substance.
The introduction of the VCC framework in Singapore is a significant development for the investment fund industry investing not only in India but the whole of Asia-Pacific region. Specifically from an India point view, clearly the VCC regime could prove to be a game-changer.
Authors are with Dhruva Advisors LLP