On 23 March 2017 the Monetary Authority of Singapore (MAS) released a consultation paper and accompanying draft legislation proposing the introduction of the Singapore Variable Capital Companies (S-VACC) regime. The S-VACC is a new type of company which may soon be formed under Singapore law. The features of an S-VACC are modelled on overseas equivalents such as the open-ended investment company (OEIC) of the UK and Luxembourg's société d'investissement à capital variable (SICAV).
The introduction of a more flexible Singapore corporate entity has been under consideration for some time. If implemented, this will further add to the appeal of Singapore as a funds domicile jurisdiction. It will overcome some of the structural limitations which currently exist with using a Singapore company within a fund structure.
WHAT IS AN S-VACC?
An S-VACC may only be used as part of a collective investment scheme.
Like the OEIC and the SICAV, an S-VACC will be able to vary its capital and redeem any of its issued shares. This is an important and defining feature of the S-VACC regime. Under current law, Singapore companies are only able to declare dividends from 'profits'. Typically the directors of a Singapore company will be reluctant to declare dividends unless there are sufficient retained earnings or current year profits as shown in the company's financial statements. This leads to the so-called 'cash trap' problem – mark-to-market or other accounting losses can cause the profit of a Singapore company to be lower than its available cash thus restricting the ability of this cash to be upstreamed.
The typical work around to the cash-trap issue involves a Singapore company issuing redeemable shares or funding the company with non-interest bearing debt. These solutions are generally effective but are seen as cumbersome. The S-VACC regime should put an end to this complication by enabling an S-VACC to distribute all of its available cash more easily.
The second defining feature of the S-VACC is the ability to form multiple sub-funds. While these sub-funds will not have a separate legal personality, they will function as cells that are separate and distinct from one another. This enables a segregation of the assets and liabilities between different sub-funds. Each sub-fund of an S-VACC can:
- sue and be sued individually;
- have different investment objectives and investors;
- invest in other sub-funds under the same S-VACC; and
- be wound up as though it were a separate legal person.
Measures to prevent and/or lower the risk of cross-cell contagion within the S-VACC include the prohibition of using a sub-fund's assets to discharge another's liabilities or claims. The MAS also has the authority to void any provisions (within the constitution or arrangements executed by the S-VACC) that may result in cross-cell contagion. The failure to ensure the segregated liability of sub-funds without due cause will be a criminal offence, which may expose the S-VACC and all its officers to a fine on conviction.
OTHER CONDITIONS AND FEATURES
Fund Managers: An S-VACC must appoint a Singapore resident fund manager to manage its assets. This fund manager must be registered or licensed under the Securities and Futures Act (Cap. 286) (SFA), or may be exempt under certain categories of exemption. It is not possible to satisfy this requirement by appointing a Singapore company which is exempt from licensing on the basis that it is a 'related corporation' of an S-VACC (which is common for family office and proprietary fund structures). This effectively restricts the S-VACC to institutional funds with external investors.
Residency: The proposed residency requirements of the S-VACC will be the same as Singapore companies incorporated under the Companies Act (Cap 50) (CA). Specifically, an S-VACC must have its registered address in Singapore, at least one director that is ordinarily resident in Singapore, and must also appoint a Singapore-resident secretary. The S-VACC Bill also provides for the re-domiciliation of foreign S-VACC counterparts in Singapore. This aligns with recent amendments to the CA which now permit the re-domiciliation of foreign companies in Singapore.
Board of Directors: In addition to the residency requirement noted above, an S-VACC will need to have at least one director who is on the board of the Singapore fund manager engaged to provide investment management services which may be resident or non-resident. The appointment and duties of S-VACC directors are similar to the related provisions under the CA.
Audit requirement: An S-VACC will need to have its accounts audited, although the S-VACC Bill does not state if the small companies' audit exemption applies. The audited financial statements have to be prepared in accordance with applicable standards and provided to shareholders. Unlike Singapore companies incorporated under the CA, these financial statements will not be publicly searchable.
Shares Register: The share register of an S-VACC is not required to be made publicly searchable. It does however need to be made available to the relevant authorities upon request.
AML/CFT: An S-VACC will have to comply with AML/CFT requirements that may be issued by the relevant authorities from time to time. This includes customer due diligence as part of on-boarding procedures and maintaining proper records on transactions such as distributions.
Approved custodian: S-VACC's consisting of either Authorised or Restricted Schemes are required to have an approved custodian that is an Approved Trustee under the SFA. Its duties are similar to that of an Approved Trustee, including the power to hold real estate on trust. The approved custodian therefore takes custody of the property of an S-VACC and is accountable to the MAS to safeguard the rights of shareholders. For S-VACCs consisting of Authorised Schemes, the Approved Custodian has to be independent of the fund manager to enable it to check on the latter's compliance with the CIS Code.
The proposed taxation of S-VACCs is not set out in the MAS consultation paper or the accompanying bill. It is not yet known how existing tax incentive schemes such as Section 13R and Section 13X of the Income Tax Act (Cap 134) will be adapted to accommodate this new entity type however the MAS is considering the feasibility of extending these fund vehicle tax schemes to S-VACCs. Potentially an entirely new incentive regime may be introduced for S-VACCs.
Presumably an S-VACC will be able to claim benefits under Singapore's network of double taxation agreements and therefore claim lower rates of withholding on foreign sourced income and even capital gains protection in some circumstances. It is this combination of treaty benefits and specific exemptions from Singapore taxation on remitted foreign-sourced income which has made Singapore resident funds very popular. The draft legislation is unclear at this juncture on whether the law is expressly prohibitive or permissive on pairing the S-VACCs with more familiar master pooling vehicles such as Cayman Islands limited partnerships while continuing to enjoy the benefits of the new S-VACC regime. However, the introduction of this new regulatory framework also contemplates consequential amendments to the SFA and its regulations which together may address some of this uncertainty. The longer term ability of non-CIV funds to assert treaty benefits under consideration by the OECD as part of their Base Erosion and Profit Shifting initiatives, but for now at least, continues to be standard fund structuring.
The tangible steps taken towards the introduction of the S-VACC regime are a welcome development. They come hot on the heels of the significant changes recently announced to the CA which include provision for the re-domiciliation of foreign incorporated companies. Assuming the tax position of the S-VACC is broadly in line with expectations, this entity type will likely become part of the standard structuring of a fund through Singapore.