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Singapore is one of the leading financial centers in Asia and the world with a highly developed business-friendly market economy. The city-state has experienced a significant growth rate in the last decades, which makes it one of the leading economies in the world with a very high standard of living.
As a former British colony that became fully sovereign in 1965, Singapore has a legal system based on common law, however with significant local differences. Especially in the fields of commercial and financial law, the legal and regulatory framework is cutting-edge, with an independent court system implementing this framework. It furthermore has a stable political system and is consistently rated among the least corrupt places in the world.
Most major financial service providers have a presence in Singapore. The asset management industry can furthermore benefit from local dedicated, skilled and experienced service providers in all fields ranging from legal and tax advisers, auditors, custodians to fund administrators.
Traditionally, Singapore has been appreciated as a jurisdiction of choice for asset managers. Its strong asset management industry is also continuously adapting to ever-growing demands for investments in the region and globally. Furthermore, it is expected to enhance its already established position as an investment fund jurisdiction with the recently introduced variable capital company (“VCC”).
The Monetary Authority of Singapore (“MAS”) is the country’s central bank and financial regulatory authority. It regulates a wide range of financial service providers, including capital markets entities such as asset managers. Asset managers are regulated under the Securities and Futures Act (“SFA”) as well as subsidiary legislation including regulations, notices, guidelines and circulars (as well as non-binding FAQs).
The SFA, the Securities and Futures (Offers of Investments) (Collective Investment Schemes) Regulations 2005 (the “Regulations”) and the Code on Collective Investment Schemes (the “CIS Code”) regulate the establishment and operation of collective investment schemes in Singapore. An investment fund typically qualifies as a collective investment scheme it if satisfies the following elements: (i) the investors have no day-to-day control over the management of the assets, (ii) the assets are managed by or on behalf of the asset manager or the contributions of the investors are pooled and (iii) the purpose or effect is to enable investors to receive profits or income arising from the assets. Closed-end funds seem to be excluded from the definition of a collective investment scheme, however a very broad exception entails that most closed-end funds actually are within the scope of the definition.
Generally, an investment fund offered in Singapore must be an authorised scheme in case of a Singapore-based investment fund and a recognised scheme in case of a foreign investment fund. In case an investment fund qualifies as such, it needs to comply with the requirements set out in the Regulations, the CIS Code as well as any underlying legislation. A lighter regime exists for certain restricted schemes, which are not required to be authorised or recognised. Lastly, offers might be exempted from the authorisation or recognition requirements altogether under certain conditions.
Offers of interests in a collective investment scheme to investors in Singapore must, as a general rule, be authorised or recognised by MAS. This applies to schemes established in Singapore, which must be authorised, and schemes established outside Singapore, which must be recognised. A prospectus and product highlights sheet must be approved by MAS in relation to the offering. MAS will authorise a scheme if, among other requirements, (i) its asset manager holds a capital markets license and (ii) in case of a variable capital company or a unit trust, a custodian or a trustee is appointed respectively. Recognition by MAS of a scheme requires that, inter alia, (i) its asset manager is licensed or regulated in the jurisdiction of its principal place of business, (ii) the laws and regulations as well as the practices of the jurisdiction of the scheme provide an equivalent degree of protection to investors in Singapore and (iii) a Singapore-based representative is appointed. Both the collective investment scheme and its asset manager must comply with the CIS Code, including the investment guidelines set out therein.
Collective investment schemes are not required to be authorised or recognised in case the interests are offered (i) only to accredited investors and other relevant persons or (ii) at a minimum of SGD 200,000 for each transaction. A notification must be submitted to MAS and an annual declaration needs to submitted as well. Although no prospectus needs to be approved by MAS, an information memorandum needs to be submitted to MAS as well in relation to an offer in a restricted scheme. Further requirements are that (i) the asset manager is licensed or regulated in the jurisdiction of its principal place of business and is fit and proper and (ii) in case of a variable capital company or a unit trust, a custodian or a trustee is appointed respectively. Restricted schemes are not required to comply with the CIS Code and its investment guidelines.
Authorisation or recognition is not required in case of certain exempted offers of interests in collective investment schemes. Among others, such offers include (i) small offers, meaning the total amount raised within 12 months is SGD 5 million or less, (ii) private placement offers, being made to no more than 50 persons within 12 months and (iii) offers targeted at accredited or institutional investors (as defined in the SFA). In these cases, the collective investment scheme and its asset manager do not need to comply with the CIS Code, but are subject to particular conditions. For example, such offers must not be advertised and specific disclosures must be made to investors.
Vehicles commonly used for operating investment funds domiciled in Singapore are the VCC, the limited partnership and the unit trust.
Variable capital company
Singapore-based investment funds can be structured as regular private limited companies, but the introduction of the VCC creates a corporate structure specifically geared towards investment funds. The VCC regime is comparable with corporate fund structures in major investment fund hubs (such as the Cayman Islands, Ireland and Luxembourg) and therefore removes the need for Singapore-based asset managers to have investment funds domiciled abroad (resulting in time and cost efficiencies). It was introduced by way of the Variable Capital Companies Act 2018, along with other related laws and regulations. A VCC fund structure can be used for both traditional as well as alternative investment strategies (including hedge funds, private equity funds and real estate funds).
A VCC can be used for open-end and closed-end fund structures. Flexibility is created, as a VCC can be structured as either (i) a stand-alone fund or (ii) an umbrella fund with sub-funds that can be easily added or removed and that have assets and liabilities legally segregated from those of other sub-funds and of the VCC itself. Within an umbrella fund, one sub-fund can be open-end while the other sub-fund is closed-end as long as this is properly documented in the VCC’s constitution, creating additional flexibility for fund structures. Sub-funds can be added or removed without amending the VCC’s constitution (the method must be described in the constitution, for example by way of a resolution of the board of directors). VCCs can have a single shareholder or hold a single asset (and can therefore be used for master-feeder fund structures). Foreign investment funds set up as corporate structures can be redomiciled to Singapore as VCCs, creating an efficient and effective solution for Singapore-based asset managers already managing foreign investment funds to locate their investment funds domestically.
VCCs must be managed by a Singapore-based asset manager licensed, registered or exempted by MAS, so VCCs cannot have a foreign asset manager (although asset managers based in Singapore can manage foreign investment funds). At least three directors are required for investment funds structured as authorised schemes (one of which must be a director of the fund manager, one of which must be independent and one of which must be a Singapore resident). One director is required for restricted or exempt schemes (who must be a director of the fund manager and a Singapore resident). Each VCC must have a registered office in Singapore as well as a company secretary based in Singapore.
A key requirement of a VCC is that its capital must be equal to its net assets, allowing for periodical subscriptions and redemptions by its shareholders (thus ensuring its capital is variable). As is common for corporate fund structures, the constitution of a VCC usually stipulates that more than one class of shares can be issued, allowing for the issue of management shares and participating shares. Details of a VCC’s shareholders need to be filed with the company registrar in Singapore, the Accounting and Corporate Regulatory Authority (“ACRA”), along with other details, but will not be available publically. Specifically for VCCs, as these can be structured as stand-alone or umbrella funds, their tax status will need to be assessed at the level of the VCC itself and not at that of the sub-funds.
A limited partnership in Singapore consists of at least one general partner and one or more limited partners (which can be both natural and legal persons). The general partner is responsible for the day-to-day management of the limited partnership and is liable for all debts and obligations of the limited partnership incurred during its appointment (usually though in fund structures, the general partner will itself be a legal person with limited liability). Limited partners are only liable for their capital committed to the limited partnership and not for the limited partnership’s debt and obligations, unless they take part in the management. As a limited partnership has no legal personality, its assets and liabilities are held by the general partner as assets and liabilities of the limited partnership and the general partner enters into contracts for the benefit of the limited partnership. Considering it has no legal personality, a limited partnership also cannot benefit from tax incentive schemes for investment funds and the applicable tax rates need to be assessed at the level of each of the limited partners.
The general partner needs to register the limited partnership with ACRA together with certain details, although the particulars of the limited partners can remain confidential from the general public if certain conditions are met. Either the general partner must be based in Singapore or a separate local manager must be appointed, which is then responsible for compliance with local notification and filing obligations (for example in relation to tax matters). In practice, the general partner can delegate the asset management to a separate asset manager (which offers a possibility for the latter to ringfence itself from the former’s liability). There are no detailed particulars which need to be included in the partnership agreement, thus offering a degree of flexibility to govern the relationship between the general partner and the limited partners specifically for each investment fund. A limited partnership is often used to structure closed-ended funds, such as private equity funds or real estate funds.
A Singapore unit trust is constituted by a trust deed, which governs that assets are held in trust by a trustee. Under a unit trust arrangement, investors contribute to a trustee and become unit holders which collectively own the trust assets and which are entitled to a pro rata part thereof. The trustee must follow instructions from the manager acting for the benefit of the unit holders. Unit holders are only liable for the amount of their investment. Unit trusts are frequently used for authorised schemes. Specific forms of unit trusts are the real estate investment trust (or REIT) or the business trust (or BT), which are for example both suited for real estate funds.
Investment funds are first of all bound by the investment strategy, policy and restrictions as stated in their offering documents (such as a prospectus or information memorandum). Authorised schemes based in Singapore must comply with the CIS Code, which sets out mandatory investment guidelines for various types of investment funds. Generally, borrowings are only allowed to facilitate short-term bridging for investments and to pay out redemption proceeds. Restricted foreign schemes are not required to comply with the aforementioned investment guidelines. However, in order for it to be recognised by MAS, it need to be subject in its home jurisdiction to investment guidelines similar to those in Singapore. Restricted schemes do not need to comply with any investment guidelines, whether they are Singapore-based or foreign. The same applies to exempt schemes.
In addition, in order for an investment fund to benefit from a tax incentive scheme such as the Singapore Resident Fund (Section 13R) scheme and the Enhanced Tier Fund (Section 13X) scheme, only specified income from designated investments will be exempt from tax. Designated investment includes a wide range of financial instruments, but does not include Singapore real estate for example, as detailed below.
Under normal circumstances, investment funds would be taxable under the regular regimes applicable to their kind of vehicle. Investment funds can however benefit from certain tax incentive schemes granted by the Income Tax Act. These are the Singapore Resident Fund (Section 13R) scheme and the Enhanced Tier Fund (Section 13X) scheme for investment funds based in Singapore and the Offshore Fund (Section 13CA) scheme for foreign investment funds, some requirements of which are set out below. In general, an investment fund generating specified income (such as gains and profits) from designated investments can benefit from the tax schemes. Designated investments is broadly defined and covers most standard financial instruments (including derivatives), but real estate located in Singapore is excluded. As a result, an investment fund benefiting from one of the tax schemes is basically not liable to pay any income tax on its investments and is therefore in that respect tax free.
For qualification under the Section 13R scheme, an investment fund must be a company tax resident in Singapore and it must not be 100% beneficially owned by Singapore tax residents. Approval from MAS is required and it may not amend its investment strategy afterwards without further approval. Next to that, a licensed, registered or exempted Singapore-based asset manager and a Singapore-based administrator must be appointed. Furthermore, it must have at least SGD 200,000 in local business spending, but there are no minimum assets under management required. Non-qualifying investors (in short, Singapore tax resident legal persons investing above a certain percentage) however need to pay a tax penalty directly to the Singapore tax authority.
As for the Section 13X scheme, an investment fund is required to be a company, limited partnership or unit trust but does not need to be a Singapore tax resident. It must obtain approval from MAS and the investment strategy cannot be changed afterwards without further approval. Equally, a licensed, registered or exempted Singapore-based asset manager and a Singapore-based administrator must be appointed (the latter only in case of a Singapore-based investment fund). Next to the requirement of business expenditures of at least SGD 200,000, the investment fund must have a minimum of SGD 50 million assets under management. There are no further tax penalties imposed on non-qualifying investors.
Lastly, the Section 13CA scheme is specifically for foreign investment funds managed by a licensed, registered or exempted Singapore-based manager (in this case there is no requirement though to appoint an administrator). It applies to investment funds being a company, limited partnership or unit trust that are not 100% beneficially owned by Singapore tax residents. No approval from MAS is required in this case and there are no requirements as to minimum business expenditure and minimum assets under management. Non-qualifying investors are again liable to pay a tax penalty.
Singapore investment funds are, depending on their regulatory status, generally required to appoint one or more of the following service providers:
• an asset manager;
• an auditor;
• a custodian; and
• an administrator.
The primary service provider appointed by an investment fund is its asset manager. Its precise role will vary depending on the terms of the agreement pursuant to which the asset manager is appointed. An asset manager is responsible for implementing an investment fund’s investment strategy, policy and restrictions. In broad terms, there are four categories of asset managers in Singapore, which all must be licensed or registered by MAS and must have a physical office in Singapore, as further detailed below. Asset managers may be explicitly exempted from any licensing or registration requirement upon request.
LFMC – Retail
A Singapore-based asset manager that wishes to offer to retail investors must hold a capital markets services (“CMS”) license to operate as a licensed fund management company. Once licensed, there are no restrictions as to the type or number of investors or the maximum assets under management. The minimum base capital for an LMFC – Retail is SGD 1 million in case of collective investment schemes offered to retail investors or SGD 500,000 in case of non-collective investment schemes. An LFMC – Retail furthermore needs to comply with detailed operational requirements, for example ensuring that its shareholders, directors, representatives and employees are fit and proper and that key individuals fulfil minimum competency requirements. Also, it must have a minimum of two directors with at least five years of relevant experience (one of which has at least ten years of relevant experience, is an executive director and is a Singapore resident). Lastly, an LFMC – Retail must have at least three relevant professionals (that may also be directors) which have at least five years of relevant experience and are a Singapore resident.
LFMC – A/I
An asset manager based in Singapore that intends to offer only to qualified investors needs to obtain a CMS license as well in order to become a licensed fund management company. If and when licensed, the LFMC – A/I may only offer to qualified investors, but there are no restrictions in regard to the number of investors. Qualified investors are accredited or institutional investors, as defined in the SFA. Similarly, there are no restrictions in relation to the maximum assets under management. As for the minimum base capital for the LFMC – A/I, this must at least be SGD 250,000 in case of collective investment schemes offered to qualified investors. Similar operational requirements apply to the LFMC – A/I as well. It must at all times have a minimum of two directors with at least five years of relevant experience (one of which is an executive director and is a Singapore resident). The LFMC – A/I must lastly have a minimum of two relevant professionals (that may also be directors) which have at least five years of relevant experience and are a Singapore resident.
In case of a registered fund management company, the Singapore-based asset manager does not need to obtain a full CMS license but merely needs to register with MAS by way of a notification. However, it may only offer to qualified investors and the number of investors is limited to 30 (of which no more than 15 may be investment funds). Its maximum assets under management is SGD 250 million (and exceeding that threshold means that a full CMS license needs to be obtained). The RFMC’s base capital must be at least SGD 250,000. Operational requirements are applicable to the RFMC comparable to those of the LFMC – Retail and LFMC – A/I. Furthermore, in relation to staffing, the RFMC is required have a minimum of two directors with at least five years of relevant experience (one of which is an executive director and is a Singapore resident). Finally, it is required to have a minimum of two relevant professionals (that may also be directors) which have at least five years of relevant experience and are a Singapore resident.
A simplified regime is available for venture capital fund managers, being asset managers that strictly manage closed-end venture capital funds. One of the key requirements is that the VCFM may only invest in venture capital, meaning that 80% of the committed capital must be invested in unlisted business ventures that have been in existence for less than ten years. The VCFM may only offer to qualified investors, but there is no limit as to the number of investors. Also, there is no maximum assets under management. There is furthermore no minimum base capital required. Certain minimum operational requirements still apply to the VCFM however. It is required to have a minimum of two directors (one of which is a Singapore resident), though relevant experience is not required. Lastly, the VCFM must have two relevant professionals (that may also be directors) which are a Singapore resident, although again relevant experience is not required.
Both authorised, restricted or exempt schemes are required to have their annual financial statements audited by an independent Singapore-based auditor. In addition, an authorised scheme is also required to have semi-annual financial statements, which however do not need to be audited (and there are other reporting obligations as well). Financial statements must be presented in accordance with IFRS, SFRS, US GAAP or RAP 7 (the latter only for authorised schemes) and must be provided to the investors.
A custodian is appointed by an investment fund to act as safekeeper of its assets pursuant to the terms of the relevant custodian agreement. In general, a custodian will hold in custody all financial instruments (insofar possible) and cash of the investment fund. It might also be agreed that a custodian will also process corporate actions in relation to such financial instruments. Authorised schemes and certain restricted or exempt schemes must appoint a custodian (although this is not required for private equity funds or real estate funds). Only certain prescribed licensed, registered or authorised entities can act as custodian, including foreign entities that are licensed, registered or authorised in the jurisdiction where the account is maintained on which the financial instruments and cash are held.
An investment fund typically appoints an administrator to assist with the investor and financial administration (including net asset value calculation) and the regulatory and tax reporting (such as required under FATCA and CRS). An investment fund in Singapore is not required, in accordance with the local regulatory framework, to appoint an administrator. However, in order be able to benefit from the tax incentive schemes of Section 13R and Section 13X, a locally domiciled investment fund is required to appoint a local administrator as well. This does not apply to a foreign investment fund wishing to benefit from the Section 13X or Section 13CA tax incentive schemes.