Why you should domicile your next fund in Singapore

Singapore further seals its appeal as an ideal location for funds with the Variable Capital Company added to its suite of fund measures.

Traditionally, offshore (non-Singapore) locations have been the go-to choice for fund domiciliation. This is typically driven by a mix of commercial and legal factors such as investors’ familiarity, the need to pool funds in a location with regulatory oversight to protect investors’ interest, and the ability to exercise commercial and operational flexibility for fund-raising and repatriation of profits to the investors. Many of these offshore locations offer different forms of fund vehicles.

Factors propelling the shift

Against the backdrop of base erosion and profit shifting (BEPS) and the introduction of legislations in respect of economic substance test in some offshore locations (e.g., the Cayman Islands, the British Virgin Islands), fund managers have started to consider the practicalities of using onshore fund structures.

In general, the anti-abuse of tax treaty benefits is high on the agenda for tax authorities in Asia-Pacific. If an offshore fund domiciled in the Cayman Islands sets up a special purpose vehicle (SPV) in Singapore in order to make an investment in Australia and the SPV intends to claim a benefit under the Singapore-Australia tax treaty, there is a risk of denial of the treaty benefit if obtaining that benefit is perceived to be one of the principal purposes of setting up the SPV in Singapore.

On 7 June 2017, Singapore became a signatory to the Multilateral Convention to Implement Tax Treaty Related Measures to prevent BEPS (MLI). The MLI enables the participating countries to modify their existing tax treaties in order to implement BEPS measures. Singapore has ratified the MLI on 21 December 2018, which entered into force on 1 April 2019. As at 31 May 2021, 45 of the tax treaties concluded by Singapore have been amended by the MLI for the adoption of the Principal Purpose Test (PPT).

Singapore is committed to introducing the PPT into its tax treaties, which lays the foundation that tax treaty benefits could be denied if one of the principal purposes of a transaction is to obtain the said treaty benefits.

Tax treaty access is not the only impact that BEPS has on fund structures. Many countries have widened their definition of permanent establishment and source-based rules to bring within their purview additional revenue from cross-border interactions. As such, setting up a fund in a country that does not have any tax treaty increases the risk of attribution of profit to every country where activities are undertaken on behalf of the fund.

In view of the above, fund managers are seeking to set up fund structures where the fund platform, the manager and associated core functions are all in one location. This provides a robust position for access to tax treaties.

Introduction of VCC amidst the onshoring trend

Singapore has always been an attractive location for fund management and ranks high in terms of political stability, robust regulatory oversight and tax certainty. These factors provide a compelling proposition for fund managers to use the city-state as a platform to invest into various regions, particularly the Asia-Pacific, and over the years, Singapore has gained recognition and popularity for such purposes.

Singapore has offered legal forms such as unit trusts, limited partnerships and companies for decades. The choice of legal form depends on investor preference, commercial requirements and investment strategy. For example, traditional retail funds have been commonly set up as unit trusts, whereas fund managers with alternative investment strategies (such as private equity, venture capital, real estate or infrastructure) have used a combination of limited partnership and a company.

To further enhance the competitiveness of Singapore as a fund location, the Variable Capital Company (VCC), which is a new structure specially designed for investment funds, was launched in January 2020. The VCC is a corporate form fund vehicle that is based on best practices from leading global international fund hubs. The VCC has been embraced by fund managers across various investment strategies, and this is evidenced by a remarkable take-up rate of over 280 VCCs registered within a short span of 18 months since its launch.

The key features of a VCC are the ability to offer a flexible capital structure, efficient upstream of cash, access to Singapore's tax treaty network, and the allowance for the creation of sub-funds within an umbrella structure. The umbrella structure allows ringfencing of the assets, liabilities and risks associated with the assets held by each sub-fund and its obligations with respect to investors within the sub-fund. The VCC framework facilitates the domiciliation of investment funds in Singapore across open-ended and close-ended funds, catering to the needs of both traditional and alternative fund managers. Besides the incorporation of new investment funds, the VCC framework also allows fund managers to redomicile existing overseas investment funds with structures comparable to that of a VCC, by transferring their registrations to Singapore as VCCs.

To catalyse the adoption of VCCs by fund managers and to help reduce the cost of setting up a VCC, the Monetary Authority of Singapore (MAS) has launched a VCC Grant Scheme to co-fund up to 70% of qualifying expenses, capped at S$150,000 per VCC, paid to Singapore-based service providers for work done in Singapore in relation to the incorporation or registration of a VCC. Each fund manager is eligible to avail of such grant for up to three VCCs.

A VCC is able to apply for existing fund tax incentive schemes available to existing fund vehicles (i.e., Section 13H, Section 13R and Section 13X). The conditions of the fund tax incentive schemes remain the same for a VCC, with a notable efficiency of such conditions being applied at an umbrella VCC level as it is a single legal entity. In other words, the economic conditions (e.g., S$200,000 of annual business spending or minimum fund size of S$50m) are required to be met by an umbrella VCC as a whole, irrespective of the number of sub-funds within the VCC. Once approved, the tax exemption award applies to all the sub-funds within that umbrella VCC.

The MAS is working together with Singapore Fund Investment Group (SFIG), a private sector initiative, to introduce policy initiatives to further enhance and expand the appeal of VCCs (i.e., VCC 2.0) and is also actively engaging with fund management industry associations. For now, it is clear that the new VCC structure in Singapore offers comparable advantages to corporate structures offered by other leading fund jurisdictions and is instrument in further strengthening the city-state’s position as the go-to Asian hub for fund domiciliation and management.

The co-authors of the article are Mriganko Mukherjee and Louisa Yeo, Partner, Financial Services Tax from Ernst and Young Solutions LLP, Neha Shah, Director, Financial Services Tax and Seow Sin Yee, Manager, Financial Services Tax from EY Corporate Advisors Pte. Ltd.