28 March 2019
On 6 March 2019, the Ministry of Finance (“MOF”) released a consultation paper that set out the proposed corporate income tax (“CIT”) treatment of variable capital companies (“VCCs”) in Singapore. The Income Tax Act (“ITA”) will be amended to implement the proposed tax policy. The proposed amendments to the ITA will be incorporated into an upcoming Variable Capital Companies (Miscellaneous Amendments) Bill 2019. The consultation closed on 21 March 2019.
The Variable Capital Companies Act 2018 (“VCC Act”) was passed by Parliament on 1 October 2018. When the VCC Act is in force (which is currently expected to be in the second half of 2019), there will be a new legal framework for VCCs in Singapore, a new type of corporate entity tailored for investment funds. Under the VCC Act, a VCC may be set up as a single standalone fund or may adopt the umbrella VCC structure under which it has multiple sub-funds that may have different investment objectives and investors, with segregation of assets and liabilities at the sub-fund level.
Currently, investment funds in Singapore may be structured as unit trusts (constituted by way of trust deeds), companies incorporated under the Companies Act or limited partnerships governed under the Limited Partnerships Act. However, these structures have limitations when used as vehicles for investment funds. Therefore, many investment funds that are currently managed out of Singapore are incorporated or set up in foreign jurisdictions which have the flexibility of a dedicated fund structure for such funds. The VCC framework seeks to provide investment managers with greater operational flexibility and allow investment funds to consolidate the fund domicile with the respective fund management activities in Singapore. Some advantages of VCCs over the current fund structures include:
- VCCs are more cost effective as sub-funds of an umbrella VCC will be allowed to share a board of directors and have common service providers;
- VCCs may consist of both open-ended and closed-end funds as sub-funds; and
- VCCs will be allowed to issue or redeem their own shares in accordance with their constitutions without having to seek shareholders’ approval, thus enabling investors to exit from their investments in the investment fund when they wish to.
The proposed CIT treatment of VCCs takes into account the unique characteristics of an umbrella VCC structure that is treated as a single legal entity with segregation of assets and liabilities at the sub-fund level.
The amendments to the relevant tax legislation are expected to come into operation in the second half of 2019.
VCCs will be treated as companies
A VCC will be treated as a company and a single tax entity under the ITA, subject to such modifications and rules made under the ITA. The key proposals on the CIT treatment of VCCs include:
- Applicable fund management tax exemption schemes under sections 13R and 13X of the ITA: Tax exemption schemes under sections 13R and 13X of the ITA (i.e. the Resident Fund Scheme and the Enhanced-Tier Fund Scheme respectively, which are the two main tax exemption schemes for fund management available for Singapore-based funds) will be extended to VCCs which are able to meet the usual conditions for such schemes.
- Tax residence: The tax residence of a VCC will be determined at the umbrella level for an umbrella VCC.
Certain CIT rules will be applied at sub-fund level for umbrella VCCs
MOF proposes applying the following key tax treatment at the sub-fund level in recognition of the segregation of assets and liabilities between sub-funds of a VCC:
- Deductions and allowances: To determine the chargeable or exempt income of a sub-fund of an umbrella VCC, deductions and allowances will be applied at the sub-fund level.
- Tax losses: Where applicable, unutilised capital allowances, trade losses and donations (collectively, “Tax Losses”) will be applied and kept to each sub-fund, to be carried forward for utilisation against future year’s taxable profits of that sub-fund or carried back for utilisation against the immediate preceding year’s taxable income of that sub-fund. Generally, a company is only allowed to carry forward or carry back its Tax Losses if there is no substantial change in its shareholders as at the relevant date (“Shareholding Test”). For an umbrella VCC, the Shareholding Test will be applied at the sub-fund level. The shareholding of each sub-fund will be determined separately based on the shareholders of the VCC in respect of that sub-fund.
The following reference materials are available on the MOF website www.mof.gov.sg:
- MOF press release
- Proposed amendments to the Income Tax Act
- Summary of proposed legislative amendments on the CIT treatment of VCCs