The benefits and limitations of Singapore’s Variable Capital Company structure

Variable Capital Companies, or VCCs, are flexible relative to many other structures and provide tax incentives, confidentiality and other benefits. In a short time, they’ve proved popular with foreign investors, with hundreds of VCCs already established. They do have limitations, however, and some of their tax incentives may expire.
To better understand VCCs, we interviewed two experts, Otto Von Domingo and Hoan Nguyen. Both are based in Singapore and focus on the private equity and real estate sectors in Asia Pacific. Their answers were sent by email and have been edited for length and clarity.

VCCs were introduced to promote Singapore as a primary investment domicile, and the effort has been widely regarded as successful. Can you briefly describe how the VCC structure works and some of its advantages compared with other common entity structures?

Otto: Singapore authorities introduced the VCC regulatory framework in January 2020. The launch of VCCs was aimed at closing a gap in Singapore’s fund-industry offerings. Singapore’s VCCs are broadly comparable to those available in other major financial hubs, such as the Cayman Islands, Hong Kong and Luxembourg. Following Singapore’s successful launch, India proposed a similar VCC framework. We’ve seen healthy interest in VCCs from venture capital fund managers in particular.

A VCC can be established either as a standalone or an umbrella entity containing sub-funds within it. An umbrella structure simplifies and consolidates fund administration across multiple sub-funds. It allows managers to segregate assets, which keeps liabilities separate between the sub-funds. It also permits redemptions during the life of the sub-fund without any solvency-test requirements. 

Hoan: As a vehicle for funds, I’d add that the VCC is very flexible. But I recommend that managers also avail themselves of Singapore’s other structures, depending on their situations, including considering limited partnerships or trust structures. Fund managers and investors can mix different vehicles in Singapore, as well as foreign vehicles, to generate a group structure that is tax-efficient and balances the needs of investors from an operational perspective. 

What types of investment firms benefit most from a VCC structure?

Otto: VCCs are attractive for venture capital, private equity, private real estate investments, infrastructure, fund of funds, private credit and debt funds, and hedge funds. In fact, there is no limit to the strategies or asset classes that can be accommodated within a well-structured VCC.

Hoan: I’d echo the point that VCCs have many benefits for many types of firms and situations. They allow for flexible strategies for traditional and alternative funds, including both open-end and closed-end funds and the ability to pull separate investors into sub-funds. This flexibility can provide operational efficiencies and related cost savings.

Critically, VCCs offer foreign investors potential tax benefits. These benefits may arise from access to tax treaties, but there are also specific incentive schemes, including the Monetary Authority of Singapore (MAS) Section 13O and 13U tax incentive schemes, which may be applied to fund managers as well as family offices.

Can you explain the appeal of having open-end and closed-end sub-funds within an umbrella?

Hoan: The concept of open- versus closed-end funds is not new to managers and investors. The VCC umbrella structure enables managers and investors to use both types of funds under the same existing structure, providing flexibility as well as operational and cost benefits. The same umbrella can be scaled to meet different investors’ needs and investment objectives. Each sub-fund is compartmentalised from an asset and liability perspective. 

Otto: Another advantage is that investors don’t have to make solvency statements at the point of redemption, unlike traditional corporate funds under a private limited company structure.

What are some of the drawbacks and limitations of a VCC, and when would a VCC not be the optimal option? 

Otto: Singapore’s VCC structure is still relatively new and hasn’t been fully tested. I think a couple more years will reveal if investors might exit. That said, the Cayman segregated portfolio, or SP, is a similar structure and has not encountered any difficult legal challenges. So it would be surprising if the VCC sub-fund structure does. 

It’s worth noting that VCCs are restricted to licensed or registered fund managers. This means that many single-family offices (SFOs) and real estate funds are unable to use the VCC structure.

Hoan: The growth of VCCs may be affected by the expiration of certain government incentives, set to end in January 2023. At the time of writing, it is not yet clear if the MAS plans to extend the grant scheme or if new grant arrangements will be offered.

I also agree that despite the early traction VCCs have received, many foreign investors still regard the structure as relatively untested. These investors have knowledge and expertise related to more traditional structures, such as limited partnerships, and have also become accustomed to working in traditional jurisdictions, such as the Caymans.

Fund managers — to become more comfortable and informed themselves about VCCs — should engage their tax and legal advisors, as well as investor relations. That will enable them to better educate their investors about the limitations and significant benefits of the VCC structure.

What tax considerations should investors from other regions (such as the US and EU) be aware of when establishing or re-domiciling a fund as a Singapore VCC?

Hoan: A VCC is treated as a company and a single entity for tax filing purposes, so only one set of income tax returns must be filed with the Inland Revenue Authority of Singapore.

VCCs are considered companies, so the prevailing company tax rates apply and VCCs may enjoy the same deductions as other companies. However, given VCCs’ specific use case as investment vehicles, they typically are eligible for tax incentives that could exempt most income derived from designated investments. 

Otto: Since each sub-fund is treated as a VCC, the chargeable income or exempt income of an umbrella VCC is the total of all its sub-funds. There are a couple of important considerations in this area. One is that Singapore has a single-tier tax regime, and shareholder dividends paid out are not taxable. The other is that Singapore has double-taxation agreements (DTAs), limited DTAs and exchange of information (EOI) arrangements in place with more than 100 countries.

How are Singapore VCCs governed?

Hoan: A VCC is governed by a board of directors according to the terms of the VCC’s constitution. It must be managed by a fund manager who is licensed or registered by the MAS. Both the VCC’s constitution and register of members are not available for public inspection. The size and composition of a VCC’s board of directors should be determined by the nature of the fund and its investors. For instance, the board composition of a private, closely held VCC fund would be different from that of an open-ended VCC fund with a large and diverse investor base.

Some VCCs are being established as a complement to a family office. Can you explain how this works and when it makes sense? 

Otto: Single-family offices can work with existing qualified fund managers, who will act as a VCC platform with a dedicated VCC or sub-fund established for the office. The SFO-managed fund can invest into the VCC sub-fund by subscription in specie, meaning the asset is transferred in its current form rather than in the equivalent amount of cash.

The Monetary Authority of Singapore is planning a VCC Act 2.0. How do you think that might change the current structure?

Hoan: A Vistra-led survey of our clients indicated two priorities for the next version of Singapore’s VCC Act. Half of our respondents want fund managers to be able to convert existing legal entity structures into VCCs. More than a third of respondents want to be able to re-domicile multiple funds into a single VCC. Participants have previously raised these issues, so they are ongoing themes. 

Otto: VCCs are currently restricted to licensed and registered fund managers. This excludes many single-family offices and real estate funds. Interestingly, this was not the most important factor for the fund managers we surveyed. Those results may be affected by population bias, however, as we surveyed only fund managers currently using VCCs.

Is there anything we haven’t covered that you think investors and fund managers should know about Singapore VCCs?

Otto: An important factor that will affect the further adoption of VCCs relates to investor confidence and awareness. While adoption has been strong, some fund managers remain wary. Many global investors are not fully aware of VCCs, and some fund managers are hesitant to sell investors on a platform without a sustained track record.

Singapore’s grant scheme and tax incentives have been successful in driving adoption, and there is a risk adoption rates will drop if the grant scheme ends in 2023.

Hoan: As I mentioned, the VCC should not be considered in isolation. It represents only one point in Singapore’s overall ecosystem for investors and fund managers.

Singapore is striving to develop a durable platform for investors and managers. This is reflected in the country’s development goals roadmap, which has been promoted by the MAS and has garnered broad support within the Singapore government and the industry. The country’s progressive regulatory regime, as well as the government’s heavy investment in talent, infrastructure and technology are significant considerations. The current version of the VCC is only the first step. We expect more developments around other legal structures and, more importantly, industry-wide projects that focus on harnessing technology to future-proof Singapore as an investment domicile.

For more information, see our page on establishing a Singapore Variable Capital Company.

This article was updated on 17 February 2023.