Tax Authority Activity and New Fund Structures 26 November 2020 Moderators Australian Taxation Office Panellists

Headline Verdana Bold 2020 Asia Pacific Investment Management Tax Conference Webinar 4: Tax Authority Activity and New Fund Structures 26 November 2020 Moderators Australian Taxation Office Panellists

Siew-Kee Chen Nadia Alfonsi Aaron Bennett Blake Sly Tax Partner Acting Assistant Director, Investment Director, Public Groups & Asia Pacific Investment Commissioner, Public Industry Strategy International Management Tax Leader Groups & International Australian Taxation Office Australian Taxation Office Deloitte Australia Australian Taxation Office

Panellists

Meghan Speers Michael Velten Anthony Lau Yves Knel Tax Partner Tax Partner Tax Partner M&A Tax Partner Victorian Business Tax Leader Asia Pacific Financial Services International and M&A Deloitte Luxembourg Deloitte Australia Industry Tax Leader Hong Kong Investment Deloitte Singapore Management Sector Leader Deloitte Hong Kong

Alison Noble Terence Tan Natalie Yu Tax Partner Tax Partner Tax Partner Deloitte Australia Deloitte Australia Deloitte China

1 New Fund Structures

2 Australian Taxation Office Panel Discussion with Nadia Alfonsi, Aaron Bennett and Blake Sly

3 Global Information Reporting

4 Q&A New Fund Structures Not regulated Non-Regulated Luxembourg fund toolbox (indirectly through the AIFM) T A Largest cross-border STRONG INVESTOR PROTECTION SCS / SCSP X investment (AIFs) fund center worldwide More Regulated Lightly Regulated SOPARFI (SPV) 841 N ELTIF partnerships > 30k entities €4,6+ trillion Total Net AuM (regulated only) E More than doubled over the past 10 years due SIF Securitisation U to AIFMD, Brexit, BEPs, etc. # 1.447 funds T €700+ billion Net AuM for regulated alternative UCI II € 597 billion R funds 243 funds A UCITS SICAR €148 billion significant amount unknown in non-regulated 1,725 funds 234 funds RAIF L products (RAIF, AIF SCS/SCSp, SPV) 14,639 sub- €54 billion 1,222 funds I compartments T €3.8 trillion Y Less Flexible More Flexible Leader in global fund Source data: CSSF/ ALFI, September 2020 distribution Luxembourg funds are distributed in Type of fund Legal forms Compartment? Type Risk Time to Reg. Investors’ type Global reach Taxation Double tax treaty* more than 70 countries available? Assets spread? market Approval? (more than 80)

UCITS Corporate or Yes listed High Up to 6 Yes All including retail Distributed in Tax exempt, small Yes (50pc dtt network for 61% Global market share in cross-border transparent transferrable months 70+jurisdictions subscription tax with corporate forms) investment funds securities EU Passport exemption

UCI II Corporate or Yes Private Equity, Moderate Up to 6 Yes All including retail Worldwide Tax exempt, small Yes (50pc dtt network for transparent Real Estate and months EUP possible subscription tax with corporate forms) Prime location in EU for Hedge Funds exemption alternative investments

SIF Corporate or Yes All Low (at Up to 3 Yes Institutional, Worldwide Tax exempt, small Yes (50pc network for 1,200+ RAIF setup in 3.5 years as well as transparent least 3 months professional and EUP possible subscription tax with corporate forms) many partnerships set up assets) HNW e.g. Well- exemption informed 90% of global private equity investments are structured using Luxembourg vehicles SICAR Corporate or Yes PE / risk capital None Up to 3 Yes Well-informed Worldwide Taxable but exempt Yes (full) transparent months EUP possible on eligible securities and transit funds Presence of largest players : 9/10 global PE players RAIF Corporate or Yes (All/risk capital) (Low / Days No (only Well-informed Worldwide (SIF/Sicar regime) Yes (50%/full) 14/15 global RE players (SIF/SICAR) transparent None) AIFM) EUP possible 10/20 global Hedge funds players have operations in Luxembourg SCS/SCSp AIF Transparent No All None Days None No restriction Worldwide Tax transparent No SCSP legal personality EUP possible 601 AIFMs (licensed alternative managers) SOPARFI (SPV) Corporate No All None Days None No restriction Worldwide Taxable with Yes (full) registered with the CSSF exemptions available

Typical alternative set up for Asian managers Distribution

• Worldwide recognition of the Luxembourg brand (including access to EU distribution passports which is not feasible for non-EU/AIFMD compliant funds)

Legal forms to accommodate any promoter and investors needs Asia fund structure Lux (parallel) fund structure • Corporate (public or private companies) Portfolio • Partnerships (limited , limited by shares, etc.) Non-EU Foreign IM management EU • FCP (trust) investors delegation investors • Possible check-the-box election for US tax purposes

Onshore tax neutral platform in a post-beps world

• Tax neutrality for all funds in principle (eg no additional taxation compared to direct investment by investors) • Tax transparent or opaque structures (for reporting purposes, double tax treaties, etc..) available Fund Fund management management • Treaty access (full or limited depending on the type of fund and legal corporate form) ManCo • Beps – MLI / PPT : convergence between regulatory substance requirement pertaining to the AIFM directive / Fund Lux AIFM Lux AIF local substance framework and tax requirements Risk management & oversight delegation Regulation and organization

• Regulated and unregulated options available depending on the target size, investment / investor strategy, HoldCo costs consideration • Possibility to “lease” to third party licensed Manco (AIFM) while the manager can focus on core functions such as raising & Portfolio management • Delegation of portfolio management to your usual advisory/management entity in Asia (or other) Local SPV Local SPV • Very affordable light versions of unregulated partnership available (if size < 500 M EUR)

Structure (Asian inbound)

(EMEA, US, Asia LA, Africa, etc.) • Possibility to structure tax neutral carried interest and management fee for Asia based asset managers • Compatible with any existing fund structure (see left hand side for the parallel fund) • Can be used as standalone too • Operating model similar to your current offshore structure (Cayman LP vs. Lux SCSP for example) • Asian outbound is also possible : for example Asian platform into a Lux fund platform © 2020 Deloitte Asia Pacific Limited *various sources: ALFI, Lux for Finance, Preqin, LPEA Deloitte Asia-Pacific Investment Management Tax Conference 6 Hong Kong Limited Partnership Fund (LPF) structure

Tax implications – ideal tax vision for “onshorisation”

Management fee • HK LPF with a HK manager, which is granted with the authority and exercises such GP Manager authority in relation to the LPF’s investments in Hong Kong. (HK or non-HK) LPF (HK) (HK) • From a tax perspective, the ideal picture (subject to fulfillment of requisite conditions) should be:

‒ Fund level – no separate tax regime specifically for LPF; the unified HK tax SPV exemption regime for funds (UFE) equally applies to LPF

 The HK LPF is tax-exempt under UFE

‒ Management fee – subject to Hong Kong profits tax at the corporate rate of SPV 16.5% in general, but with potential non-taxable offshore claim on the portion attributable to activities conducted outside HK

‒ Carried interest – can enjoy the upcoming tax concession

Portfolio companies ‒ Tax treaty benefits – accessibility to HK’s tax treaty network with increased functions and substance in HK

Going forward – asks from the industry

• The highly competitive rate should be at 0% rather than a reduced tax rate

• Per the current consultation, tax concession applies only to carried interest from PE Carried interest investments in companies. The scope of exemption should be expanded to also cover:

‒ carried interest of a fund of PE/VC funds, which invests in other funds that typically GP Carried interest Management fee Manager are established in the form of limited partnerships rather than companies (HK or non-HK) LPF (HK) (HK) ‒ carried interest arising from hedging transactions in relation to a PE/VC fund's PE investments, as it is common that PE funds will also enter into hedging transactions e.g. for employing hedging strategies against currency or other risk exposures associated with a PE deal

• In view of the global set-up of global PE firms and a mixture of manage and advisor Invest in other models in the industry, language should be broadened to cover carried interest funds as fund of derived from provision of "advisory" services and a wide range of activities, including PE investments funds, enter into financial, legal, administrative and back-office support functions, etc. hedging transactions? • Required disclosure of information to IRD on carried interest distributions – should only be limited to what is relevant to the HK tax concession claimed

Draft legislation is expected to be released in 2021 Q1 – let’s look forward to positive changes reflecting the above.

Viability of VCC as alternative?

Pros VCC (Singapore) • VCC potentially able to claim tax treaty benefits—subject to local jurisdiction challenges

• “Onshorisation” by choosing Singapore over Cayman Islands

Cons Hold Co 1 (Singapore) • VCC has separate legal entity and is tax opaque—may be unattractive to PE investors who often prefer transparent pooling entities due to local rules, e.g., Japanese investors

• Less familiar to international investors

Hold Co 2 • Transfer of shares in VCC may trigger stamp duty c.f. complex stamp duty analysis if (Singapore) transfer instruments for a Cayman LP holding an underlying Singapore Co are executed or brought into Singapore

© 2020 Deloitte Asia Pacific Limited Deloitte Asia-Pacific Investment Management Tax Conference 9 Australian Taxation Office Panel Discussion Global Information Reporting Effectiveness of the Common Reporting Standard (CRS) Measured by the numbers reported by the OECD*

CRS aims to identify non-resident persons trying to avoid tax obligations by holding assets in structures and In 2020, more than 7,000 products located in other countries. Financial entities need to identify the tax residency of practically all of their bilateral automatic exchanges customers/investors. of information among nearly 100 jurisdictions

1 Identification and 3 Exchange of documentation information In 2019, exchange of information for more than 84 million bank accounts, totaling Domestic tax authorities almost EUR 10 trillion Accountholders

2 Tax authorities have identified Reporting for collection EUR 102 billion of additional tax revenue

CRS to be used as a basis for reporting by intermediaries to tax authorities on income from Controlling Reporting Financial Foreign tax authorities the sale of crypto-assets persons Institutions in countries of account holders and controlling persons

CRS is the global benchmark for ensuring tax transparency in respect of financial assets and income.

*OECD Secretary-General Tax Report to G20 Finance Ministers and Central Bank Governors, October 2020 © 2020 Deloitte Asia Pacific Limited Deloitte Asia-Pacific Investment Management Tax Conference 12 Moving from implementation to enforcement Review of legal frameworks, effectiveness in practice, data

Peer reviews Scrutiny of CRS reports OECD has been reviewing regulations Countries have been scrutinising reports and guidance to assess legal and requiring amended filings; Countries frameworks and will be visiting have begun assessing penalties. jurisdictions to do peer reviews of 01 effectiveness in practice. 04

Compliance questionnaire Tax Authority activities OECD has issued multiple Annual compliance certifications; questionnaires focused on Financial Institution audits and reviews. 02 compliance. 05

Minimum standards CRS avoidance schemes OECD issued minimum audit standards Established CRS hotline. Guidance on for jurisdictions to implement and will mandatory disclosure of avoidance 03 be issuing a compliance handbook. 06 schemes and misuse of residence.

OECD peer reviews are placing pressure on tax authorities around enforcement of compliance and many are expected to introduce requirements to review compliance periodically.

CRS reviews have commenced in Singapore, Hong Kong, Australia and New Zealand.

• In Singapore, prior to commencing CRS reviews, IRAS had issued (on 23 July 2019) an eTax Guide entitled CRS Compliance Guidelines (Guidelines); the first tax authority to do so.

‒ The Guidelines note that the level, nature, and extent of the CRS internal controls of a Reporting Singapore Financial Institution (SGFI) should be proportionate to its business circumstances and its CRS risk level. An SGFI’s CRS internal controls should be at three levels: entity, process, and reporting levels. Periodic CRS compliance reviews should be part of the SGFI’s existing internal risk management framework, and performed by independent reviewers. SGFIs that outsource their CRS functions remain responsible for any CRS obligation that its service provider carries out on its behalf.

• In Australia, the ATO has commenced CRS reviews, with the initial ‘Request for Information’ focussing on 39 questions and request for documents covering the end-to-end CRS compliance lifecycle. The ATO is also currently finalising a certification questionnaire to be completed annually by every Reporting Financial Institution.

• In New Zealand, the IRD is preparing for CRS reviews and has drafted a certification questionnaire to be completed annually by Reporting Financial Institutions.

• In Hong Kong, the IRD has recently sent out notices to certain financial institutions enquiring on the CRS due diligence procedures, additional details on information reported, etc.

The Cayman Islands recently announced the addition of the Cayman Islands Common Why has this been introduced? Reporting Standard (CRS) Compliance Form, an additional filing requirement for Cayman This declaration form is being required by Cayman Islands Tax Authority Registered Financial Institutions (RFIs). in order to comply with OECD guidelines and upcoming peer reviews.

New CRS Regulations require Cayman RFIs to provide additional information on an annual basis. These additional requirements are being requested to ensure the RFI’s effectiveness What’s the purpose of this new requirement? of its implementation and compliance with the due diligence procedures required under local regulations. To ensure high levels of compliance by requiring FIs to certify their adherence with CRS policies and procedures and the accuracy of their reportable and non-reportable populations.

Who’s impacted? Timing Whose responsibility is it to file the CRS Compliance Form? Every FI, including those with NIL CRS reporting, is responsible for Everyone filing in the Cayman L Get started now. The first CRS submitting the form. Islands, including NIL filers, Compliance Form filing is due 31 needs to comply with this new March 2021 (extended from 31 regulation. December 2020). Who can complete the submission? Principal Points of Contact (PPOCs) or Secondary Users can submit the form on behalf of the FIs through the Cayman portal.

More jurisdictions introducing Stricter annual Increasing focus . mandatory certification of on non-reportable disclosure rules compliance entities and on CRS accounts avoidance Tax authority instituting audits Inclusion of crypto- of account holders currency, digital based on CRS data assets and e-commerce

Peer review resulting in changes to local law and guidance on CRS - Substantial increase e.g. reversal of in enforcement previously out of activities on CRS scope industries and products

The Cayman Islands Jurisdiction

The Cayman Islands is a British Overseas Territory and the leading jurisdiction for establishing offshore investment funds globally.

As of September 30, 2020, the Cayman Islands Monetary Authority (CIMA)1, the primary regulator of the Cayman Islands’ financial services industry, reported that the total number of regulated funds was 11,691, comprised of 7,855 registered funds, 2,959 master funds, 282 administered funds, 61 licensed funds and 534 Limited Investor Funds.

1 https://www.cima.ky/upimages/commonfiles/NumberofMutualFundsandMutualFundAdministrators-30September2020_1602098470.pdf

The side-by-side structure contemplates an investment manager making trades for the onshore and offshore funds according to an identical Foreign/U.S. investment strategy. While the positions held are the same, each fund Domestic tax exempt has its distinct brokerage accounts and trades are executed for each Investors investors separately. Accordingly, the investors would expect to receive a same or similar investment return.

Offshore Cayman Onshore Islands

Fees Fees Investment Manager

A stand-alone fund operates as a single vehicle and is typically used by managers that seek to operate a single strategy. Structurally, each Fees Offshore Cayman vehicle in a side-by-side arrangement is a stand-alone fund. Investment Manager Islands The offshore fund entity may be established using one of the Cayman Islands’ legal entities discussed further within the section ‘Legal Entities’.

Foreign / U.S. tax exempt investors

A Master-Feeder structure is typically utilised in order to allow investors with different tax requirements to participate in the same fund (the Foreign/U.S tax Offshore fund structure Master trading fund). This structure is commonly used by managers in exempt investors Cayman Islands the United States. These managers seek to raise their capital from global investors by establishing an offshore feeder vehicle that will invest primarily into the offshore Master trading vehicle, while separately establishing an onshore feeder vehicle to care to U.S. taxable investors, without having to operate a duplicate trading vehicle, as is required for Offshore Feeder side-by-side funds. It is therefore both a cost and administratively General Partner Investment manager Cayman Islands Onshore efficient means of operating and marketing an investment manager's Fees Fees (Delaware LLC) exempted company Feeder products to both domestic and global investors. Delaware LP

Master Fund Cayman Islands exempted company or LP

14000

12000

10000

8000

6000

4000

2000

0 2012 2013 2014 2015 2016 2017 2018 2019 2020 1Q/2020 2Q/2020 3Q/2020 Registered Master Administered Licensed Limited Investor Funds

1 https://www.cima.ky/upimages/commonfiles/NumberofMutualFundsandMutualFundAdministrators-30September2020_1602098470.pdf/

© 2020 Deloitte Asia Pacific Limited Deloitte Asia-Pacific Investment Management Tax Conference 26 Hong Kong Limited Partnership Hong Kong Limited Partnership Fund (LPF) structure Limited Partnership Fund (LPF)

• The LPF regime has come into operation on 31 August 2020.

• The LPF regime gives market players flexibility in structuring the fund vehicle and operations. More importantly, aligning the domicile of fund with commercial Management fee substance under the international tax and regulatory environment. GP Manager (HK or non-HK) LPF (HK) (HK) • Number of registered HK LPFs: 50 (as of 24 November 2020) Key features of the LPF regime

• Not a legal person itself. SPV • Has to be registered with the Registrar of Companies and has an obligation to file an annual return.

• At least two partners (including one GP and one LP).

SPV • Constituted by a limited partnership agreement, i.e. the partners have freedom to contract in respect of the LPF’s key operation.

• Appoint a local auditor to carry out audit of the LPF’s financial statements according to the Hong Kong Financial Reporting Standards. Portfolio companies • Maintain proper custody arrangements for its assets and record keeping.

• No capital duty on capital contributed by partners.

• No stamp duty on the contribution / transfer / withdrawal of LPF interests.

• The LPF regime currently does not cater for inward re-domiciliation of funds.

Tax implications – ideal tax vision for “onshorisation”

‒ Fund level – no separate tax regime specifically for LPF; the unified HK tax SPV exemption regime for funds (UFE) equally applies to LPF

 The HK LPF is tax-exempt under UFE

‒ Carried interest – can enjoy the upcoming tax concession

Portfolio companies ‒ Tax treaty benefits – accessibility to HK’s tax treaty network with increased functions and substance in HK

Transactions in “qualifying assets” (include private companies incorporated in HK subject to Encompasses the features of a conditions) and incidental “collective investment scheme” transactions (with a threshold) • Pooling requirement and being managed as a whole; investors without day-to-day control Qualifying transactions carried out or arranged in HK by a “specified • Certain arrangements, e.g. group A “fund” as defined (regardless of person” scheme, employee share scheme, location of its central management or are specifically excluded from the and control) definition of “fund” the “fund” is a qualified investment fund

Tax exemption under UFE

(a) The private company holds >10% of its assets in immovable property in Hong Kong

Yes No No tax exemption (b) The private company is controlled by the fund or a special purpose entity

Yes No

(c)(i) The private company has been held by Tax-exempted the fund or a special purpose entity for less than 2 years • Not a “qualifying asset” • Not immoveable property in HK Yes No • Held for less than 3 consecutive years before disposal (c)(ii) The private company holds Tax-exempted more than 50% value of its assets in short-term assets

Yes No No tax exemption Tax-exempted

Satisfy either:

(i) Qualifying transactions carried out or arranged by a “specified person” (i.e. corporation or authorized financial institution registered under the Securities and Futures Ordinance (SFO) for carrying out any regulated activity)

or (ii) The fund is a “qualified investment fund”

Investors Originator

Capital commitments < 10%

Net proceeds ≤ 30% Qualified Investment Fund

Potential tax treaty benefits – accessibility to HK’s tax treaty network

• The HK LPF can obtain a certificate of HK resident status (HKCOR) provided conditions are satisfied

Management fee • The Hong Kong Inland Revenue Department (IRD) has indicated that in deciding GP Manager whether a HKCOR could be issued to a special purpose entity of a fund (SPE), the (HK or non-HK) LPF (HK) (HK) whole fund structure (including the activities undertaken by the fund manager or adviser via a regional investment platform where applicable) has to be considered.

• The IRD also indicated that:

SPV – the place of residence of the SPE owned by a PE fund generally followed that of the PE fund

– in deciding whether a HKCOR could be issued to an SPE, the IRD would also examine the activities rendered by the fund manager in HK SPV – if the SPE had substantial business presence in HK with its own central and management control exercised in HK, then the SPE might be regarded as a HK resident person, in particular when the fund had a regional investment platform located in HK Portfolio companies

OFC in Hong Kong

• Came into operation on 30 July 2018

• 11 OFCs in HK (as of 24 November 2020)

Management fee and • Seems not that popular, mainly because of certain legal and regulatory restrictions performance fee Manager HK OFC (HK) Tax implications

• Fund level – can also qualify for tax exemption under UFE provided conditions are satisfied

Investments • Manager level

• Management fee and performance fee

− similar to the scenario under HK LPF; subject to tax at 16.5% in general but with potential non-taxable offshore claim if activities are performed outside Hong Kong

− yet, as the investment management activities, like placing orders, of OFCs are likely in Hong Kong, the offshore claim may only be limited to fund-raising activities conducted outside Hong Kong

OFC – going forward After months of consultation, SFC announced in September 2020 enhancements to the OFC regime Previously, OFC regime seems to be not that popular, mainly because of the key shortcomings/restrictions as follows:

Areas Custodian eligibility • A custodian of an OFC has to meet the same eligibility requirements as

To allow intermediaries licensed or registered for Type 1 requirements custodians for SFC-licensed funds as set out in the Code on Unit Trusts OFCs private or licensed intermediaries allow to and Mutual Funds, regardless of whether the OFC is public or private. regulated activity (i.e. dealing in securities) to act as custodians for private OFCs, provided certain requirements are Many private OFCs appoint a prime broker, instead of having a custodian, met. and such prime broker may not meet the requirements for custodians. Investment scope • Private OFCs must invest at least 90% of their gross asset value in

specific “SFC Assets” covering securities and futures contracts and/or cash, bank deposits, certificates of deposit, foreign currencies and RemovingOFCs the private investment or restrictionslicensed applicable tointermediaries private allow to foreign exchange contracts. Investments in non-SFC Assets is subject to a OFCs, subject to compliance requirements 10% “de minimis” limit.

Investment scope is more limited than that of a Cayman exempted company, which is not subject to investment restrictions.

Upcoming introduction of a statutory re-domiciliation regime, Re-domiciliation of • Absence of a mechanism to allow corporate funds from overseas OFCs private or licensed intermediaries allow to overseas corporate jurisdictions to re-domicile to Hong Kong. enabling corporate funds established overseas to re-domicile funds to Hong Kong as an OFC provided certain conditions are Singapore’s VCC regime has such mechanism. satisfied.

© 2020 Deloitte Asia Pacific Limited Deloitte Asia-Pacific Investment Management Tax Conference 36 Hong Kong Proposed tax concession for carried interest Hong Kong Proposed tax concession on carried interest Key features Details Tax rate on carried Taxed at a “highly competitive rate” * If enacted, expected to have retrospective effect from the year of assessment • interest Pending clarification from the Hong Kong SAR Government on the commencing on 1 April 2020 • exact rate (e.g. 0%) Eligible funds • Only applies to carried interest distributed by a fund meeting the definition under UFE • Has to be "validated" by the Hong Kong Monetary Authority upfront "Qualifying" carried Only applicable to carried interest distributed out of tax-exempted Carried interest interest qualifying transactions in PE investments Eligible carried interest Eligible to the persons who provide investment management services to a GP Carried interest Management fee Manager recipients validated fund in Hong Kong or arrange such services to be carried out in (HK or non-HK) LPF (HK) Hong Kong: (HK) i. SFO licensed corporation or authorised financial institution; ii. Non-SFO licensed person (defined to include a corporation, partnership, etc.) providing investment management services (or arrange such services to be carried out) in HK to a "qualifying investment fund", as defined under the UFE; and iii. An employee deriving assessable income from the employment Invest in other with (i) or (ii) above by providing investment management services funds as fund of to validated funds on behalf of his/her employer. PE investments funds, enter into hedging transactions? Substantial activities requirements (except for (iii) above) • Not less than two investment professionals (or one investment professional and one related professional in legal, compliance or finance); and • Not less than HK$3 million local expenditures for a year.

The proposed Hong Kong tax concession on carried interest is still at consultation stage. As such, the above, as well as the other details and aspects with respect to the proposed Hong Kong tax concession on carried interest, is subject to further changes/clarifications as the legislative process progresses. © 2020 Deloitte Asia Pacific Limited Deloitte Asia-Pacific Investment Management Tax Conference 38 Hong Kong Proposed tax concession on carried interest

Going forward – asks from the industry

• The highly competitive rate should be at 0% rather than a reduced tax rate

• Per the current consultation, tax concession applies only to carried interest from PE investments in companies. The scope of exemption should be expanded to also cover: Carried interest – carried interest of a fund of PE/VC funds, which invests in other funds that typically are established in the form of limited partnerships rather than companies GP Carried interest Management fee Manager (HK or non-HK) LPF (HK) – carried interest arising from hedging transactions in relation to a PE/VC fund's PE (HK) investments, as it is common that PE funds will also enter into hedging transactions e.g. for employing hedging strategies against currency or other risk exposures associated with a PE deal

• In view of the global set-up of global PE firms and a mixture of manage and advisor models in the industry, language should be broadened to cover carried interest derived from provision of "advisory" services and a wide range of activities, including Invest in other funds as fund of financial, legal, administrative and back-office support functions, etc. PE investments funds, enter into hedging • Required disclosure of information to IRD on carried interest distributions – should transactions? only be limited to what is relevant to the HK tax concession claimed

Draft legislation is expected to be released in 2021 Q1 – let’s look forward to positive changes reflecting the above.

© 2020 Deloitte Asia Pacific Limited Deloitte Asia-Pacific Investment Management Tax Conference 39 Singapore VCC: recap of the use case Use cases for the Singapore VCC Mutual Funds: Singapore Unit Trust

Mutual funds involve large pools of investors and usually have a larger focus on equities and fixed income products. A typical structure used by mutual funds is Unitholders the Singapore unit trust which has the following features:

• Allows for a fund to be open-ended

• Allows for investors to have limited liability

• Allows for the segregation of assets under an umbrella fund/sub-fund structure

Manager Unit Trustee • No Singapore stamp duty imposed on issuance, transfer, or redemption of units Trust (Singapore) • However, it is usually difficult for a trust to claim tax treaty benefits

Viability of VCC as alternative?

Shareholders Pros:

• Similar to the unit trust, a VCC allows for a fund to be open-ended, for investors to have limited liability, and for the segregation of assets under an umbrella fund/sub-fund structure

• There is an additional benefit of a VCC being potentially able to claim tax treaty VCC Manager benefits—subject to challenges in local tax jurisdictions (Singapore) Cons:

• A transfer of shares in a VCC triggers stamp duty (however, issuance and redemption of shares do not)

Another common fund entity used is the Ireland VCC:

• Corporate entity with separate legal personality

• Can operate as umbrella fund with segregated sub-funds VCC (Ireland) • Potentially able to claim tax treaty benefits based on Ireland’s wide treaty network

• No Irish tax on income and gains of fund insofar as it does not have any Irish taxable investors. No Irish stamp duty on issue, transfer or redemption of shares

Viability of VCC as alternative?

Pros

• Singapore VCC similar to Ireland VCC in many ways—both can operate as VCC umbrella funds with segregated sub-funds; both are corporate entities (Singapore) potentially able to claim tax treaty benefits

• “Onshorisation” by choosing Singapore over Ireland where the fund manager is located here

Cons

• For the VCC, tax exemption will depend on Singapore’s 13X and 13R fund incentives. The fund incentive will be applied to the VCC as a whole (and not to each sub-fund)—Actions of one sub-fund on investment strategy can affect the tax exemption status of other sub-funds

PE funds usually make investments over at least a 3-5 year horizon. We typically see PE funds use a Cayman LP as a pooling vehicle. Key features are: Exempted LP • Transparent entity to serve as pooling vehicle may be attractive to PE (Cayman) investors due to fiscal transparency, tax benefits at home jurisdiction, CFC considerations etc.

Holding companies may be used: HoldCo 1 (Singapore) • To claim treaty benefits • To mitigate tax on exit (subject to indirect transfer rules)

• For capital structure management purposes (usually involves multiple layers of holding companies) HoldCo 2 (Singapore)

HoldCo 3 (Singapore)

Viability of VCC as alternative?

Pros VCC (Singapore) • VCC potentially able to claim tax treaty benefits—subject to local jurisdiction challenges

• “Onshorisation” by choosing Singapore over Cayman Islands

• Less familiar to international investors

Hold Co 2 • Transfer of shares in VCC may trigger stamp duty c.f. complex stamp duty (Singapore) analysis if transfer instruments for a Cayman LP holding an underlying Singapore Co are executed or brought into Singapore

Hedge funds often engage in active trading rather than passive holding of investments, resulting in less emphasis on tax treaty benefits. A common structure we see for hedge funds is the Cayman SPC

SPC The Cayman SPC is also often used for ‘bespoke’ private funds or multi-family (Cayman) office funds which are set up by service providers for clients who require individualised structures

Features of a Cayman SPC are:

• Corporate entity with separate legal personality

• No requirement to employ a management company

• Can operate as umbrella fund with segregated sub-funds

• No Cayman Islands tax

• However, unable to access tax treaty benefits

Viability of VCC as alternative?

Pros

VCC • Singapore VCC similar to Cayman SPC in many ways—both can operate as (Singapore) umbrella funds with segregated sub-funds

• VCC potentially able to claim tax treaty benefits—subject to challenges in local tax jurisdictions

• “Onshorisation” by choosing Singapore over Cayman Islands

Cons

• Singapore VCC requires a Singapore manager; cf. Cayman SPC which does not have an analogous requirement

• The introduction of the Singapore VCC has been successful. Approximately 150 Singapore VCCs have been incorporated to date in the first year (cf. the Hong Kong OEIC which had about 2 incorporations in the first 18 months).

• Adoption has been driven by the boutique firms, likely motivated by the MAS grant. The MAS grant scheme will continue to 15 January 2023 (i.e., for 2 more years). Larger fund houses seem to be taking a “wait and see” approach.

• We also note that the MAS’ most recent survey stated that 86 new asset manager licenses and registrations were issued during the first three quarters of 2020 – query how many new asset managers were set up to use the new VCC.

• We expect increasing use of the Singapore VCC, due to: (i) onshorisation; (ii) the Cayman Islands Private Fund Law; (iii) Singapore retaining a strong position as a platform for investments into Asia (cf. Hong Kong which may be increasingly part of China).

• From a Deloitte perspective, we have seen clients use the Singapore VCC both as an investment platform and as a fund, although the former appears to be more common.

ESG/Impact

VC Fund Mutual Fund

PE Fund MFO Fund/Bespoke

Hedge Fund

MFO Mutual Fund PE Fund Hedge Fund VC Fund ESG/Impact Fund/Bespoke

27 22 13 33 22 3

© 2020 Deloitte Asia Pacific Limited Deloitte Asia-Pacific Investment Management Tax Conference 51 CIV funds and tax treaty relief CIV funds and treaty relief Threshold issue – Can the VCC as a CIV fund qualify for treaty benefits?

• The OECD in a 2010 report considered whether CIV funds would qualified for treaty relief. These conclusions in the 2010 report were endorsed in the BEPS Action 6 report.

• The OECD definition of a CIV fund is a fund that is: (i) widely held; (ii) holds a diversified portfolio of securities; and is (iii) subject to investor-protection legislation in the country in which it is established

• In assessing whether a CIV fund qualifies for treaty benefits, the OECD identified the key issues as are whether it qualifies as a “person”, a tax “resident”, and the “beneficial owner” of the income it receives.

• We expect a VCC to satisfy each item:

− A VCC is a corporate entity and would be a “person” for tax treaty purposes.

− Singapore’s tax laws allows a VCC to be a tax “resident” if its control and management takes place in Singapore.

− Turning to the issue of “beneficial ownership”, the OECD view is that a CIV that falls within its definition should be treated as the beneficial owner of the income it receives, so long as the managers of the CIV have discretionary powers to manage the assets on behalf of the holders of interest in the CIV. This should be satisfied in the case of a VCC.

• The Final BEPS Action 6 Report contains one example on the application of the PPT to a CIV fund. There are three examples on the application of the PPT to a non-CIV fund (Regional investment platform example, Securitisation company example, and Immoveable property example)

• The OECD examples for non-CIV funds highlight the importance of economic substance in the jurisdiction of the holding company and commercial purpose/reasons for choosing that location

 Minority • RCo: Resident of State R PPT does not apply Investors ‒ Collective investment vehicle Other ‒ Manages diversified portfolio of investments (no treaty with S) ‒ Currently 15% of portfolio is held in shares of companies resident of State S (SCos), from which RCo receives annual dividends

Investors • A majority of investors in RCo are residents of State R, but a number of investors (the minority investors) are residents of States which do not have treaty with State S 15% of portfolio • Investors’ decisions to invest in RCo not driven by any particular investment made by RCo Majority of RCo’s RCo held in SCos shares investors are resident • RCo’s investment strategy not driven by tax position of its investors of State R R • RCo considered benefit under R/S treaty when deciding to investment in SCos • RCo pursues policy of full distribution of profits to investors Dividends S

DWHT: • 30% domestic rate SCos • 10% under R-S treaty

“In making its decision to invest in shares of companies resident of State S, RCo considered the existence of a benefit under the State R-State S tax convention with respect to dividends, but this alone would not be sufficient to trigger the application of [PPT]. The intent of tax treaties is to provide benefits to encourage cross border investment and, therefore, to determine whether or not [PPT] applies to an investment, it is necessary to consider the context in which the investment was made… [Unless] RCo’s investment is part of an arrangement or relates to another transaction undertaken for a principal purpose of obtaining the benefit of the Convention, it would not be reasonable to deny the benefit of the State R-State S tax treaty to RCo.” [Bolding added]

• RCo operates exclusively as regional investment platform for Fund through acquisition and  PPT does not apply management of a diversified portfolio of private market investments located in a regional (Institutional Fund investor) grouping that includes State R • Factors supporting State R: − Knowledgeable directors − Skilled multilingual workforce − State R’s membership of a regional grouping and use of the regional grouping’s common (Regional currency RCo investment platform) − Extensive double tax treaty network: low withholding tax rates • RCo employs experienced management team. Potential investment • RCo’s board of directors: − Majority are State R resident directors with investment management expertise − Members of Fund’s global management team DWHT: • 30% domestic rate • RCo now contemplating an investment in SCo • 5% under R-S treaty SCo • 10% under T-S treaty − Only part of RCo’s overall investment portfolio • Benefit of R/S treaty is taken into account by RCo

“In making its decision whether or not to invest in SCo, RCo considers the existence of a benefit under the [R/S treaty] with respect to dividends, but this alone would not be sufficient to trigger the application of [the PPT]. The intent of tax treaties is to provide benefits to encourage cross-border investment and, therefore, to determine whether or not [the PPT] applies to an investment, it is necessary to consider the context in which the investment was made, including the reasons for establishing RCo in State R and the investment functions and other activities carried out in State R. In this example, in the absence of other facts and circumstances showing that RCo’s investment is part of an arrangement or relates to another transaction undertaken for a principal purpose of obtaining the benefit of the [treaty], it would not be reasonable to deny the benefit of the [R/S treaty] to RCo.”

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