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Asia-Pacific Investment Fund Tax Structures ALTA: Asia-Pacific's Leading Tax Advisers1

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Asia-Pacific Investment Fund Tax Structures ALTA: Asia-Pacific's Leading Tax Advisers1 Asia-Pacific Investment Fund Tax Structures ALTA: Asia-Pacific's Leading Tax Advisers1 I. INTRODUCTION Most Asian-Pacific investment funds are established in the Cayman Islands in the form of a limited partnership, unit trust, or less common, a corporation, managed offshore under the Cayman Islands regulatory regime that is easy for investment managers to comply with. These fund structures have been in existence for a long period of time, and are viewed as market-standard fund structures by most American and global investors. Such Cayman funds are sometimes structured to claim tax treaty benefits, thereby reducing the effective tax rates of the fund with regards to investments into high tax jurisdictions in Asia – Pacific, such as Japan, Australia, China, India, and South Korea. Numerous Asian jurisdictions, such as South Korea, Indonesia, China and India, have adopted strong general anti-abuse tax legislation, and anti-treaty shopping and indirect transfer rules, which are designed to impose taxation on foreign funds which claim tax treaty benefits or engage in tax-efficient exit strategies which the investment jurisdiction tax authorities use to challenge. Notable examples include India and South Korea tax examiners who have often used such rules to aggressively challenge treaty benefits claimed by Cayman funds, and China's State Administration of Taxation ("SAT"), which often asserts its right to tax sales of offshore holding companies by Cayman funds, under China's indirect transfer tax rules. In addition to such domestic tax legislation, the OECD backed initiative to tackle Base Erosion and Profits Shifting (“BEPS”) and the Multilateral Instrument (“MLI”) have challenged conventional offshore structures that are primarily tax driven. Action 7 requires nations who sign on to the MLI to elect which test must be satisfied by taxpayers claiming treaty benefits. For example, Japan and Singapore, both signatories to the MLI, have adopted the principal purpose test, which requires the funds to have a non-tax principal business purpose to support the claim for a treaty benefit. In addition to these important tax considerations and developments, institutional and high net worth investors are increasingly hesitant to invest into Asia-Pacific funds established in the Cayman Islands, due in large part to the negative market perceptions created by disclosures of confidential offshore company information, such as the Panama Papers. Even before these public press disclosures, European pension funds, financial institutions, and institutional investors adopted investment policies which preclude them from investing into funds established in tax haven offshore jurisdictions, making it impossible for them to invest in large investment funds targeting Asia using traditional Cayman entities. Such European investors usually can only invest into Asia-Pacific funds established in Luxembourg (often as a SCSp) which severely limits the ability of many such European investors to invest into the Asia-Pacific market. The practical ability for many Asia-based investment managers targeting the Asia-Pacific region to establish Luxembourg funds is limited (or in some cases 1 Stephen Banfield and Eric Roose, Withers (Singapore and Tokyo); Mark Gao and Peter Ni, Zhonglun (Shanghai); Manual Makas, Greenwoods (Sydney); and Jay Shim, Lee & Ko. PERSONAL/S1B‐HK‐10586713/1 1. impossible), since the investment management teams for such Asia focused funds are generally based in Asia, usually in Singapore and Hong Kong. In response to these significant tax developments and negative public perceptions of offshore jurisdictions such as the Cayman Islands, fund tax advisors to Asian investment funds are increasingly moving towards recommending to their clients that future Asia-Pacific funds be established in Singapore. Singapore has a highly attractive funds tax regime and extensive tax treaty network, and an investment management regulatory regime administered by the Monetary Authority of Singapore (MAS) which is highly regarded by investors and as respected as the equal of regulatory authorities of respected funds jurisdictions, such as Luxembourg and the United States. This article focuses on the forms of Singapore funds today (as well as the so called S-VACC, to be adopted into law very shortly) and how Asian-Pacific funds established in Singapore, or the traditional Cayman fund, structure their investments into Australia, China, Japan and South Korea. II. SINGAPORE INVESTMENT FUNDS A. INTRODUCTION Singapore continues to gain prominence as global funds centre. According to a survey conducted by the Monetary Authority of Singapore ("MAS") in 2016, Singapore had reached S$2.7 trillion of assets under management ("AUM"). This amount grew to S$3.3 trillion by the end of 2017. Approximately 70% of the AUM is invested into the Asia-Pacific Region which demonstrates the position of Singapore as a hub for the deployment of regional capital. A number of factors have contributed to the success of Singapore as a preferred asset management hub. These include geographic proximity to investors and investment opportunities, a pro-business environment, progressive and careful regulatory oversight, and a conducive tax regime. B. COMMON FUND STRUCTURES Singapore based asset managers manage a broad range of offshore and domestic investment structures. Cayman limited partnerships are commonly used as master pooling vehicles by alternative asset managers. These funds typically pool into intermediate corporate sub-funds which include Singapore companies established on an asset-by-asset or collective basis. The economic substance associated with a local fund manager supports a claim by these entities for access to Singapore's expansive network of double taxation agreements ("DTA"). A growing trend is the replacement of offshore master pooling vehicles and feeder funds with onshore entities. This is in part a response to international tax policy initiatives such as BEPs and an increasing aversion of institutional investors to structure through tax haven jurisdictions for reputational reasons. It is possible to build an entirely onshore investment structure with the equivalent flexibility of tried PERSONAL/S1B‐HK‐10586713/1 2. and tested offshore structures using entities which may be established under Singapore law. The entity types are based on the common law trinity of companies, partnerships and trusts though have recently been augmented by the introduction of the variable capital company. This modular quality to Singapore fund structures is key to their appeal and flexibility. This is supported by the suite of local tax incentives which can be used to reduce the imposition of Singapore tax on repatriated investment flows and realisation gains. In addition to unlisted alternative funds with a regional mandate, REITs and registered business trusts are popular listed vehicles for investments into mature real estate and infrastructure assets respectively. Different investment structures are also seen for investments into Singapore real estate. The suite of fund tax incentives which are described below do not exempt income and gains deriving from Singapore real estate. C. VARIABLE CAPITAL COMPANY The introduction of the VCC is intended to further enhance Singapore's appeal as an international fund management hub. It expands Singapore's existing toolbox of domestic vehicles and brings it into closer alignment with competitor jurisdictions such as Hong Kong, Luxembourg, Ireland and traditional offshore jurisdictions. Enabling legislation was passed into law in October 2018 and is expected to become operative shortly. The key features of the VCC may be summarised as follows: (a) A VCC must be a collective investment scheme as this term is defined within the Singapore Securities and Futures Act (Cap 289) ("SFA"). An earlier proposal to require a minimum of two investors in a VCC was scrapped by the MAS in response to industry feedback. The MAS describe a VCC with multiple cells as an 'umbrella VCC'. They have confirmed that it is possible for an umbrella VCC to consist of both open-ended and closed-end funds as its sub-funds. (b) A VCC must appoint a fund manager which is licensed under the SFA. Certain exempt fund managers, including registered fund management companies, may also manage a VCC. (c) Investors can directly invest into the VCC as members and hold shares that are transferable and redeemable. It can be expected that a transfer of the shares in a VCC will be subject to Singapore stamp duty in the typical manner. (d) VCCs are required to appoint an auditor to audit their accounts on an annual basis. Each sub-fund will be required to prepare separate financial statements, which must be audited and prepared in accordance with a single accounting standard across all sub-funds. There is no need for a VCC to have an audit committee. (e) A VCC which is an Authorised Scheme or Restricted Scheme under the SFA will be required to appoint a custodian, subject to various conditions. The MAS specifically reference an exemption for PERSONAL/S1B‐HK‐10586713/1 3. VCCs which are used as private equity and venture capital fund vehicles. This aligns with the current position for such funds under the SFA. (f) A VCC will have variable capital which is fundamental in facilitating investment redemptions. (g) A VCC can register and segregate its assets into different sub-funds held within the same legal entity. A VCC can then use each sub-fund to invest and directly hold a portfolio of different investments. The VCC Act provides for several measures to mitigate against cross-cell contagion, so that liabilities against a sub-fund may be prevented from being claimed against another sub-fund. (h) The register of members of a VCC does not need to be made public. (i) A VCC can access the suite of tax incentives available under the Singapore Income Tax Act (Cap 134) ("ITA"). It may also apply for a certificate of tax residency, and is intended to be able to access benefits under Singapore's network of DTAs. (j) Foreign corporate entities may also apply to be redomiciled into Singapore as a VCC.
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