With the successive launch of the Economic Substantive Act, led by the Cayman Islands, compliance efforts have become more complex and time-consuming. At the same time, due to the strengthening of international anti-money laundering and national tax information exchange systems, and increasing customer due diligence standards and disclosure requirements, Singapore introduced variable capital companies (VCCs). Let’s take a look at some of the key characteristics and requirements of the VCC framework.

What is a VCC?

VCC is a new type of corporate framework.

VCC can be used for:

Traditional and alternative fund strategies including open and closed investment funds

How to create VCCs

As an independent or as an umbrella entity with multiple sub-funds

Can foreign funds re-register as VCCs?

Foreign corporate entities established as funds can be re-registered in the form of VCCs.

What are the benefits?

• Improved tax efficiency and operations
• No public disclosure of registered shareholders required
• If the conditions are met, the annual shareholder meeting can be waived
• Provides flexibility for investors to issue and redeem investments and pay dividends with capital
• Tax incentive schemes applicable to Singapore funds such as Capital Increase Fund and Singapore Resident Fund Scheme
• The assets and liabilities of each sub-fund under VCC are separated
• Broader accounting standards used in the preparation of financial statements to meet the needs of global investors

VCCs can be used in all types of investment funds in Singapore

* At present, corporate legal entities in Singapore are mostly used as a degraded tool, mainly for investment purposes, pooled outside Singapore. In the future, VCCs can be used as a pooling and investment tool.

Interpreting VCC as each type of investment fund

What are the requirements for VCC?

1. VCC capital will always be equal to its net assets, providing flexibility in allocating and reducing capital
2. VCC must appoint a fund manager regulated by the Monetary Authority of Singapore to manage investments
3. VCCs need to meet existing Securities and Futures Act (SFA) requirements for investment funds.
   Non-authorized plans must have at least one resident director in Singapore, and authorized plans must have at least three directors.
4. The company must have a registered office in Singapore and must appoint a company secretary in Singapore
5. It must be audited by a Singapore auditor and the company must submit financial statements in accordance with IFRS, Singapore Financial Reporting Standards, or US Generally Accepted Accounting Principles

Audit considerations:

VCC auditors need to register with ACRA (Accounting and Corporate Regulatory Authority) in Singapore.

Accounting considerations:

Separated assets and liabilities of the Sub-Fund:

• The assets and liabilities of each sub-fund will be separated so that the assets of one sub-fund cannot be used to settle the liabilities of another sub-fund
• Each sub-fund must be wound up separately to ensure that the assets and liabilities of each sub-fund are segregated in the event of bankruptcy
• Common assets and liabilities, including shared expenses, are represented by umbrella VCC sub-funds (such as director fees, establishment or establishment costs), and managers need to be proficient in judging the methods of fair distribution between established sub-funds (such as based on invested capital, time of occurrence, No. Investment complexity, etc.)

Disclosure of details of the sub-fund:

Procedures and controls should be implemented to ensure that arrangements, assets, and liabilities of each sub-fund are separated.

Fiscal year:

1. Upon registration, the last day of the first financial year must be provided.
2. Unless approved, the first financial year must not exceed 18 months

Accounting records and control systems:

1. The same procedures for Singapore companies apply to accounting and other records, as well as internal controls
2. Umbrella VCC must maintain separate records and financial statements for each sub-fund

Financial Statements:

-Independent VCC and Umbrella VCC-

Each VCC must have audited financial statements for each financial period/year, which can accurately reflect the financial performance of the independent VCC. If it is an umbrella VCC, it can reflect the financial performance of each sub-fund.

-Merge independent VCC and umbrella VCC-

For VCC as the parent company, the group’s consolidated financial statements must be audited every financial period/year.

For the VCC as the parent company, it is an umbrella-shaped VCC, the sub-fund is its subsidiary, and the investment in the sub-fund is measured by the fair value of profit and loss (“FVTPL”). Umbrella funds do not need to submit consolidated financial statements. Therefore, for the investment of a sub-fund measured by FVTPL, there is no non-controlling interest in the umbrella fund’s financial statements.

Directors’ responsibilities for financial statements are similar to other Singapore-registered companies.

Accounting Standards:

VCC may not only use the Singapore Financial Reporting Standards (SFRS) framework to prepare financial statements but may also use International Financial Reporting Standards (IFRS) and US Generally Accepted Accounting Standards (GAAP) to prepare financial statements.

In this regard, VCC differs from the existing Singapore unit trust structure, which requires the use of the RAP 7 (Recommended Accounting Practice 7) framework. The RAP 7 framework is somewhat different from IFRS, as it is unheard of outside of Singapore, and is considered inflexible in terms of information disclosure.

The ability to prepare financial statements using the US Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) will make sponsors/fund managers more likely to consider Singapore as a jurisdiction in which to register funds.

While Singapore Financial Reporting Standards (International) (IFRS) are mandatory in the registration of listed company debt or equity instruments in Singapore (except for unit trusts such as listed real estate investment trusts, which must use RAP7), it can serve as an alternative to VCC’s financial reporting framework. It provides dual-compliance equivalent to that issued by the International Accounting Standards Board. We hope that VCC will adopt purely international financial reporting standards instead of SFRS (I) or US GAAP.

VCC activities and components:

Based on the VCC’s sole objective and the implicit structure of each VCC, we expect that the VCC should meet the criteria for consolidated financial statements to be considered as investment entities under IFRS 10 / FRS 110, and apply exceptions to consolidation. VCC’s investments, including investments through subsidiaries’ investment vehicles (if any), are measured at fair value through profit or loss in accordance with IFRS 9 / FRS 109. According to IFRS 13 / FRS 113.9, fair value is defined as the price received for the sale of assets or the price paid for the transfer of liabilities in an orderly transaction between market participants on the measurement date.

The VCC charter provides flexibility for managers to allocate and reduce capital when making decisions. VCC stock issuance, redemption, or repurchase price is equal to the proportion of VCC’s net asset value. Each share requires a reliable system and process to calculate the net asset value of VCC stock issuance. Month or quarter, as required by the Constitution). This may pose a challenge to private equity and venture capital funds, especially since the latest fair value information may not be available at any time during the issue, redemption, or repurchase of shares to facilitate the calculation of net asset value. Therefore, different types of funds (such as hedge funds, private equity, venture capital, etc.) may make different provisions according to their constitutions to meet their operating needs and requirements.

Note to the company secretary:

At any time, a VCC must appoint a manager who meets the following requirements to manage its property or operate the collective investment plan that comprises the VCC. The manager of the VCC refers to: (A)  A licensed fund management company that holds a capital markets services licence for fund management under the Securities and Futures Act;  (b) a registered fund management company; (c) A financial institution exempted under sections 99(1)(a), (b), (c) or (d) of the Securities and Futures Act from the requirement to hold a capital markets services licence to carry on business in fund management. A VCC must have VCC as a part and end of its name. VCC directors must be qualified representatives of directors or managers.

Sub-fund registration

The sub-fund must be registered within 7 days after its establishment. Each sub-fund will have a separate name and registration number.

Charter

The nature of VCC is measured on the basis of fair value. The actual value of paid-in capital is equal to the company’s net asset value at all times. The issuance, redemption, or repurchase price of VCC shares is equal to the ratio of handling fees and handling fees.

Annual review

VCC must submit an annual return within seven months of the end of the financial year. The timetable in the bill provides flexibility for managers to complete audits and submit annual reports. However, after receiving monthly or quarterly statements, managers should still consider investor expectations for audited financial statements. Generally, the fund issues financial statements within 90 to 120 days after the last day of the financial period/year. There is no prescribed format for annual returns.

Tax considerations:

Applicable tax benefits

–Enhanced Funds Program | ETF

-Singapore Resident Fund Scheme | SRF

The current tax concession schemes for Singapore Funds (ie Enhanced Fund Scheme (ETF) and Singapore Resident Fund Scheme (SRF)) will be extended to VCC.

The ETF and SRF plans provide that “designated income” from “designated investments” is tax-exempt.

Subject to certain conditions, funds approved under the ETF and SRF schemes can also receive withholding tax deductions for interest paid to non-residents and may recover GST based on a fixed recovery rate.

Independent (Independent Fund) VCC

One of the key characteristics of VCC is that it can be used as a single fund VCC (commonly called an independent VCC) or as a VCC with multiple sub-funds (commonly called an umbrella VCC).

The tax treatment of an independent VCC will be the same as that of a Singapore company.

The Monetary Authority of Singapore (MAS) is responsible for enforcing the Prevention of Money Laundering and Terrorist Financing Act and has the authority to issue VCC directives and regulations related to “anti-money laundering” / “anti-terrorist financing”.

Umbrella (Multiple Sub-Funds) VCC

A VCC established in a lump-sum form may apply for tax incentives on behalf of its sub-funds. The preferential tax conditions and corresponding economic commitments under the ETF and SRF schemes will apply to VCC umbrella funds (not every sub-fund of VCC).

E.g:

If the fund management company has five sub-funds, the minimum fund size requirements under the ETF plan will only be met at the umbrella fund management company level, not at each sub-fund level. The requirement to maintain a consistent investment objective (that is, the investment objective of the reward fund cannot be changed unless approved by the relevant authority) must be met at the umbrella VCC level, not just on a sub-fund basis. If an umbrella VCC violates the conditions of the tax incentive plan, all sub-funds within the umbrella VCC will not be able to enjoy the benefits of the annual tax incentive plan.

Economic conditions to be met by ETF and SRF plans

Under the ETF scheme, the fund must meet (among other things) the following economic conditions:

1. At the time of application, the minimum fund size for the application must be S$50 million
2. The fund’s local business expenditure must reach at least S$200,000 per year

Similarly, there is a condition under the SRF plan that the fund’s annual business expenditure (not necessarily local) is at least S$200,000.

Umbrella VCC should be noted that it has been announced that the above provisions will apply to VCC (not every sub-fund)

Therefore, if a VCC has three sub-funds, the business expenditure requirements for the entire VCC will be set at S$200,000 (instead of S$600,000). If VCC applies for an ETF scheme, the minimum fund size requirement will be S$50 million (instead of S$150 million).

The use of umbrella VCC fund managers brings major benefits. In the past, three Singapore companies had to use a fund size of at least S$150 million and business costs of at least S$600,000, instead of using the three sub-funds of VCC now.

Tender conditions

A current condition of the ETF and SRF plans is that once the fund is approved under either of these plans, the fund’s investment objectives cannot be changed (except in some cases and subject to approval by the authorities).

It has been made clear in the recent announcement that the objective conditions for investment must be met at the VCC level (rather than sub-funds by sub-fund level). this means:

1. If a sub-fund violates the objective investment conditions, it will adversely affect the entire VCC (ie other sub-funds). Defaults may occur when the Sub-Fund invests outside the VCC investment targets approved under the ETF and SRF plans.

2. Each time a VCC adds a new sub-fund, its investment objectives are different from those previously approved under the ETF or SRF plan. The VCC will need to update the investment objectives under the ETF and SRF plan and obtain approval from the authorities.

To prevent the approved entities from being abused or recycled, objective conditions for investment are introduced in the scheme. We hope that the relevant departments will reconsider this point. Only the sub-funds that violate the objective conditions of investment will lose the incentive in the year of default (other sub-funds will not).

Certificate of Resident Enterprise (“COR”)

VCC is a Singapore tax resident and will be eligible for a Singapore tax agreement. For umbrella VCC, COR will be issued under the name of VCC, and the name of the relevant sub-fund is included in the COR. Therefore, VCC and its related sub-funds should be able to access the tax treaties signed by Singapore.

Providing “Financial Industry Incentive Fund Management” Program to Fund Managers of Fund Companies:

Under the “Fund Management Company-Fund Management Company” plan, a preferential tax rate of 10% will be added to include fee income from management or agency providing consulting services.

Anti-Money Laundering / Terrorist Financing Regulations:

The MAS of Singapore requires VCCs to conduct due diligence on clients and to record all transactions and information obtained through said due diligence.

VCCs must assist foreign and Singapore domestic supervisory authorities in monitoring and other actions related to money laundering, financing of terrorism, and other crimes

If it is registered by a subsidiary (FI) of a foreign financial institution or established in a foreign VCC, it may be subject to the supervision of foreign anti-money laundering/counter-terrorism financial supervision authorities.

Anti-money laundering/counter-terrorism financial surveillance authorities in foreign countries and Singapore may request information about VCC from MAS, and MAS may obtain such information from VCC.

The HKMA may order any VCC or any VCC director or administrator, fund manager, approved custodian, employee, agent, or officeholder to provide the HKMA with any information required by foreign anti-money laundering / anti-money laundering authorities and domestic authorities. The HKMA may also order domestic institutions in Singapore to provide the HKMA with any information required by the anti-money laundering/counter-terrorism financial surveillance authority.

Inspections by the HKMA and foreign anti-money laundering authorities

The HKMA may from time to time inspect VCC or any of its affiliates, branches, agents, or offices outside Singapore to ensure that it meets the requirements of anti-money laundering regulations. The information obtained by the HKMA during an inspection may be passed to a foreign agency that exercises unified supervisory powers over the VCC involved in the inspection.