1. Introduction

On January 14, 2020 the Variable Capital Company (“VCC”) framework was operationalised in Singapore. The VCC is a new corporate entity structure allowing multiple collective investment schemes to be managed under a single corporate entity and allowing each of these to be ring-fenced. This structure is similar to multi-class fund structures such as the protected cell company and segregated portfolio company prevalent in other offshore fund jurisdictions such as Cayman Islands, the British Virgin Islands and Mauritius. The legislative framework for VCCs is provided under the Variable Capital Companies Act (“VCC Act”).

A total of 20 investment funds have been incorporated or re-domiciled as VCCs as part to the VCC Pilot Program, initiated by Monetary Authority of Singapore (“MAS”) and Accounting and Corporate Regulatory Authority (“ACRA”).

MAS has also launched a VCC grant scheme to encourage industry adoption of this corporate structure. The grant scheme covers up to 70% of eligible expenses paid to Singapore-based service providers, with the grant amount capped at S$150,000 for each application, and a maximum of 3 VCCs per fund manager.[1] The scheme would run up till January 15 2023.

  1. Brief History
March 23, 2017: MAS issued a consultation paper for Singapore Variable Capital Companies.

 

September 10, 2018: The MAS tabled the Variable Capital Companies Bill (“Bill”) in Singapore Parliament.

 

October 1, 2018: The Bill for the Variable Capital Companies Act was passed in Parliament.

 

August 5, 2019 The Second Minister of Finance moved the Bill for the First Reading in Parliament.

 

December 3, 2019 Singapore Academy of Law with the Members of the Working Group on VCC Model Constitutions and Guidance Notes were released. Singapore Academy of Law and Singapore VC and PE Association, along with the Working Group also published Venture Capital Investment Model Agreement on the Singapore Law Watch as a reference guide for use in seed rounds and early stage financing.

 

January 15, 2020 The VCC Act took effect on January 14, 2020 and the MAS announced the launched on January 15, 2020.

 

  1. Overview of VCC

According to Section 15 of the VCC Act, the sole object of a VCC is to enable one or more collective investment schemes in the form of a body corporate. VCCs can be set up either as standalone funds or as umbrella funds with multiple sub-funds.

This structure can be used for a wide range of investment funds, across diversified asset classes or sectoral themes and provides fund managers greater operational flexibility. Fund managers will have more flexibility in share issuance/redemption and the payment of dividends and the managers will be able to incorporate multiple funds in a single VCC and achieve cost savings.

Fund managers will also be able to constitute investment funds as VCCs across both traditional and alternative strategies, and as open-ended or closed-end funds. Fund managers may also re-domicile their existing investment funds with comparable structures by transferring their registration to Singapore as VCCs.

  1. Corporate Structure of VCCs

The VCC Act provides for the segregation of assets and liabilities of sub-funds where the liabilities incurred by a sub-fund must be discharged solely from the assets of that sub-fund and the assets of that sub fund cannot be used to discharge the liabilities of any other sub fund of the VCC.[2]

To prevent cross-cell contagion, any provisions of the constitution of an umbrella VCC or any agreement, which are inconsistent with the segregation of assets and liabilities of sub-funds are void.[3] Further the umbrella VCC in its agreements must disclose the registration number and name of the sub-fund along with the fact that the sub-fund has segregated assets and liabilities.[4]

  1. Corporate Governance

A VCC must have at least one director who is ordinarily resident in Singapore and one director of the VCC must also be a director or qualified representative of the VCC’s fund manager (who may be the same person as the Singapore resident director).[5]

A VCC is required to have its registered office in Singapore[6] and the naming requirements for a VCC are similar to those under the Companies Act.[7]

Public disclosure of the register of shareholders of a VCC and its financial statements will not be required, however it will have to be disclosed to the MAS, ACRA and other public authorities for the purpose of administering and enforcing written law.[8]

  1. Constitution of a VCC

A VCC will also not be subject to the same restrictions on arrangements, reconstruction, and amalgamations under the Companies Act. Rather, these mechanisms will be governed by the provisions set out in the constitution of the VCC.[9]

A carefully drafted constitution of a VCC provides a functional improvement over the multi-class structure while still maintaining the key features commonly seen in venture capital limited partnerships such as the control rule. By using the VCC instead of a multi-class fund structure, the investment vehicle now has perpetual succession and will be able to hold property in its own name, allowing more certainty for investors and fund managers and, at the same time, taking advantage of the benefits described above.

  1. Common Service Providers

1. Fund Manager

A Fund Manager, established or operating in Singapore, must be a holder of a capital markets services (“CMS”) license for fund management under the Securities and Futures Act (“SFA”), unless exempted under Section 99(1) (a), (b), (c) or (d) of the SFA (Cap. 289)[10].

The VCC cannot be its own fund manager[11]. This implies that a VCC would have to either set up a separate company to apply for the fund management license or enter an arrangement with a company with an fund management license. The new VCC regime facilitates delegation of fund management activities to sub-managers that are regulated as fund managers in other jurisdictions, however the registered fund manager of the VCC retains the overall responsibilities with respect to delegated duties and mitigation of any conflict. VCC sub-funds can share a board of directors, and service providers, making it a very cost-effective structure (compared to multiple boards and service providers).

2. Venture Capital Fund Management License

In order to engage in fund management activity in Singapore, the fund manager (typically organised as a Fund Management Company (“FMC”)) must either hold a CMS license issued by MAS or fall under an exemption from licensing requirements. Singapore has also in the recent past introduced a simplified category of CMS license for FMCs, targeted at close ended venture capital funds, in the form of the Venture Capital Fund Manager (VCFM) license.

In accordance with the Guidelines on Licensing, Registration and Conduct of Business for Fund Management Companies, VCFMs should meet the following requirements:

  1. Fit and Proper – VCFMs must satisfy MAS that its shareholders, directors, representatives and employees, as well as the VCFM itself, are fit and proper, in accordance with the Guidelines on Fit and Proper Criteria issued by MAS.
  2. Place of Incorporation – VCFMs must be a Singapore incorporated company that has a permanent physical office in Singapore. The office should be dedicated, secure and accessible only to the VCFM’s directors and staff.
  3. Key personnel – VCFMs must have at least two directors, at least one of whom should be full-time and resident in Singapore; and at least two full-time professionals and representatives resident in Singapore, who may include the directors. Nominee directors such as legal advisers or corporate secretaries will not count towards meeting this requirement.
  4. Disclosure – VCFMs must disclose to investors that they are not subject to the specified requirements that are imposed on other FMCs.
  5. Conflicts of Interests – VCFMs must avoid any conflicts of interest and, where such conflicts arise, ensure that they are resolved fairly and equitably.
  6. AML/CFT Requirements – VCFMs must comply with the requirements on anti-money laundering and countering the financing of terrorism [“AML/CFT”] requirements, as set out in the Notice to Capital Markets Service Licensees and Exempt Persons on Prevention of Money Laundering and Countering the Financing of Terrorism.
  7. Reporting of Misconduct – VCFMs must comply with the misconduct reporting requirements set out in the Notice on Reporting of Misconduct of Representatives by Holders of CMS License and Exempt Financial institutions.
  8. Use of Service Providers – Prior to entering into arrangements with service providers (such as a compliance service provider or a fund administrator), a VCFM should take into account the requirements set out in the MAS Guidelines on Outsourcing.

Under the VCFM regime, the fund manager may only manage funds that meet the following requirements:

  1. invest at least 80% of its committed capital in unlisted business ventures that have been incorporated for no more than ten (10) years at the initial time of investment;
  2. invest up to 20% of its committed capital in unlisted business ventures that do not meet a sub-criterion (i) i.e. incorporated for more than ten (10) years at the time of initial investment, and/or through acquisition from other investors in the secondary market;
  3. fund must not be redeemable at the discretion of the investor and must not be continuously available for subscription; and
  4. the funds are offered only to accredited investors and/or institutional investors.

The MAS, usually, takes not more than 4 months to review and process an application if the business model is straightforward, the applicant meets the relevant admission criteria fully, and the application is complete and clear. In general, the VCFM license is valid until the fund manager stops conducting regulated activities or it is cancelled by MAS. 

3. Auditor

VCCs will also be required to appoint a Singapore based auditor as the financial statements must be accompanied with the auditor’s report.[12]

  1. Accounting Standards

Apart from the accounting standards set by the Singapore Accounting Standards Council, VCCs will be allowed to use the International Financial Reporting Standards and US Generally Accepted Accounting Principles to cater to the needs of global investors.

  1. Winding up

In the event of a sub-fund’s insolvency, each sub-fund may be wound up as if it were a separate legal entity and there will be ring-fencing of each sub-fund’s assets and liabilities during liquidation. A VCC may be wound up by (i) its members voluntarily by passing a special resolution for winding up, or (ii) by a court order, provided the conditions under the VCC Act are satisfied[13]. In addition, a sub-fund may be wound up and the shares of the sub-fund redeemed upon its winding up[14].

  1. Capital Reduction and Payment of Dividend

According to Section 19(1)(d) and 19(1)(e) of the VCC Act, the value of the paid-up share capital shall be at all times equal to the net asset value (“NAV”) of the VCC; and subject to adjustments for fees and charges as provided in the constitution of the VCC, the shares of the VCC shall be issued, redeemed or repurchased at the price equal to the proportion of the NAV of the VCC represented by each share.

Unlike a company which follows a general rule that it must pay dividends out of profits[15], a VCC is permitted to freely redeem shares and pay dividends using its capital.

  1. Buyback of Shares

The VCC Act provides that where the VCC has redeemed or repurchased its own shares (which must be fully paid) on such terms and carried out in such manner as may be provided by its constitution, these shares are to be cancelled and the amount of the issued share capital must be reduced by the amount of consideration paid.[16]

In contrast, under the Companies Act[17], a company may generally only repurchase 20% of its shares during any period up to the next annual general meeting unless it follows a capital reduction procedure, which requires a solvency statement to be made by all the directors, as well as a creditor objection period of 6 weeks to lapse before a capital reduction can be effected.

  1. Tax Treatment of VCC as compared to Tax Treatment of a Limited Partnership, Company and Trust

A stand-alone VCC will have the same tax treatment as that of a Singapore company. Accordingly, the Enhanced Tier Fund (“ETF”) Scheme and Singapore Resident Fund (“SRF”) Scheme under the Income Tax Act will apply to a stand-alone VCC similar to how it would apply to a Singapore company.

For an umbrella VCC, it has been announced that the economic conditions[18] regarding minimum fund size and annual local business spend will be applied to the VCC and not to each sub- fund.

The umbrella VCC will be as a single entity and company. Thus, the VCC will file tax returns and each sub-fund will not need to file multiple tax returns which will simplify tax returns process. However, the disadvantage to this is that if one sub fund is not doing well, it will be subjected to higher taxes as compared to what its tax liability would have been on a standalone basis.

Both ETF Scheme and SRF Scheme allow the VCCs to be exempt from tax on income derived from designated investments which broadly includes most portfolio investments such as immovable properties situated outside of Singapore, structured products, gains and profits realised from the sale or dividends from stocks and shares of companies.[19]

Additionally, Partial Tax Exemption and Start-Up Tax Exemption (“SUTE”) will be applied once at the umbrella level, regardless of the number of sub-funds the umbrella VCC may have. Subject to conditions, a VCC will enjoy the SUTE for its first three years of assessment. In the case of an umbrella VCC, the first three years of assessment are determined with reference to its date of incorporation and not the date of registration of its sub-funds.

In Singapore, if the fund is organised as a limited partnership, any income will be taxed at the level of the investor (regardless of whether the investor is domiciled in Singapore) and not at the level of the limited partnership[20]. Where the investor is an individual, his share of income will be taxed based on his personal income tax rate which is capped at 22%[21]. Where the investor is a company, its share of income will be taxed at the fixed corporate tax rate of 17%[22].

If the fund is organised as a company, in the absence of any tax exemptions, the fund itself would be taxed at the flat rate of 17% on its net chargeable income. The investors will then be taxed a second time when they are filing for their individual income tax[23].

With regards to goods and services tax (“GST”), the registration, accounting and reporting will be done separately by the umbrella VCC on behalf of its sub-funds. While each sub-fund is required to assess its GST registration liability based on the value of taxable supplies made. GST-registered sub-funds are also required to file separate GST returns. The collection and enforcement of GST will be conducted at the sub-fund level based on the GST returns filed by the respective GST-registered sub-funds. Stamp duty will also be applicable on the transactions carried out at the sub-fund level, including those between the umbrella VCC and sub-fund. The current GST remission will be made available to VCCs approved under the ETF and SRF schemes, along with the withholding tax exemption available to fund managers approved under ETF and SRF schemes. The 10% concessionary tax rate under the Financial Sector Incentive – Fund Management Scheme will also be extended to approved fund managers managing eligible VCCs.

Funds organised as trusts are generally recognised as tax pass-through in Singapore, i.e., the fund itself is not taxed upon the realisation of returns from the portfolio companies; however, the ultimate investors are taxed as and when they realise returns from the fund. The VCC can also avail itself of the US ‘check the box’ election.

  1. A Comparison of a Fund Vehicles in Singapore
Features Company Variable Capital Company Trust Limited Partnership
The entity has a separate legal personality and is capable of suing and being sued in their own names. Yes. Yes. No. Yes.
The entity has limited liability. Yes. Members are liable only to the extent of any amount unpaid on their shares. Yes. Members are liable only to the extent of any amount unpaid on their shares. As a trust has no separate legal entity, under the general law of trust, the trustee is liable for the legal obligations of the trust.

This also applies for a registered business trust, unless the unitholder has expressly agreed to contribute to any outstanding debts/liabilities incurred by the trustee-manager under the registered business trust.

Yes, for the limited partners. A general partner is liable for all debts and obligations of the limited partner incurred while it is a general partner.
Permitted to freely redeem shares and pay dividends using its net assets/capital, thereby providing flexibility in the distribution and return of capital.

 

No. Company may redeem shares out of capital provided that the shares are fully paid and if all the directors have made a solvency statement in relation to the redemption. Dividends may only be paid out of distributable profits. Yes. Yes. Beneficiaries are entitled to share of distributions. Distributions may be paid out of operating cash flows. Yes.
The law governing the entity structure provides for the segregation of assets and liabilities of sub-funds. No. Yes. No. No.
Tax exemption on specified income from designated investments under Section 13R and 13X is available. Yes. Yes. Exemption under Section 13R is available. However, the exemption under 13X is available. Exemption under Section 13R is available. However, the exemption under 13X is available.
There is a minimum share capital requirement. No. No. No. No.
There is a requirement to file annual returns with the ACRA. Yes. Yes. No. No.
There is a statutory requirement to appoint a local director. Yes. Yes.

 

No. No. However, a local manager is required if the general partner is not a Singapore resident.
There is a statutory requirement to appoint a company secretary. Yes. Yes. No. No.
Shareholder/investor information is publicly available. Yes. No.

 

No. Yes, but it is possible to keep the particulars of limited partners confidential if certain conditions are met.
Financial statements are publicly available. Yes, unless certain conditions are met for exemption. No. No. (Save for listed trusts). No.

 

  1. Challenges of VCC Structure

Since the VCC structure has just been launched in Singapore, the complexities and operational requirements are not fully understood by the service providers, and there is a possibility of practical issues arising during this initial phase.

Since the provisions of the law governing the VCC structure have not been interpreted by the courts as of now, there is a degree of uncertainty regarding the actual working of the segregation of the assets and liabilities of the sub-funds in this structure.

Further, the officers of the VCC, including directors must ensure that the VCC is compliant with the statutory requirement for disclosure of sub-fund details such as the name, registration number and the fact that the assets and liabilities of the sub-fund are segregated. Such disclosure is required in every agreement in which any of its sub-funds are mentioned including any oral agreement entered by the umbrella VCC on behalf of its sub-funds. Failure to comply with the disclosure requirement results in an offence and, in case the document is a bill of exchange, promissory note, indorsement, cheque or order, the officer will be liable to the other party for the amount due under such document, until such liability is discharged by the VCC. 

  1. VCC from an Indian Regulatory and Tax perspective

Generally, venture capital funds, organised as VCCs should not face additional challenges for investments under the Foreign Direct Investment regime of India. Further, investment funds organised as VCCs seeking to invest in Indian capital markets may note that foreign investors wishing to make portfolio investments in Indian capital markets must obtain a foreign portfolio investor (“FPI”) license. The license is granted by a local custodian on behalf of the capital market regulator, the Securities and Exchange Board of India (“SEBI”). As an FPI, a foreign investor is subject to rules and regulations prescribed by the SEBI with respect to eligibility criteria, categories of registration, key investment conditions and restrictions, etc. On September 23, 2019, the SEBI issued revised Foreign Portfolio Investor Regulations, designed to simplify the FPI regime. Under the SEBI (FPI) Regulations, 2014, designated depository participants (“DDP”) were required to ensure that FPIs did not have an “opaque structure”.

This was broadly defined to include entities with structures, such as a protected cell company, segregated portfolio company, etc., where the ultimate beneficial owners could not be determined or where the beneficial owners either were ring-fenced from each other or ring fenced with regard to enforcement. Generally, this condition was considered to be complex by FPIs, given the confidentiality and associated laws applicable in different countries. This prohibition on opaque structure was removed in the revised regulations, based upon the recommendations of SEBI’s Working Group on FPI Regulations’ report on May 24, 2019.

Singapore as renowned financial center and FATF, IOSCO-member country will be an attractive jurisdiction for asset managers of VCCs seeking to register sub-funds as Category I FPIs.

From an Indian tax perspective, however, it remains to be seen how VCCs will be treated. Indian tax authorities have in the past recognised segregated portfolio entity structures at the umbrella entity level; however, there is some concern on how Indian tax authorities will assess sub-funds which may have different investors and investment strategies. This determination is important to ensure that Indian tax liability of a sub-fund is appropriately segregated.

 

[1] MAS, “MAS and ACRA Launch Variable Capital Companies Framework”, available at: https://www.mas.gov.sg/news/media-releases/2020/mas-and-acra-launch-variable-capital-companies-framework

[2] Section 29 (1) of the VCC Act

[3] Section 29(2) of the VCC Act

[4] Section 30 of the VCC Act

[5] Section 48 (1) (a) and (b) and Section 48 (5) of the VCC Act

[6] Section 39(2)(b) of the VCC Act

[7] Under Section 21 of the VCC Act

[8] Section 82 of the VCC Act

[9] Section 19(f)(3) of the VCC Act

[10] Section 46 (2) (a) and (c) of the VCC Act

[11] Section 46(3) of VCC Act.

[12] Section 105(2) VCC Act

[13] Section 121 of the VCC

[14] Section 33 of the VCC Act

[15] Section 403(1) of Singapore Companies Act

[16] Section 35 of the VCC Act

[17] Section 76B of Singapore Companies Act

[18] Under the ETF Scheme, the fund has to fulfil (among other things) the following economic conditions:

  • The applicant fund must have a minimum fund size of SGD 50 million at the point of application.
  • The fund must have an annual local business spend of at least SGD 200,000.

Similarly, there is a condition under the SRF Scheme that the fund should have an annual business spend (need not be local) of at least SGD 200,000.

[19] Income Tax (Exemption of Income of Prescribed Persons Arising from Funds Managed by Fund Manager in Singapore) Regulations 2010 section 2, First Schedule, Second Schedule and Third Schedule

[20] IRAS, “Income Tax Treatment of Limited Liability Partnerships (LLPs) (Second Edition)”, online: IRAS <https://www.iras.gov.sg/irashome/uploadedFiles/IRASHome/e-

Tax_Guides/etaxguides_IIT_Income%20Tax%20Treatment%20of%20LLPs_2014-03-01.pdf> at 4.

[21] IRAS, “Individual Income Tax Rates”, online: <https://www.iras.gov.sg/irashome/Quick-Links/TaxRates/Individual-Income-Tax-Rates/>.

[22] IRAS, “Corporate Tax Rates”, online: <https://www.iras.gov.sg/irashome/Quick-Links/Tax-Rates/CorporateTax-Rates/>.

[23] However, to achieve tax neutrality, various tax exemptions are provided to exempt Singapore-domiciled funds from virtually all incidence of income tax.

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