The introduction of new corporate fund structures by Hong Kong, Australia and Singapore (the OFC, CCIV and VCC respectively) is designed to encourage asset managers to look at domiciling funds in the fast-growing Asia-Pacific region. We assessed these vehicles’ background and key features in part one of this two-part series. In part two, we turn to the factors that asset managers should consider as they decide whether these structures suit their fund manufacturing and distribution strategies.
Benefits drawbacks and challenges to consider
When it comes to fund managers weighing up options around where to domicile, and whether to take advantage of the new Asia-Pacific corporate fund structures, there are no "right" answers. In making their decision, fund managers need to factor in a number of variables, not least the demands of the target investor pool and the regulatory obligations for the fund in question.
Additionally, fund managers need to consider the objectives and specifics of each vehicle, including: the establishment and running costs involved; compliance requirements; taxation elements; and how closely their investment strategies will align with each option. For example, a US-based fund manager who is focused on North American investments would have little reason to domicile their fund in Australia, Hong Kong or Singapore unless they were specifically targeting investors from these or other Asia-Pacific locations.
In addition, a fund manager based in the Asia-Pacific and looking to export an Asian-based investment strategy might consider the advantages of domiciliation in the Asia-Pacific region not only to target APAC investors but also to offer a recognised fund structure to other potential markets.
Furthermore, a domicile like Luxembourg has a long history of hosting funds and a strong track record, and is rightly regarded as well-tested and secure. The UCITS framework, which evolved over 30-plus years in Europe, is considered the dominant cross-border brand globally, and in Asia, more than 100 fund managers have used UCITS-compliant funds (commonly Luxembourg-domiciled SICAVs) to gather in excess of US$250 billion across more than 1,000 separate funds.
Leveraging the UCITS experience, regional governments and regulators are committed to developing Asia-Pacific as an investment management hub, and the evolution of the various passporting schemes and fund structures is, in effect, Asia-Pacific’s response to the dominance of the UCITS brand in the region by offering local alternatives.
As such, the costs and benefits of these new corporate fund structures warrant careful consideration by fund managers and investors, to understand how those might better suit their objectives.
Push and pull factors
In considering whether to use these structures, a number of push and pull factors are relevant.
Investors keen for robust regulatory guidelines might find the corporate structures being propounded by Australia, Hong Kong and Singapore of interest.
This links to the “pull” factors in Australia, Hong Kong and Singapore’s favour. They are well-regarded in terms of their legal and regulatory jurisdictions which reduces risk.
Additionally, each jurisdiction has introduced regulations that have been developed in consultation with the asset management industry and we believe that largely, a fund-friendly approach has been adopted. However, some aspects of the current CCIV drafting create some commercial challenges and further engagement with industry and subsequent refinement would be welcomed.
Another factor is that all are located in a dynamic region that will grow fast in the coming decades. Also, each is based in the same time zone as the investors they are targeting – unlike funds in, say, Europe – and that makes investor interaction easier.
Other key points of attention
As noted in the first part of this analysis, there are a number of differences between Australia’s CCIV, Hong Kong’s OFC and Singapore’s VCC. Some of these differences may drive the appeal of particular jurisdictional structures for regional fund managers. For example, in Australia, the CCIV regime places additional requirements for retail funds versus wholesale funds, notably, there is no depositary requirement for wholesale CCIVs which is mandatory for retail CCIVs.
In addition, the current drafting of the CCIV law for wholesale operators is more onerous than the existing framework for wholesale unit trusts. This could potentially act as a disincentive for fund managers looking to establish a wholesale CCIV1.
Taxation is another important topic. When it comes to OFCs and VCCs, we are awaiting clarity on a number of points2. In Hong Kong, stamp duty implications associated with OFC are subject to limitations; the transfer of shares in OFC is subject to stamp duty; however, stamp duty is not applicable for OFC shares allotment and cancellation. Private OFCs in Hong Kong are eligible for tax exemption under certain conditions as defined by the Inland Revenue Department3.
And, in Singapore, a VCC will be treated as a company and a single legal entity for tax purposes– with the sub-funds in umbrella VCCs having their name included on the Certificate of Residence4.
In relation to the Australian CCIVs, the current proposal treats sub-funds as separate entities for tax purposes so that a single CCIV can serve as the umbrella for many different investors and investments. Distributions will have both taxable and non-taxable components, with non-resident taxation only applicable to the taxable components. Withholding tax rates continue to be a focus of industry consultation, which is continuing.
Singapore also says VCCs will benefit from its tax incentive schemes for funds under sections 13R and 13X of the Income Tax Act, while approved fund managers managing an incentivized VCC may be eligible from the 10 % concessionary tax rate under the Financial Sector Incentive-Fund Manager (FSI-FM) scheme5.
In summary, fund managers and investors assessing the suitability of these new vehicles must factor in a range of considerations:
The nature of the fund, its assets, and the investor base that is being targeted;
Push factors in jurisdictions where new rules are coming into force – those could make Asia-Pacific offerings more attractive;
And how the laws underpinning the corporate funds account for wholesale versus retail funds, among other factors.
When deciding where to domicile their funds, managers should therefore ask themselves the following key questions:
- What are your strategic and commercial objectives in Asia-Pacific?
- What types of assets and investment strategies do you/are you intending to manage?
- How do you plan to grow your regional footprint and assets under management over the medium to long term?
- What are the key demands of investor pools for specific funds, and are these more closely met by Asia-Pacific funds than those domiciled outside of the region?
BNP Paribas Securities Services is working closely with regulators and key strategic stakeholders to provide feedback and address industry questions on the new schemes. And, thanks to our Asia-Pacific footprint and global cross-border expertise, we can help clients to identify the impact of the different schemes from a cost of administration or ability to support different investment strategies' perspective. We provide support from set-up with trustee, custody and transfer agency services, as well as fund administration.
Call our experts for a more in-depth conversation about cross-border fund distribution.
3 Hong Kong Open-Ended Fund Company (OFC) – regulation memo, BNP Paribas Securities Services, op cit.
4 The Singapore Variable Capital Company – regulation memo, BNP Paribas Securities Services, op cit.
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