Hedge funds, private equity funds and real estate fund managers operating in Asia are interested in using the incoming Singapore Variable Capital Company (S-VACC) structure to domicile their investment funds, although sorting out the tax treatment of these vehicles remains a pressing issue, experts have told AsianInvestor.
Once introduced, the S-VACC is expected to provide private investors in Singapore with an offshore-like tax neutral position in an onshore environment—which is especially relevant given the increasing scrutiny over offshore tax havens.
In March 2017, the Monetary Authority of Singapore (MAS) announced that it would hold a public consultation for the S-VACC, a new structure for investment funds that aimed at increasing fund domiciliation in the city-state. While final legislation and commencement of the S-VACC is pending, investors in Singapore say there is enthusiasm to adopt the investment vehicle.
“The feedback on S-VACC has been very positive from what we’ve heard,” Paul Moloney, partner at UK law firm Eversheds Sutherland told AsianInvestor. “I think the view is that a lot of managers are looking at using the S-VACC to move funds going forward, and that will impact potentially offshore jurisdictions.”
“There’s very strong interest [from investor clients],” agreed Ho Han Ming, Singapore-based partner at US law firm Sidley Austin.
The S-VACC framework is set to allow a company to be registered with the Accounting and Corporate Regulatory Authority (Acra) and supervised by the MAS through the Securities and Futures Act (SFA). The structure can accommodate a wide range of investment funds, including unit trust funds, mutual funds, and private funds under the corporate vehicle.
This last point is especially relevant to interest for private fund managers. Singapore currently does not have a corporate investment vehicle available for the private funds universe, according to a 2017 report by UK consultancy PwC.
“I would say the S-VACC will likely be more popular with the private funds sector,” Long Jek-Aun, Singapore-based partner at UK law firm Simmons & Simmons. “I can imagine that, especially in the private fund space—whether it’s hedge funds, private equity funds or real estate funds—there will be a good take-up rate,” he told AsianInvestor.
“From a Singapore perspective, it would be a new corporate vehicle type,” said Sidley Austin’s Ho. “If a hedge fund manager’s looking at setting up a typical open-ended fund domiciled in Singapore, the S-VACC would be a suitable structure.”
There are a number of reasons behind why the S-VACC might be appealing for private fund managers, experts said, including tax efficiency and operational streamlining.
“Assuming that the Singaporean authorities get the tax treatment of that correct and that it’s tax efficient, then my understanding from talking to clients and contacts in Singapore is that a lot of asset managers and institutions in Singapore would be keen to use the S-VACC going forward,” said Eversheds’ Moloney.
Currently, the Cayman Islands is one of the leading offshore domiciles for investment funds due to its tax neutral status. The British Overseas Territory does not have a corporate or income tax, so investment funds structured as corporate vehicles there are not subject to taxation, although investors can still be taxed in their home jurisdictions on any income and gains from the fund.
In order for the S-VACC to gain more interest from fund houses that might otherwise use Cayman fund sructures, Singapore's authorities will have to offer similar tax treatment, Ho pointed out. “If the Singapore tax authorities issue a positive or favourable position for the Singapore S-VACC, it would be a natural attraction for fund managers,” he added.
Getting a favourable tax position from the Ministry of Finance is essential for investors, Ho emphasised. “There’s a lot of interest, but we’re [waiting] in anticipation of the tax position before we can press the green light,” he said. He expects the ministry to issue its position in either the second or the third quarter of this year.
Experts are optimistic that the Singapore government will adopt an investor-friendly tax position. "I think sorting the tax treatment is being finalised by the Singaporean authorities, so it's actually ensuring the S-VACC is tax-neutral," Moloney said.
Having less jurisdictions to deal with would also make operating and maintaining a fund less complicated and cumbersome, Simmons & Simmons’ Long said.
“Setting up a fund could be streamlined because if the fund was to be Singapore-domiciled, then essentially you’ll only be working with one set of lawyers,” he explained. “If the funds and managers are all based in just one jurisdiction, you can imagine that it does help in terms of streamlining,” he added.
Ultimately, the S-VACC needs to be cognisant of the advantages that offshore jurisdictions present to investors in order to succeed. “They’ll have to ensure that their legal and regulatory tax regime provides the same level of flexibility, same level of speed, and similar type of costs,” Moloney said.
Another impetus for interest in the S-VACC may be growing scrutiny on offshore jurisdictions, said Justin Ong, Asia-Pacific head of the asset and wealth management practice at consultancy PwC.
“We are seeing more effort and interest by institutions and investors to consider using more localised structures in Asia, as the global push for more substance and transparency takes hold,” he told AsianInvestor.
Simmons & Simmons’ Long agreed: “It may be that going forward, there will be more and more impetus for funds to be domiciled onshore, as opposed to the traditional offshore havens."
Effie Vasilopoulos, a Hong Kong-based partner at law firm Sidley Austin, noted: “There is a worldwide theme around moving structures onshore and minimising the use of tax-neutral entities in fund management arrangements."
Governments around the world are more coordinated in looking at tax leakage, she explained, and this is leading to regulatory changes that will become push factors for increasing use of onshore structures.
For example, the US enacted the Foreign Account Tax Compliance Act (Fatca) in 2010, which required all foreign financial instiutions to report on the assets and identities of US persons or entities in their records for the purposes of taxation. In 2014, The Organisation for Economic Co-operation and Development (OECD) initiated the Common Reporting Standard (CRS), to ensure the automatic exchange of financial information to combat tax evasion.
“When that idea and theme really takes hold and the relevant accompanying legal framework is in place to make that a reality, it will force fund managers and other institutions to use onshore structures,” Vasilopoulos added.
While this is not yet a reality, the fund management industry is moving in that direction. Vasilopoulos believes that eventually investment treaties will only be available when using onshore structures.
Over the short to medium term the Cayman Islands is set to remain the leading jurisdiction for Asian managers and institutions seeking to domicile their private funds, Eversheds’ Moloney said.
“Things like the S-VACC in Singapore may start reducing the appeal of offshore structures over time, but I think it will take time,” he added.
Experts expect the S-VACC to launch within the year, after the Ministry of Finance releases its final tax position, though the MAS has not released an official commencement date.