Single Family Office (SFO) vs. Variable Capital Company (VCC)
An Alternative to Single-Family Offices (SFOs) amidst rising costs and increased qualifying conditions
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Is the Single-Family Office regime for everyone?
The Straits Times has reported that Singapore is now ranked the third-best country to build multi-generational wealth. Due to its favourable regulations, stability and position as a global financial hub, Singapore is increasingly becoming a hotspot for family offices, with over 1,400 Single-Family Offices (SFOs) setting up over the past 5 years. Some appealing regulations include attractive tax regimes, double tax treaties, and grant schemes presented by the Republic, with intentions to draw a new stream of investments into Singapore.
Despite its exponential growth, the influx of SFOs into Singapore is not without its fair share of issues and challenges. In August 2023, 10 individuals were arrested in relation to money laundering of amounts in excess of SGD 3 billion. Upon investigation, it was uncovered that there were links to how the accused leveraged the tax incentives given out to SFOs. This led to much scrutiny on the administration process of SFOs and foreshadowed the impending tightening of regulations, with MAS proposing to bring all SFOs under anti-money laundering controls by standardising the criteria for licensing exemptions, in addition to other regulations.
The VCC Alternative
The Variable Capital Company (VCC) structure offers a compelling alternative for those seeking a cost-effective and flexible solution. The structure serves to improve Singapore’s competitiveness as a global wealth manager and to further enhance Singapore's ecosystem to support the growth of business families.
VCCs typically have lower setup and ongoing compliance costs as compared to SFOs. Additionally, VCCs require professional investment oversight and management, potentially providing an added layer of security for investors.
“The VCC fund structure is growing in popularity as an alternative to Single Family Offices in Singapore, since it is more cost effective, more flexible in terms of the investors that it can onboard, and in terms of the types of investment that it can make.? Finally, the VCC manager being a regulated investment manager would be able to perform due diligence on the investors at inception and on an ongoing basis, ensuring that the structure is kept compliant with the latest regulatory requirements.” – Hogi Hyun, Managing Director, Abacus Capital
Listed are some key differentiators between both structures.
1.?????? Cost Efficiencies
VCCs can attain lower operational costs through economies of scale by consolidating resources through the sharing of a common fund manager, board of directors, service providers, etc. across different families. This is represented by the minimum annual spending ranging from at least SGD 200,000 to SGD 1,000,000 per SFO, as compared to an annual minimum spending of SGD 200,000 at the VCC umbrella level, which can be shared across multiple families.
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2.?????? Minimum Asset Under Management (AUM)
Unlike the SFOs, which currently require an asset under management of at least SGD 20 million and above, the VCC has no such restriction and thus allows smaller families who may not be able to meet the minimum requirements for SFOs in terms of AUM, investment professionals, business spending, etc. to also access and enjoy the same favourable benefits dished enjoyed by SFOs.
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3.?????? Setup Time
Given the complexity and due diligence required to establish an SFO, which can take over 12 months to get approved, the VCC is a quicker solution, since a sub-fund can be established within a week.
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4.?????? Tax Exemption
For a VCC with an existing 13O Tax Exemption, no new application is needed, as compared to new SFOs requiring approval from the Monetary Authority of Singapore for the tax exemption scheme, which may not be guaranteed, especially with the fresh impetus to the regulatory scrutiny and requirements.
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5.?????? External Investors
An SFO can only manage assets that are held by members of the same family, which may be limiting if the families would like to raise funds from external investors for an investment mandate. We have noticed an increasing interest in business families wanting to set up thematic investment portfolios in areas of interest that they specialise in. The VCC can facilitate capital pooling by accepting an unlimited number of investors to pool investments from friends and families to invest into a particular sector or theme, with Abacus Capital assisting in executing the investment mandate.?
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6.?????? Tax Efficiency – Tax & Investment Treaties
In addition to the Section 13O/U Tax Incentives, a VCC can leverage Singapore’s extensive double taxation and investment treaties network, Tax resident VCCs are allowed to access Singapore’s wide tax treaty network of up to 100 double tax treaties, 38 bilateral investment treaties, and 22 free trade agreements with different countries around the world, promoting cross-border trade, which is a building block for families involved in international businesses, as they become progressively internationally mobile, having their businesses and wealth spread all over the world.
A VCC can also apply for a Certificate of Residence (COR) to avoid double taxation on foreign-earned income
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7.?????? Privacy
Heightened privacy is an essential feature of the VCC, since the fund’s financial statements, constitution, and investor names are not available to the public. In the case of an SFO, all this information is available to the public.
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8.?????? Compliant & Regulated
VCCs are subject to high compliance standards, ensuring that every family has a clear view of all investments and movements of money. As a regulated fund manager, Abacus Capital will undertake compliance-related and MAS/ACRA reporting matters on behalf of clients and has the appropriate expertise and controls in place to conduct Know-Your-Customer (KYC) checks to deter the flow of illicit funds through Singapore’s financial system. Abacus Capital is also obligated to use a regulated custodian and a third-party fund administrator to ensure strict compliance and transparency. This ensures that there are regular checks conducted to maintain compliance with MAS standards of operation.
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Overall, families should carefully consider their objectives and needs, instead of jumping onto the bandwagon of establishing their own SFO against the backdrop of rising costs and compliance. Families should also be mindful of the growing list of qualifying conditions to maintain an SFO in Singapore and the various costs involved. As such, the alternative of a VCC fund structure may better cater to the needs of families in terms of flexibility, features, and cost, especially if they want to stay nimble.
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Above and Beyond with Salesforce @ACTUM Digital ?? | MBA Candidate at Prague University of Economics & Business | CFA Candidate ??
10 个月??????