27 September 2019
On 3 September 2019, the Variable Capital Companies (Miscellaneous Amendments) Bill (“Bill”) was passed. The Bill seeks to introduce a tax framework for variable capital companies (“VCCs”) which are incorporated under the Variable Capital Companies Act 2018 (“VCC Act”). The Bill also seeks to amend the VCC Act to make changes necessitated by the transfer of the corporate insolvency provisions in the Companies Act to the Insolvency, Restructuring and Dissolution Act 2018 (“IRDA”).
The VCC is a corporate structure incorporated under the VCC Act which may only be used as an investment fund vehicle. It accordingly has features that are tailored for this purpose, e.g. being able to vary its share capital without seeking investors’ approval and pay dividends using profit or capital. The shareholders of a VCC are the fund investors. A VCC must be managed by a fund manager that is regulated by the Monetary Authority of Singapore.
Introducing the VCC will provide an additional structuring option for Singapore-based fund managers to domicile their investment funds locally and enhance Singapore’s position as a full-service international fund management centre.
It is stated in the parliamentary speech delivered at the Second Reading of the Bill that the VCC framework will become operational at the end of 2019.
Tax framework for VCCs
The tax framework for VCCs will be established through amendments to the Income Tax Act, Goods and Services Act and Stamp Duties Act. The tax treatment of VCCs recognises the unique characteristics of a VCC, one of which is its ability to combine the advantage of a single legal entity at the umbrella VCC fund level, with segregation of assets and liabilities at the sub-fund level.
Generally, a VCC will be treated as a company for corporate income tax (“CIT”) purposes and salient aspects of the tax treatment are as follows:
- To ease the compliance burden, an umbrella VCC will only need to file a single CIT return with the Inland Revenue Authority of Singapore (“IRAS”), regardless of the number of sub-funds it has.
- Deductions and allowances for expenses incurred by an umbrella VCC will be applied at the sub-fund level to determine the sub-fund’s chargeable income.
- Where applicable, a VCC will enjoy the start-up or partial tax exemption under the general CIT regime. These exemptions will be enjoyed once at the umbrella VCC level, regardless of the number of sub-funds under the umbrella VCC or the number of sub-funds that are subsequently added to the umbrella VCC.
- VCCs will be eligible to benefit from tax incentives for funds under sections 13R and 13X of the Income Tax Act. These incentives will provide tax exemption on qualifying investment income.
Goods and services tax (“GST”) will apply at the sub-fund level as each sub-fund makes independent sale and purchase decisions based on its respective investment mandate. GST accounting and reporting are to be performed separately by each sub-fund that is liable for GST registration.
Stamp duty is levied at the sub-fund level, e.g. stamp duty will be levied on an instrument that transfers the interest in property and shares between sub-funds. This treatment is consistent with the principle that sub-funds have segregated assets and liabilities.
IRAS will provide further guidance and details of the tax treatment for VCCs in due course.
Insolvency provisions in VCC Act
The Bill also seeks to amend the VCC Act to make changes necessitated by the transfer of the corporate insolvency provisions in the Companies Act to the IRDA.
Currently, the provisions in the VCC Act relating to receivership and winding are adapted from the Companies Act. Gazetted in November 2018, but not yet in force, the IRDA consolidates all personal and corporate insolvency, and debt restructuring laws into one statute. When the IRDA comes into force, the insolvency provisions in the Companies Act will be repealed. Hence, amendments to the VCC Act are necessary to change references to the Companies Act to the IRDA instead. This will align the insolvency regime for VCCs and their sub-funds with that of other corporate structures in Singapore.
Technical amendments will also be made to the VCC Act, e.g. to clarify that a VCC should have at least one member.