Singapore: Spotlighting The Variable Capital Company

This article explores the evolution of the VCC structure to-date, proposed changes to its regulations, and our views on the future prospects of the VCC structure in Singapore.

Features Of The VCC

The VCC is a corporate structure tailored specifically for investment funds without the capital restrictions of a traditional Singapore private limited company. It can be set up as a standalone entity or as an umbrella VCC with multiple sub-funds, each having its own investment objective and strategy to suit varying requirements of investors, their risk appetites, or specifications of certain asset classes. Although viewed as a single legal entity when set up as an umbrella VCC with multiple sub-funds, the assets and liabilities between the sub-funds are legally required to be segregated and ring-fenced to prevent the risk of assets of one sub-fund being used to discharge liabilities of another, serving as a safeguard for both creditors and investors.

Unlike traditional Singapore private limited company, the VCC in particular:

• Provides for anonymity for investors as the register of members, constitution and financial statements of a VCC (and its sub-funds) are not required to be made available for public inspection.
• May be used as a closed-ended or open-ended investment vehicle, and as there are no capital maintenance requirements, it allows fund managers to easily increase or return capital to investors (via issuance or redemption of shares) without the need for shareholders’ approval, and to make distributions without restricting such payments being made only out of profits.
• Allows fund managers to consolidate multiple sub-funds under one entity, which provides for operational efficiency and economies of scale by optimising costs and reducing administrative complexities associated with fund setup, administration, compliance, and reporting.

VCCs can also offer investors various tax benefits, making them highly attractive to both investors and fund managers seeking tax-efficient structures. VCCs are eligible to apply for tax incentives under Sections 13O or 13U of the Income Tax Act 1967 of Singapore, where, if awarded, allows all specified income from designated investments of the VCC to be tax-free. As a corporate structure, VCCs are eligible to access over 100 double taxation agreements (DTA) between Singapore and other jurisdictions that may allow a VCC to enjoy lower withholding taxes on dividends, interest, and royalties from investments in such jurisdictions. In addition, VCCs may seek a Goods and Services Tax (GST) remission which will allow the VCC to recover GST incurred on certain qualifying expenses related to its investment activities.

To promote the adoption of the VCC framework, the MAS launched the Variable Capital Companies Grant Scheme in January 2020. This scheme, which has been extended to January 2025, helps fund managers defray the costs of setting up a VCC by co-funding a portion of the eligible expenses paid to Singapore-based service providers.

Role Of VCCs In The Singapore Fund Ecosystem

Since its introduction in 2020, VCCs have been utilised across a wide range of asset classes, including open-ended mutual funds and hedge funds, and closed-ended private equity, venture capital, private credit and real estate funds. Prior to VCCs, closed-ended funds were more commonly structured as limited partnerships.

The VCC has provided fund managers with a versatile and efficient vehicle to establish and manage Singapore domiciled investment funds. Establishing a VCC as an umbrella fund with multiple sub-funds enables fund managers to group different funds with different investment objectives and strategies under a single legal structure that has a common board of directors and service providers (such as the fund manager, custodian, auditor and fund administrator) across all the sub-funds, typically resulting in economies of scale and significant cost savings for each sub-fund. As a VCC is permitted to have a single investor, they may be used in master-feeder structures where the VCC is the master vehicle that holds the underlying assets, with the feeder fund being either another VCC or a non-Singapore domiciled fund such as a Cayman Islands limited partnership.

Given the flexibility of the VCC structure, the Singapore asset management industry has been able to use VCCs to experiment with innovative fund products. Under Project Guardian³, an industry initiative led by the MAS to enhance liquidity and efficiency of financial markets through asset tokenisation, financial institutions such as UBS Asset Management and Franklin Templeton have successfully launched tokenised VCCs, which utilise digital asset networks to maintain the records of fund shares and smart contracts to enable blockchain-native fund subscriptions and redemptions. Schroders and Calastone are working on a tokenised investment vehicle pilot, which will securely capture and maintain records of tokens issued in a VCC directly onto distributed ledger technology (DLT) and blockchain network. The pilot will apply the security attributes inherent in DLT to evolve traditional forms of book-keeping and demonstrate proof of ownership of the VCC tokens.

On the wealth management front, banks in Singapore are increasingly turning to VCCs as a preferred vehicle for managing and structuring investment portfolios on behalf of high-net-worth individuals and family offices. The VCC provides banks with a flexible and efficient way to offer customised investment solutions to their clients, while also ensuring compliance with regulatory requirements and operational best practices. Notably, DBS Bank launched its DBS Multi-Family Office Foundry VCC⁴ in November 2023, which it calls the world’s first bank-backed multi-family office. It leverages the VCC structure to provide ultra-high-net-worth families with the option of using a fund structure to manage and consolidate their assets in Singapore without having to establish single family offices. Standard Chartered Bank followed in June 2024, launching the Standard Chartered Funds VCC to cater exclusively to its high-net-worth clients in Singapore, Hong Kong and Dubai⁵.

Limitations And Proposed Enhancements To The VCC Regime

Despite its many advantages and the favourable uptake to-date, there are some limitations of the VCC structure. These include:

• Concept of ring-fencing of assets remains untested – Although it is statutorily provided in the Variable Capital Companies Act 2018 that the assets of one sub-fund must not be used to discharge any liability of any other sub-fund, the concept of ring-fencing of assets within a single legal entity has not been judicially tested, and there is no guarantee that such a concept will be upheld in courts of other jurisdictions outside of Singapore.
• Stakeholder awareness – While the take up of the VCC structure has been relatively high compared to similar new fund structures launched in recent years in Australia and Hong Kong, there remains a segment of global investors and fund managers who are accustomed to segregated portfolio company and limited partnership structures in the Cayman Islands or the British Virgin Islands.
• Operational considerations – Implementing the VCC structure requires a fund manager that is licenced by the MAS to carry on fund management activities in Singapore, and a Singapore-based fund administrator must also be appointed for purposes of the tax incentive schemes. Whilst there are no capital maintenance requirements for a VCC, shares of a VCC are to be issued, redeemed or repurchased at a price equal to the proportion of the net asset value of the VCC represented by each share (except during the initial offering period of the shares), which may be cumbersome for closed-ended funds, often requiring separate series and classes of shares to be issued within a VCC or sub-fund.

The MAS has been working on enhancements to the VCC regime (VCC 2.0) to refine and expand on the laws and regulations of the VCC structure based on feedback from industry stakeholders, including fund managers, lawyers and other service providers. Some proposed changes include expanding the pool of fund managers (currently limited only to licenced Singapore fund managers) that can use the VCC structure to include single-family offices and real estate fund managers, and implementing a statutory mechanism to facilitate the conversion of existing fund entities established as Singapore private limited companies to VCCs.

Outlook On The VCC Regime

The VCC has significantly impacted the funds landscape in Singapore since its introduction. In our view, the MAS has done a commendable job in shaping the VCC framework into a globally recognised and competitive fund structure. Coupled with Singapore’s strategic location and its reputation as a financial centre with a stable regulatory environment, the VCC has evidently been a popular choice with global fund managers choosing Singapore as their preferred domicile for launching investment funds targeting Asian markets and beyond. Although challenges remain, these are not uncommon themes amongst similar structures in other jurisdictions, and the future of VCCs continues to look promising with MAS’ ongoing efforts and commitment to improve the relatively new VCC framework to adapt to global market trends and investor preferences through initiatives like VCC 2.0.

With the Singapore regulators prioritising transparency, accountability, and regulatory compliance, investors can confidently invest in VCCs, knowing that they adhere strictly to these regulations, maintain high standards of corporate governance, and operate within a clearly defined legal framework. Besides focusing on developing Singapore as a domiciliation hub for funds, the MAS is also looking to broaden market access opportunities for Singapore-domiciled funds (such as facilitating funds passporting schemes with other countries), and to deepen the asset servicing capabilities of the Singapore funds ecosystem (such as providing collaboration opportunities for custodians, fund administrators, accountants, lawyers and fund directors). With strong support from the MAS, we can expect the VCC to continue to gain prominence in the global funds market and cement Singapore’s reputation as a leading fund domiciliation hub.

¹ https://www.acra.gov.sg/training-and-resources/facts-and-figures/business-registry-statistics  

²  https://www.mas.gov.sg/-/media/mas/news-and-publications/surveys/asset-management/asset-management-survey-report-2022_version-finalised.pdf

³ https://www.mas.gov.sg/schemes-and-initiatives/project-guardian  

⁴  https://www.dbs.com/newsroom/DBS_launches_worlds_first_bank_backed_multi_family_office_VCC_for_wealthy_families_sg ⁵ https://av.sc.com/sg/content/docs/sg-pr-sc-sets-up-first-global-fund-management-entity-in-sg.pdf

Emily Low
Emily is a Senior Partner and deputy head of Dentons Rodyk’s Corporate practice group. She is also the Co-Head of the Investment Funds practice.

Xinlei Ng
Xinlei is a Senior Associate in Dentons Rodyk’s Corporate practice. Her practice area includes private investment funds and corporate and financial regulatory work.