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  • SINGAPORE

    World Wide Tax News Issue 56 - October 2020

Tax framework for the Singapore Variable Capital Company

To further enhance Singapore’s credentials as an international fund management centre, the Singapore Variable Capital Companies (VCC) framework was officially launched on 15 January 2020.  VCC is a corporate vehicle tailored for use as a collective investment scheme.  It may be set up as a single standalone fund structure or an umbrella fund with multiple sub-funds, each holding a portfolio of segregated assets and liabilities.  Despite having multiple sub-funds, only one Board of Directors is required to form an umbrella VCC.  Fund managers may establish new VCCs or re-domicile existing overseas investment funds to Singapore. 

Tax framework for VCC

Although VCCs are treated as companies incorporated under the Companies Act for income tax purposes, given the specific features of VCCs, in August 2020 the Inland Revenue Authority of Singapore (IRAS) published a tax guide on the tax framework for VCCs.  The guide outlines specific tax treatments of VCCs, which are in line with the intent of the VCCs, such as:

(i) Tax residence

Tax resident VCCs are allowed to access Singapore’s wide tax treaty network.  A VCC is considered a tax resident in Singapore, subject to the VCC establishing that it is controlled and managed from Singapore.  As a sub-fund is not a legal person separate from the VCC, its tax residency would follow that of its umbrella VCC.  In practice, the certificate of residence (COR) required by a sub-fund would be issued in the name of the umbrella VCC, with the name of the sub-fund included in the COR.

(ii) Incentives

VCCs can be considered for the Enhanced Tier Fund (ETF) Scheme, Singapore Resident Fund (SRF) Scheme and Venture Capital Fund Scheme (VCF).  No other incentive would be available for VCCs.

(iii) Disallowable expenses

In line with the object of VCCs, certain expenses which are intended to promote specific, non-fund related activities, will be denied a tax deduction.  The activities in respect of which expenses are not allowed include the following:

  • Protecting intellectual properties
  • Promoting internationalisation
  • Promoting research and development
  • Promoting management services for investment companies
  • Promoting philanthropy
  • Specific tax treatment for banks and insurers
  • Specific tax deduction for share acquisitions.

​(iv) Taxable income of an umbrella VCC

Tax rules under the Income Tax Act would apply at the sub-fund level and the taxable income/exempt income of an umbrella fund is the sum of the taxable income /exempt income of all its sub-funds.  Specifically, rules worth noting include, amongst others:

  • A partial tax exemption scheme, the start-up tax exemption scheme (SUTE), which provides for certain exemptions on the first SGD 200,000 of chargeable income, would be allowed at the VCC level, instead of at sub-fund level, to avoid multiple claims.
  • Determination of the first three consecutive years of assessment for the purpose of partial tax exemption scheme under SUTE is tied to the date of incorporation of the VCC (instead of the registration date of sub-fund).
  • Unabsorbed tax losses, capital allowances and donations (collectively “loss items”) would be quarantined at sub-fund level (i.e. loss items of one sub-fund cannot be used by other sub-funds within the umbrella VCC).
  • The shareholding test to carry forward or carry back the loss items for utilisation would apply to the holders of shares of the umbrella VCC in relation to the sub-fund to which the loss items belong.

Our thoughts

The tax treatments of VCCs are largely in line with the objective of the VCC, which is to provide an alternative fund structure in Singapore for investment funds.  There are some restrictions in place to close loopholes to avoid unintended “tax planning”, most of which are reasonable.  For example, although certain expenses are specifically disallowed for VCCs, there should be no significant downside, as the funds are not expected to incur those expenses due to the nature of their principal activities.  There is still room to come up with a tax efficient structure, and we look forward to discussing the structure with you.  

Evelyn Lim
[email protected]

Wong Sook Ling
[email protected]