As Hong Kong considers how best to set up modern limited partnership rules and taxes to attract private equity companies to set up in the city, it may cast some envious glances southwards, where Singapore has had its PE regime up and running since 2010. 

The Lion City’s experience could also prove instructive, as it took time for it to generate decent traction with private equity managers.

“The Singapore limited partnership regime started getting popular only post 2012 or 2013, before which we had seen very few asset owners using the Singapore-based LP structure,” said Armin Choksey, Singapore-based partner of asset management at consultancy PwC. “However, now we see at least five out of 10 private equity funds [operating in Singapore] are using Singapore limited partnerships.”

In the past Singapore had been the only viable jurisdiction in Asia for bigger institutional investors, Robert Woll, a Hong Kong-based partner at US-based law firm Mayer Brown, said. 

Robert Woll, Mayer Brown

Major institutional LPs increasingly wish to invest in funds domiciled in jurisdictions perceived to have taken steps to comply with European Union and global initiatives in areas such as anti-money laundering (AML) and base erosion and profit shifting (BEPS), he added.

BEPS refers to tax avoidance methods that use gaps in jurisdictions’ tax rules to shift taxable profits to low or tax-free locations.

And Singapore hasn’t stood still with its fund regulations. In the fourth quarter of this year the city state is set to introduce a new corporate structure called a Variable Capital Company (VCC). It will enable asset managers to structure funds either as limited partnerships or as VCCs, said Ho Han Ming, Singapore-based partner of investment funds and private equity at US law firm Sidley Austin.

The VCC framework provides safeguards against the commingling of assets and liabilities between sub-funds. That means that even if one fund becomes insolvent, the assets of sub-funds or the umbrella fund cannot be touched to pay for its liabilities.

A VCC will also receive the same tax incentive schemes as onshore companies, including exemption from withholding tax and a 10% concessionary tax rate for fund managers under the Financial Sector Incentive. Singapore’s limited partnership regime taxes carried interest at 10%, and this would remain the same if it was incorporated as a VCC. 

Ho said the VCC structure makes a lot of sense for some fund vehicles, “for example, inclusion under applicable double-tax treaty arrangements”.

TAX ADVANTAGE

That plays to another of Singapore’s advantages over Hong Kong: the number of double-taxation treaties it has with other countries. These agreements ensure that when companies or individuals from one jurisdiction earn money in the other, they pay tax where the income is earned and aren’t taxed on it again in their home market. 

“Being able to access Singapore’s tax treaties can help reduce the tax on investments made into the target countries and thereby improve returns for the fund,” said Choksey. Singapore has double-tax treaties with over 80 countries, he added. Hong Kong only has 40.

At a time when the validity and appeal of offshore jurisdictions is coming into question, Singapore looks better set than Hong Kong to capture fund managers inclined to move, courtesy of its limited partnership regime track record and its new VCC structure.

Ho Han Ming, Sidley Austin

Sidley's Ho said: “There’s strong interest in Singapore versus Hong Kong for a variety of reasons, including familiarity with the operational mechanics and legislative concepts similar to corresponding structures in the Cayman Island. In short, from a funds perspective, it [the VCC framework] works."

In addition to tax benefits, Ho noted that Singapore's VCC licensing regime was relatively progressive. The Monetary Authority of Singapore allows fund managers to apply for different tiers of licence with varying requirements, depending on which type of investor they are targeting. 

There’s no guarantee the VCC regime will turn out to be as handy as it sounds. But it appears well set to take advantage of shifting investment trends. 

“The shift is there, from offshore to onshore fund domiciles, but where funds eventually gravitate globally, for now at least, it does seem to point towards Asia,” said Ho. 

OFFSHORE COMPLICATIONS

Moreover, the private equity hub ambitions of both Singapore and Hong Kong could gain a boost from an unexpected source: the Organisation for Economic Cooperation and Development. 

The intergovernmental organisation has come down hard on offshore finance jurisdictions like the Cayman Islands. Lawyers and placement agents say that 90% or more of private equity funds investing in Asia are domiciled in such locations. 

The OECD has demanded that offshore centres provide a higher threshold of ‘domestic economic substance’, effectively meaning they must have more personnel and resources in those centres. 

One possible outcome is that the fund managers look for other domiciles, such as Hong Kong and Singapore.

This story was adapted from the cover story of AsianInvestor's Summer 2019 magazine edition.