Variable Capital Company vs Hong Kong OFC: A Comprehensive Comparison for Fund Managers

newhmteam
Oct 18
10 min read

Introduction to Modern Fund Structures
Understanding Variable Capital Companies (VCCs)
Key Features of Singapore's VCC
Regulatory Framework
Tax Considerations
Hong Kong's Open-Ended Fund Company (OFC)
OFC Structure and Characteristics
Regulatory Environment
Tax Implications
VCC vs OFC: Comparative Analysis
Legal and Operational Flexibility
Cost Considerations
Investor Protection Mechanisms
International Recognition and Compliance
Strategic Considerations for Fund Managers
Future Outlook for VCC and OFC Structures
Conclusion

Variable Capital Company vs Hong Kong OFC: A Comprehensive Comparison for Fund Managers

In the evolving landscape of global wealth management, fund structures play a pivotal role in determining operational efficiency, investor protection, and tax optimization. Two significant innovations in Asia's financial hubs have gained substantial attention from fund managers and Ultra-High Net Worth Individuals (UHNWIs): Singapore's Variable Capital Company (VCC) and Hong Kong's Open-Ended Fund Company (OFC).

Both structures were introduced to enhance the competitiveness of their respective financial centers, providing alternatives to traditional fund vehicles like limited partnerships and unit trusts. As wealth management strategies become increasingly sophisticated, understanding the nuances between these two structures has become essential for informed decision-making.

This comprehensive comparison examines how Singapore's VCC and Hong Kong's OFC stack up against each other across multiple dimensions, from regulatory frameworks to tax implications and operational flexibility. Whether you're establishing a new fund or considering a restructuring of existing investments, this analysis will provide the insights needed to align your fund structure with your long-term wealth management objectives.

Introduction to Modern Fund Structures

The evolution of fund structures in Asia represents a strategic response to the changing needs of global investors and wealth managers. Traditional fund vehicles, while functional, often presented limitations in terms of flexibility, cost-efficiency, and cross-border operations. The introduction of specialized fund structures by leading financial centers signals a recognition of the growing sophistication in wealth management approaches.

Singapore and Hong Kong, as premier financial hubs in Asia, have both developed innovative fund structures designed to attract fund managers, family offices, and institutional investors. These structures—the Variable Capital Company (VCC) in Singapore and the Open-Ended Fund Company (OFC) in Hong Kong—represent significant milestones in the evolution of fund management infrastructure in Asia.

The competitive landscape between these jurisdictions has intensified as each seeks to position itself as the preferred domicile for fund establishment and management. This healthy competition has led to continuous refinements in regulatory frameworks, tax incentives, and operational guidelines, ultimately benefiting fund managers and investors alike.

Understanding Variable Capital Companies (VCCs)

The Variable Capital Company framework, introduced in Singapore in January 2020, represents a significant advancement in the city-state's fund management ecosystem. The VCC was specifically designed to position Singapore as a premier fund domiciliation hub, competing with established jurisdictions like Luxembourg, Ireland, and the Cayman Islands.

A VCC is a corporate entity specifically structured for collective investment schemes. Unlike traditional company structures, the VCC offers variable capital features that allow for efficient subscription and redemption of investments without the need for complex corporate procedures. This flexibility makes it particularly suitable for a wide range of investment strategies, including hedge funds, private equity, real estate, and family office structures.

Key Features of Singapore's VCC

Singapore's VCC framework offers several distinctive features that make it attractive to fund managers and investors:

Umbrella Structure Capability: A VCC can be established as a standalone entity or as an umbrella structure with multiple sub-funds. Each sub-fund maintains segregated assets and liabilities, effectively insulating investors in one sub-fund from risks associated with other sub-funds within the same VCC.
Capital Flexibility: The capital of a VCC can be freely increased or decreased without the need for court approval or complex corporate procedures. This allows for efficient investor entry and exit, particularly important for open-ended fund structures.
Privacy Provisions: While a VCC must maintain a register of shareholders, this register is not publicly available, offering a level of privacy that many high-net-worth investors value.
Redomiciliation Provisions: Foreign corporate entities that meet specific criteria can be redomiciled to Singapore as VCCs, providing an efficient pathway for existing funds to leverage Singapore's advantages without disrupting their operations.
Operational Flexibility: VCCs can issue different classes of shares with varying rights and dividend policies, accommodating diverse investor preferences and investment strategies.

Regulatory Framework for VCCs

The VCC framework in Singapore operates under a comprehensive regulatory system overseen by the Monetary Authority of Singapore (MAS). Key regulatory aspects include:

Dual Registration: VCCs must be registered with both the Accounting and Corporate Regulatory Authority (ACRA) and authorized by MAS, ensuring proper oversight while maintaining operational efficiency.
Fund Management Requirements: A VCC must be managed by a fund manager regulated by MAS, such as a holder of a Capital Markets Services (CMS) license, a Registered Fund Management Company (RFMC), or certain exempt financial institutions.
Compliance Obligations: VCCs must adhere to anti-money laundering and countering the financing of terrorism (AML/CFT) regulations, reinforcing Singapore's reputation for regulatory robustness.
Governance Structure: Each VCC must have at least one director who is also a director of the fund manager, as well as a minimum of one Singapore resident director, ensuring proper management and accountability.

Tax Considerations for VCCs

Tax efficiency remains one of the most compelling aspects of Singapore's VCC framework:

Tax Incentives: VCCs can access Singapore's various tax incentive schemes, including the 13R (Singapore Resident Fund) and 13X (Enhanced Tier Fund) schemes, which can potentially result in tax exemption on specified income from designated investments.
Single Tax Return: An umbrella VCC files a single corporate tax return, simplifying compliance requirements despite having multiple sub-funds.
GST Remission: VCCs benefit from a 4% GST remission on expenses incurred, reducing the overall operational costs of fund management.
Extensive Tax Treaty Network: Singapore's network of over 80 comprehensive tax treaties provides VCCs with potential benefits when investing in treaty countries, enhancing cross-border investment efficiency.

Hong Kong's Open-Ended Fund Company (OFC)

Hong Kong introduced the Open-Ended Fund Company (OFC) structure in 2018, marking a significant development in its fund management landscape. The OFC was designed to provide an alternative to the unit trust structure that had traditionally dominated Hong Kong's fund industry, particularly for open-ended investment funds.

The OFC is a corporate structure with variable capital specifically tailored for investment funds. It combines the flexibility of open-ended arrangements with the advantages of a corporate structure, allowing for efficient subscription and redemption processes that reflect the open-ended nature of many investment strategies.

OFC Structure and Characteristics

The Hong Kong OFC offers several distinctive features that address specific needs within the fund management industry:

Corporate Entity with Variable Share Capital: The OFC structure allows for changes in capital through the issuance and redemption of shares without the procedural complexity typically associated with traditional companies.
Segregated Sub-Fund Structure: Similar to Singapore's VCC, the OFC can operate as an umbrella fund with multiple sub-funds, each with segregated assets and liabilities, protecting investors in one sub-fund from risks in another.
Public or Private Classification: OFCs can be established as either public or private entities. Public OFCs are retail-oriented and subject to more stringent regulatory requirements, while private OFCs cater to professional investors with relatively lighter regulatory oversight.
Operational Flexibility: OFCs can issue multiple share classes to accommodate different investor preferences and investment strategies, enhancing their versatility for fund managers.

Regulatory Environment for OFCs

Hong Kong's OFC operates under a dual regulatory regime that balances oversight with operational efficiency:

Securities and Futures Commission (SFC) Oversight: The SFC is the primary regulator for OFCs, responsible for registration, supervision, and enforcement of compliance with relevant regulations.
Companies Registry Involvement: While OFCs are registered with the Companies Registry, they are primarily governed by the Securities and Futures Ordinance rather than the Companies Ordinance, reflecting their specialized nature.
Management Requirements: An OFC must appoint at least one investment manager licensed by or registered with the SFC to conduct asset management activities.
Custodian Requirement: Unlike some other fund structures, OFCs must appoint a custodian to safeguard the scheme property, providing additional investor protection.
Corporate Governance: An OFC must have a board of directors with at least two individual directors, with at least one director independent of the custodian and its associated entities.

Tax Implications for OFCs

The tax treatment of OFCs represents a significant aspect of their appeal to fund managers:

Profits Tax Exemption: OFCs can enjoy profits tax exemption for qualifying transactions and transactions incidental to those qualifying transactions, subject to meeting specific conditions.
Streamlined Tax Reporting: The unified reporting at the OFC level simplifies compliance requirements for umbrella structures with multiple sub-funds.
No Stamp Duty on Share Transactions: Transfers of shares in OFCs are generally not subject to Hong Kong stamp duty, reducing transaction costs for investors.
Carried Interest Tax Concessions: Recent developments in Hong Kong's tax landscape have introduced favorable tax treatment for carried interest distributed by eligible private equity funds, potentially benefiting OFCs involved in private equity strategies.

VCC vs OFC: Comparative Analysis

Legal and Operational Flexibility

When comparing the legal frameworks and operational flexibility of Singapore's VCC and Hong Kong's OFC, several key distinctions emerge:

Constitutional Documents: The VCC operates under a constitution that combines elements traditionally found in memoranda and articles of association with customary fund documentation. The OFC, similarly, has an instrument of incorporation that serves as its constitutional document.
Structural Adaptability: Both structures offer umbrella fund capabilities with segregated sub-funds. However, industry trends suggest that the VCC framework provides somewhat greater flexibility in terms of converting existing fund structures and accommodating diverse investment strategies.
Redomiciliation Options: Singapore's VCC framework includes specific provisions for redomiciling foreign corporate entities as VCCs, which can be advantageous for existing funds looking to relocate. Hong Kong's OFC framework has more limited redomiciliation provisions, potentially requiring more complex restructuring for foreign funds.
Director Requirements: The VCC requires at least one director who is also a director of the fund manager and at least one Singapore resident director. The OFC requires at least two directors, including one who is independent of the custodian, representing slightly different approaches to governance.

Cost Considerations

The cost structure for establishing and maintaining fund vehicles is a critical consideration for fund managers:

Establishment Costs: Industry trends indicate that the initial setup costs for both VCCs and OFCs are relatively comparable, though specific costs vary based on fund complexity, service providers, and other factors.
Ongoing Operational Expenses: Both structures involve costs related to regulatory compliance, fund administration, custodian services, and audit requirements. The specific cost advantage of one structure over the other often depends on the particular circumstances of the fund and its investment strategy.
Economies of Scale: Both structures offer potential cost efficiencies through their umbrella fund capabilities, allowing multiple sub-funds to share certain overhead expenses.
Grant Schemes: Singapore has periodically offered grant schemes to defray the costs of establishing VCCs, potentially providing a cost advantage under certain circumstances.

Investor Protection Mechanisms

Investor protection features differ between the two structures in several notable ways:

Custodian Requirements: The OFC mandates the appointment of a custodian to safeguard assets, which represents a built-in protection mechanism. The VCC has more flexible custody arrangements, particularly for private funds, though certain types of VCCs may still require a custodian.
Regulatory Oversight: Both jurisdictions maintain robust regulatory frameworks, but there are differences in emphasis. Hong Kong's approach through the SFC places particular focus on investor protection, while Singapore's MAS balances investor protection with creating a business-friendly environment.
Disclosure Requirements: Public OFCs face more stringent disclosure requirements compared to their private counterparts, reflecting their retail orientation. Singapore's approach to VCC disclosure is generally more uniform, with some variations based on whether the VCC is offered to retail or accredited investors.

International Recognition and Compliance

The global standing of these fund structures has implications for cross-border investment and fundraising:

OECD Compliance: Both Singapore and Hong Kong have committed to international standards such as the OECD's Base Erosion and Profit Shifting (BEPS) initiatives, enhancing the legitimacy of their fund structures in an increasingly compliance-focused global environment.
Market Recognition: Market data indicates that the VCC has gained significant traction since its introduction, with hundreds of VCCs established. The OFC has seen more modest adoption, though its usage continues to grow as the framework matures.
Passporting Opportunities: Both structures can potentially benefit from regional fund passporting initiatives, though specific advantages depend on ongoing developments in these arrangements.

Strategic Considerations for Fund Managers

When deciding between a VCC and an OFC, fund managers should consider several strategic factors:

Investment Strategy Alignment: Certain investment strategies may align better with one structure over the other. For instance, strategies involving significant real estate investments or requiring specific dividend policies may find advantages in particular aspects of either the VCC or OFC framework.
Investor Base Characteristics: The composition of the investor base—whether primarily Asian, European, or global; institutional or individual; tax-exempt or taxable—can influence the optimal choice between these structures.
Regulatory Comfort: Some investors and fund managers may have established relationships or greater familiarity with either Singapore's or Hong Kong's regulatory environment, potentially influencing their preference.
Ecosystem Considerations: Both Singapore and Hong Kong offer developed ecosystems of service providers, including fund administrators, law firms, and accounting firms experienced in supporting their respective fund structures.
Business Continuity Planning: The political and economic stability of the jurisdiction, as well as its approach to financial services regulation, may factor into long-term strategic decisions about fund domiciliation.

Future Outlook for VCC and OFC Structures

Both the VCC and OFC frameworks continue to evolve in response to market feedback and competitive pressures:

Regulatory Refinements: Both Singapore and Hong Kong have demonstrated willingness to refine their respective frameworks based on industry feedback, suggesting continued improvements in user-friendliness and efficiency.
Tax Framework Developments: Ongoing enhancements to tax incentives and clarifications of tax treatments are likely as both jurisdictions compete to attract fund domiciliation.
Ecosystem Maturation: As service providers gain more experience with these relatively new structures, operational efficiencies and best practices are emerging, potentially reducing costs and enhancing effectiveness.
International Recognition: Industry trends suggest growing international recognition of both structures, particularly the VCC, which may influence their adoption rates among global fund managers.

Through our work as an appointed Enterprise SG (ESG) EntrePass Partner, IWC Management has observed firsthand how fund structures impact overall business strategy for wealth managers and entrepreneurs establishing presence in Singapore.

Conclusion

The comparison between Singapore's Variable Capital Company and Hong Kong's Open-Ended Fund Company reveals two sophisticated fund structures, each with distinct advantages tailored to different investment strategies and investor preferences.

Singapore's VCC offers notable strengths in terms of operational flexibility, privacy provisions, and access to Singapore's comprehensive tax treaty network. It has gained significant market traction since its introduction, supported by Singapore's reputation for political stability and regulatory consistency.

Hong Kong's OFC provides its own advantages, particularly in its established position within China-focused investment strategies and its dual public/private framework that can accommodate both retail and professional investor-focused funds.

Rather than declaring one structure categorically superior to the other, fund managers are best served by evaluating their specific circumstances—including investment strategy, investor base, and long-term objectives—when choosing between these options.

As both frameworks continue to evolve in response to market feedback and competitive pressures, fund managers should maintain awareness of ongoing developments that may impact the relative advantages of each structure.

Ultimately, both the VCC and OFC represent significant innovations in fund structuring within Asia, offering viable alternatives to traditional fund vehicles and enhancing the competitiveness of Singapore and Hong Kong as fund domiciliation centers.

Contact Us

Contact us at info@iwcmgmt.com for more information about how IWC Management can help you navigate fund structure decisions and implement optimal wealth management solutions tailored to your specific needs.

Note that views and figures as subject to change without notice. IWC Management shall not be held liable for any losses or damages to any parties that may arise due to views, figures and inaccuracies that may arise in the articles. Perusing or reading this article means understanding and acceptance of this condition.

Table Of Contents

Introduction to Modern Fund Structures

Understanding Variable Capital Companies (VCCs)

Key Features of Singapore's VCC

Regulatory Framework

Tax Considerations

Hong Kong's Open-Ended Fund Company (OFC)

OFC Structure and Characteristics

Regulatory Environment

Tax Implications

VCC vs OFC: Comparative Analysis

Legal and Operational Flexibility

Cost Considerations

Investor Protection Mechanisms

International Recognition and Compliance

Strategic Considerations for Fund Managers

Future Outlook for VCC and OFC Structures

Conclusion

Variable Capital Company vs Hong Kong OFC: A Comprehensive Comparison for Fund Managers

Introduction to Modern Fund Structures

Understanding Variable Capital Companies (VCCs)

Key Features of Singapore's VCC

Singapore's VCC framework offers several distinctive features that make it attractive to fund managers and investors:

Capital Flexibility: The capital of a VCC can be freely increased or decreased without the need for court approval or complex corporate procedures. This allows for efficient investor entry and exit, particularly important for open-ended fund structures.

Privacy Provisions: While a VCC must maintain a register of shareholders, this register is not publicly available, offering a level of privacy that many high-net-worth investors value.

Redomiciliation Provisions: Foreign corporate entities that meet specific criteria can be redomiciled to Singapore as VCCs, providing an efficient pathway for existing funds to leverage Singapore's advantages without disrupting their operations.

Operational Flexibility: VCCs can issue different classes of shares with varying rights and dividend policies, accommodating diverse investor preferences and investment strategies.

Regulatory Framework for VCCs

The VCC framework in Singapore operates under a comprehensive regulatory system overseen by the Monetary Authority of Singapore (MAS). Key regulatory aspects include:

Dual Registration: VCCs must be registered with both the Accounting and Corporate Regulatory Authority (ACRA) and authorized by MAS, ensuring proper oversight while maintaining operational efficiency.

Fund Management Requirements: A VCC must be managed by a fund manager regulated by MAS, such as a holder of a Capital Markets Services (CMS) license, a Registered Fund Management Company (RFMC), or certain exempt financial institutions.

Compliance Obligations: VCCs must adhere to anti-money laundering and countering the financing of terrorism (AML/CFT) regulations, reinforcing Singapore's reputation for regulatory robustness.

Governance Structure: Each VCC must have at least one director who is also a director of the fund manager, as well as a minimum of one Singapore resident director, ensuring proper management and accountability.

Tax Considerations for VCCs

Tax efficiency remains one of the most compelling aspects of Singapore's VCC framework:

Tax Incentives: VCCs can access Singapore's various tax incentive schemes, including the 13R (Singapore Resident Fund) and 13X (Enhanced Tier Fund) schemes, which can potentially result in tax exemption on specified income from designated investments.

Single Tax Return: An umbrella VCC files a single corporate tax return, simplifying compliance requirements despite having multiple sub-funds.

GST Remission: VCCs benefit from a 4% GST remission on expenses incurred, reducing the overall operational costs of fund management.

Extensive Tax Treaty Network: Singapore's network of over 80 comprehensive tax treaties provides VCCs with potential benefits when investing in treaty countries, enhancing cross-border investment efficiency.

Hong Kong's Open-Ended Fund Company (OFC)

OFC Structure and Characteristics

The Hong Kong OFC offers several distinctive features that address specific needs within the fund management industry:

Corporate Entity with Variable Share Capital: The OFC structure allows for changes in capital through the issuance and redemption of shares without the procedural complexity typically associated with traditional companies.

Segregated Sub-Fund Structure: Similar to Singapore's VCC, the OFC can operate as an umbrella fund with multiple sub-funds, each with segregated assets and liabilities, protecting investors in one sub-fund from risks in another.

Public or Private Classification: OFCs can be established as either public or private entities. Public OFCs are retail-oriented and subject to more stringent regulatory requirements, while private OFCs cater to professional investors with relatively lighter regulatory oversight.

Operational Flexibility: OFCs can issue multiple share classes to accommodate different investor preferences and investment strategies, enhancing their versatility for fund managers.

Regulatory Environment for OFCs

Hong Kong's OFC operates under a dual regulatory regime that balances oversight with operational efficiency:

Securities and Futures Commission (SFC) Oversight: The SFC is the primary regulator for OFCs, responsible for registration, supervision, and enforcement of compliance with relevant regulations.

Companies Registry Involvement: While OFCs are registered with the Companies Registry, they are primarily governed by the Securities and Futures Ordinance rather than the Companies Ordinance, reflecting their specialized nature.

Management Requirements: An OFC must appoint at least one investment manager licensed by or registered with the SFC to conduct asset management activities.

Custodian Requirement: Unlike some other fund structures, OFCs must appoint a custodian to safeguard the scheme property, providing additional investor protection.

Corporate Governance: An OFC must have a board of directors with at least two individual directors, with at least one director independent of the custodian and its associated entities.

Tax Implications for OFCs

The tax treatment of OFCs represents a significant aspect of their appeal to fund managers:

Profits Tax Exemption: OFCs can enjoy profits tax exemption for qualifying transactions and transactions incidental to those qualifying transactions, subject to meeting specific conditions.

Streamlined Tax Reporting: The unified reporting at the OFC level simplifies compliance requirements for umbrella structures with multiple sub-funds.

No Stamp Duty on Share Transactions: Transfers of shares in OFCs are generally not subject to Hong Kong stamp duty, reducing transaction costs for investors.

Carried Interest Tax Concessions: Recent developments in Hong Kong's tax landscape have introduced favorable tax treatment for carried interest distributed by eligible private equity funds, potentially benefiting OFCs involved in private equity strategies.

VCC vs OFC: Comparative Analysis

Legal and Operational Flexibility

When comparing the legal frameworks and operational flexibility of Singapore's VCC and Hong Kong's OFC, several key distinctions emerge:

Constitutional Documents: The VCC operates under a constitution that combines elements traditionally found in memoranda and articles of association with customary fund documentation. The OFC, similarly, has an instrument of incorporation that serves as its constitutional document.

Structural Adaptability: Both structures offer umbrella fund capabilities with segregated sub-funds. However, industry trends suggest that the VCC framework provides somewhat greater flexibility in terms of converting existing fund structures and accommodating diverse investment strategies.

Cost Considerations

The cost structure for establishing and maintaining fund vehicles is a critical consideration for fund managers:

Establishment Costs: Industry trends indicate that the initial setup costs for both VCCs and OFCs are relatively comparable, though specific costs vary based on fund complexity, service providers, and other factors.

Economies of Scale: Both structures offer potential cost efficiencies through their umbrella fund capabilities, allowing multiple sub-funds to share certain overhead expenses.

Grant Schemes: Singapore has periodically offered grant schemes to defray the costs of establishing VCCs, potentially providing a cost advantage under certain circumstances.

Investor Protection Mechanisms

Investor protection features differ between the two structures in several notable ways:

Custodian Requirements: The OFC mandates the appointment of a custodian to safeguard assets, which represents a built-in protection mechanism. The VCC has more flexible custody arrangements, particularly for private funds, though certain types of VCCs may still require a custodian.

International Recognition and Compliance

The global standing of these fund structures has implications for cross-border investment and fundraising:

OECD Compliance: Both Singapore and Hong Kong have committed to international standards such as the OECD's Base Erosion and Profit Shifting (BEPS) initiatives, enhancing the legitimacy of their fund structures in an increasingly compliance-focused global environment.

Market Recognition: Market data indicates that the VCC has gained significant traction since its introduction, with hundreds of VCCs established. The OFC has seen more modest adoption, though its usage continues to grow as the framework matures.

Passporting Opportunities: Both structures can potentially benefit from regional fund passporting initiatives, though specific advantages depend on ongoing developments in these arrangements.

Strategic Considerations for Fund Managers

When deciding between a VCC and an OFC, fund managers should consider several strategic factors:

Investor Base Characteristics: The composition of the investor base—whether primarily Asian, European, or global; institutional or individual; tax-exempt or taxable—can influence the optimal choice between these structures.