Singapore VCC: Navigating The Incorporation Process

For a long time, the assets and wealth management industry in Asia lagged behind offshore jurisdictions due to the absence of flexible and tax-efficient investment structures.

However, the introduction of the Singapore Variable Capital Company (VCC) in 2020 changed the game, closing the gap between Singapore’s fund-industry offerings and other major financial hubs, such as the Cayman Islands, BVI, and the US.

This article will examine the VCC fund structure in detail, covering its main features, the process of setting up a VCC in Singapore, regulatory compliance requirements, and potential drawbacks to keep in mind.

What is a Variable Capital Company (VCC)?

The Variable Capital Company (VCC) is a new legal entity structure for all types of investment funds in Singapore.

The Singapore authorities introduced VCC under its own legislation in January 2020. In only a short period, this structure has become increasingly popular with foreign investors, with hundreds of VCCs already established in Singapore.

A VCC is a separate legal entity from its owners, much like a Singapore private limited company or limited liability company.

Yet, the VCC has four distinct characteristics that set it apart from other types of company structures:

• Variable capital

The VCC’s share capital can be adjusted without shareholder approval, allowing the company to change the capital structure in response to investment inflows and outflows.

In contrast, other structures such as LLCs may have more limitations on the adjustment of capital.

• Fund manager

A VCC is required to appoint a Singapore-based licensed or registered fund manager that is regulated by the Monetary Authority of Singapore (MAS).

• Closed-end and open-end funds

VCCs can be used to set up both open-end funds (e.g., mutual funds) and closed-end funds (e.g., private equity or venture capital funds), providing flexibility to accommodate various investment strategies and investor types.

• Umbrella and sub-funds

The VCCs can be set up as standalone entities or as an umbrella structure with multiple sub-funds. The assets and liabilities of each sub-fund are segregated, and each sub-fund can have a different investment objective and portfolio.

Investors can pool their assets together and manage multiple investment strategies under a single VCC structure.

Why set up a VCC in Singapore?

The VCC structures are attractive for many types of firms in Singapore, including venture capital, private equity, real estate investments, private credit, debt funds, and hedge funds.

This is due to several reasons listed below:

• Flexibility in share issuance and redemption

VCCs offer operational flexibility such as the ability to issue and redeem shares at net asset value without shareholders’ approval, and the option to use multiple currencies for share capital and financial reporting.

• Distributing dividends out of capital

Under Singapore law, companies are not allowed to distribute dividends to investors from the capital, as dividends are required to be paid out of profits.

Nevertheless, the VCC offers more flexibility in this regard, allowing dividends to be distributed from its profits or capital, as long as the distribution adheres to relevant laws and regulations.

• Tax benefits

The VCC structure benefits from Singapore’s attractive tax regime, which includes a 10% concessionary tax rate under the Financial Sector Incentive (FSI) scheme for qualifying fund management activities, and a possible tax exemption under the Enhanced Tier Fund Tax Exemption Scheme for qualifying funds.

• Reliable regulatory framework

VCCs are regulated by the Monetary Authority of Singapore (MAS), which sets out the framework and guidelines for the establishment, operation, and management of VCCs.

This provides a level of assurance to investors, ensuring the protection of investors’ interests and the overall stability of Singapore’s financial system.

• Complying with a simplified financial report

A Singapore VCC may be subject to a simplified financial reporting framework called the Simplified Reporting Standard (SRS) under certain conditions.

This framework is designed to reduce the compliance burden for small to medium-sized VCCs who may not have the resources to comply with more complex requirements.

What are the downsides of starting a VCC?

Similar to any fund structure, there are some downsides to using a VCC.

Because the Singapore VCC framework is relatively new, it may not be recognized by foreign investors or jurisdictions, which could affect its appeal or limit cross-border opportunities.

Other disadvantages of starting a VCC include:

• High setup and operational costs

Establishing a VCC may require a substantial investment and ongoing expenses.

These can include professional fees for legal, accounting, and audit services, as well as costs related to maintaining a physical office, employing key personnel, and engaging a licensed fund manager.

• Extensive compliance requirements

VCCs must comply with various requirements in Singapore such as anti-money laundering (AML) and countering the financing of terrorism (CFT) regulations. This may increase operational complexity and reporting burden for the VCCs.

In summary, while Singapore VCCs offer several advantages, they may not be the best fit for every asset manager or investor, and it is essential to carefully weigh the pros and cons before deciding to set up a VCC in Singapore.

How to establish a VCC in Singapore?

Setting up a VCC in Singapore can be summarized in the following three steps:

Step 1: Reserve your VCC name

A reserved name serves as a placeholder to ensure your chosen name is not taken by another entity while the incorporation process is ongoing.

You should conduct a company name check to make sure it is unique, does not infringe on existing trademarks, and complies with any naming guidelines set by ACRA.

Step 2: Appoint company key officers

You are required to appoint key officers to fulfill specific roles and responsibilities, which include:

• Director

VCCs must have at least one Singapore-resident director. If you are a foreigner looking to set up a VCC in Singapore, hiring a Singapore nominee director may be a good alternative for this requirement.

• Fund manager

A VCC is required to appoint a Singapore-based licensed or registered fund manager that is regulated by the Monetary Authority of Singapore (MAS).

The fund manager will be responsible for the investment management and compliance with applicable laws and regulations.

• Company secretary

Within six months of incorporation, a VCC must appoint a qualified company secretary. This person will be responsible for maintaining the company’s statutory records and ensuring compliance with corporate governance requirements.

Step 3: Register your VCC

This involves submitting an application to the Accounting and Corporate Regulatory Authority (ACRA).

You will need to provide key information such as the VCC’s name, registered office address, proposed constitution, unique entity number, and any other relevant documents required.

The processing time may take 14-60 days, assuming that all required documents and information are prepared and submitted correctly.

To expedite the process, you should engage a professional company formation service to ensure that the necessary documentation and applications are prepared accurately and submitted in a timely manner.

How to maintain annual compliance for VCCs

Maintaining annual compliance for a Variable Capital Company (VCC) in Singapore involves adhering to various legal, regulatory, and tax obligations.

Key steps to ensure your VCC compliance include:

• Prepare and audit financial statements

You’re required to maintain accurate financial records of your VCC and ensure that the financial statements are prepared and audited by a qualified auditor.

• Conduct annual general meeting

It’s necessary to hold an annual general meeting (AGM) within 18 months of the VCC’s incorporation and subsequently at least once every calendar year.

At the AGM, present the audited financial statements to the shareholders for approval.

• Submit annual returns

A VCC should submit an annual return with ACRA within one month of the AGM.

The annual return should include information about the VCC’s directors, shareholders, and registered office, and a copy of the audited financial statements.

• File tax returns

You should file the VCC’s annual income tax return with the Inland Revenue Authority of Singapore (IRAS) within seven months of the VCC’s financial year-end.

Along with that, make sure to calculate and pay any applicable taxes, and claim tax incentives (if eligible) for your VCC.

Conclusion

In conclusion, a Variable Capital Company (VCC) in Singapore offers a flexible and efficient fund structure for asset managers and investors, with tax incentives and a robust regulatory framework.

Establishing and maintaining a VCC involves appointing key officers, registering with ACRA and MAS, and ensuring ongoing compliance with legal, regulatory, and tax obligations.

It’s recommended that you engage experienced professionals to support you with setting up and operating a VCC in Singapore. So if you have any questions about this matter, don’t hesitate to drop a message via service@bbcincorp.com today!

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