Singapore’s financial regulator has big ambitions for the long-awaited corporate structure for funds it proposed* on March 23 – but certain points need clarifying if the concept is to gain traction.

These include questions over the treatment of both foreign and Singaporean structures, and about taxation of funds, said Justin Ong, asset and wealth management leader for Asia Pacific at consultancy PwC.

Moreover, real estate funds are likely to want to use the Singapore Variable Capital Company (S-Vacc) vehicle,** but they cannot do so under the current draft, he told AsianInvestor.

The Monetary Authority of Singapore (MAS) appointed PwC in 2015 as a consultant for studying the investment fund framework.

Singapore currently does not have any corporate form fund vehicle catering to the specific needs of hedge, private equity, mutual or real estate funds. The proposal that has emerged, S-Vacc, aims to compliment the three existing local structures for investment funds: unit trusts, companies formed under the Companies Act, and limited partnerships.

Redomiciliation and tax questions

Provisions were introduced last month allowing for the redomiciling of foreign corporates as companies in Singapore under the Companies Act, noted Ong, which is a positive move. “That was not possible in the past,” he noted. And the S-Vacc bill provides for the redomiciliation in the city-state of funds housed in other jurisdictions following the Companies Act amendment.

At issue now, however, is the threshold at which companies qualify for redomiliciation, which could be an obstacle for investment funds.

The current rules under the Companies Act are focused on attracting big companies, noted Singapore-based Ong. “[The regulators] don’t want small, fly-by-night firms looking to set up in Singapore simply with the aim of escaping tax,” he said.

But the proposed high minimum threshold is not always suitable for funds, noted Ong, so the new rules need to be tailored with them in mind.

Another related point is that the current proposals allow for redomiciling of foreign structures, but make no provision for transferring existing Singapore vehicles to S-Vacc, noted Ong.

“The feedback should also take this into account,” he said. “We expect that the first wave of funds to move into the S-Vacc structure would be from existing unit trusts, limited partnerships and corporate vehicles in Singapore.”

What's more, added Ong, it is also unclear under the draft bill whether the tax advantages enjoyed by the existing Singapore fund structures will also be applicable to S-Vaccs. The assumption is that they will, he noted, but this needs to be confirmed.

He added that there are also industry requests for some changes to be made to the tax incentives for funds to make S-Vaccs a more attractive choice.

Real estate funds exempted

A fourth area of uncertainty is that the new structure is not currently applicable to real estate funds or real estate investment trusts (Reits). “This will certainly receive a lot of industry feedback,” noted Ong, as there is likely to strong interest from property investment firms in using the S-Vacc.

One reason that property funds are excluded from S-Vacc now is because, under the proposed rules, only Singapore-licensed fund managers can set up these structures.

Since August 2012, managers of real estate and other immovable property have been exempted from the licensing requirements applicable to other fund managers. The MAS reasoned that the risk profile of their underlying assets was very different from those of other managers, said Ong. “You can’t run a real estate fund the same way you would a typical retail or hedge fund,” he noted.

As a result – and perhaps as an unintended consequence – property managers are excluded from the S-Vacc structure, said Ong.

S-Vacc demand

PwC is already in discussion with several large retail fund houses on whether they could make use of the structure, said Ong. “It’s logical for a fund manager with, say, 30-40 unit trusts in Singapore to consider the cost benefit of launching new products using S-Vacc.”

However, he said the structure was not initially designed for typical retail products, but rather for alternative investment funds.

“When we first looked at this as a concept back in 2013,” Ong noted, “we felt a new investment fund framework was needed more for private equity, real estate and hedge funds – in that order. Of course, it’s available to retail funds if they choose to use it.”

Still, said Ong, once the Asia Region Fund Passporting programme goes live at the end of 2017, there is likely to be more demand for a corporate structure for retail funds.

* The deadline for submitting comments to the MAS on the draft bill is April 24.

** Last month PwC published both a short-form and a more detailed briefing explaining the S-Vacc structure.