The topic of fund formation has proved to be evergreen. Government and regulatory changes, tax law refinement, and investor preference continue to drive competition over which jurisdiction offers the most favorable fund domicile for alternative fund managers and investors alike.
Singapore vs. Cayman has increasingly become a key decision for fund managers as they launch their first or fourth fund. What's driving competition between these two jurisdictions? Until 2020, certain fund structures were more popular to set up in the Cayman Islands, leaving fund managers with little choice regarding their fund jurisdiction. But in January 2020, Singapore introduced the Variable Capital Company (VCC) umbrella fund structure which is similar to the Cayman Segregated Portfolio Company (SPC) in many ways. Essentially both fund structures allow for a number of legal compartments to be created under the umbrella of a single corporate entity, with each compartment having segregated assets and liabilities that are ring-fenced from the other compartments.
Although the mechanics of the Singapore VCC and Cayman SPC are similar, we will explore some notable differences in this article.
Cayman Islands SPC
Despite its popularity waning, the Cayman Islands still has the lion's share of offshore fund domiciles. This shift began in 2019 after the economic substance legislation was introduced in Cayman. Since then, other fund domicile jurisdictions, including Hong Kong, Luxembourg, Ireland, and Singapore, have gained popularity. However, the Cayman Islands SPC remains a popular fund structure choice for fund managers for several reasons.
The Cayman Islands SPC is well-established and widely used by many global investors, particularly in the private equity and hedge fund industries. The Cayman Islands offers a favorable tax regime with no income tax, capital gains tax or withholding tax, making it an attractive option for investors. Additionally, the fund structure is flexible and often used for multi-class hedge funds, umbrella funds and master-feeder fund structures.
One disadvantage of the SPC is that it may be subject to more regulatory scrutiny and compliance requirements than the VCC, particularly if it is marketed to U.S. investors. Additionally, the cost of setting up and maintaining a Cayman Islands fund can be higher than that of a VCC.
The VCC is a crucial component of Singapore's efforts to position itself as a full-service fund management and fund domiciliation hub. International investors have highly regarded Singapore, and as they become more familiar with the VCC, it becomes an even more compelling option. The fund structure has become a flexible and cost-effective option for investment funds.
The key advantage of the VCC is its tax efficiency, as it is subject to a maximum take rate of 10% on its income and similar to the Cayman Islands, capital gains are not taxed in Singapore. Additionally, the VCC is flexible in terms of share issuance, redemption and dividend distribution. The speed and simplicity of incorporation are other benefits. It takes between 14 days and 60 days to obtain approval. The process is accelerated because the regulator requires no pre-approval.
Fund managers with a broad Asian investor base or who invest in the region can take advantage of the double tax treaties available in Singapore. Singapore has up to 100 double-tax treaties with different countries around the world. Dividends and distributions paid by a VCC are tax also exempted. There is also a significant financial incentive, as the Monetary Authority of Singapore extended a grant scheme for a validity period of two years from 16 January 2023 to 15 January 2025 to encourage adoption and conversions to the new VCC structure. The grant covers 30% of the qualifying expenses (capped at 30,000 Singapore dollars per VCC and up to three VCCs per fund manager) paid to Singapore-based service providers for work done in relation to the incorporation and registration of VCCs and their sub-funds.
Is the VCC Here to Stay?
Only time will tell if the VCC is here to stay. Data shows that the formation of VCCs in Singapore increased by 65% from a year earlier. As of October 14, 2022, 660 VCCs represented over 1,300 sub-funds managed by 420 regulated fund management companies. The dispersion across fund types is 33% private equity and venture capital, 28% multi-family offices, 20% hedge funds, 14% traditional funds, and 5% other.
Currently, the VCC is less expensive to operate compared to a Cayman Islands SPC because the fund does not require another set of service providers to comply with local regulations. Additionally, there is only one set of regulations to follow, contributing to cost and operational efficiency. Singapore has created a compelling regulatory environment for investment funds by offering flexible fund structures, strong regulatory controls and a community of experienced service providers, propelling the country to become a leading alternative fund domicile.
Ultimately, the choice between the VCC and the Cayman Islands fund structure will depend on the specific needs and preferences of the investor and fund manager. Factors such as tax efficiency, regulatory requirements, and costs must all be weighed.