Cayman and Singapore: Still an attractive combination

Read our article in the Cayman Financial Review Magazine, eversion 

Singapore is a financial centre with an open economy. Due to its small population of about 5 million, one of its key strategies is the attraction of a large volume of non-resident business.

There is almost no restriction on foreign entities engaging in economic activities in Singapore. 

In such an environment, the use of offshore companies in Singapore is widespread and still growing. Offshore companies are used as holding companies and as vehicles for take-overs, joint ventures, listings, trusts, funds, security issues, securitisations and other special purposes.

More than 300 international companies from over 20 countries are listed on the Singapore Exchange, accounting for more than 40 per cent of all equity listings.

The foreign companies include those incorporated in the Cayman Islands, Australia, Bermuda, British Virgin Islands, Hong Kong, Indonesia, South Korea, Thailand and the United Kingdom. There are about 16 Cayman companies listed on the SGX. In addition, there is also a large number of foreign security issuers offering debt securities which are listed and traded on the Singapore Exchange.

Companies incorporated in the Cayman Islands are ideally suited for use by Singapore-based businesses in their international arrangements. Cayman shares a common legal heritage with Singapore, being the English common law, and the company law of Cayman and method of operation are familiar to persons or entities managing or operating Singapore companies.

The ability to use Cayman vehicles as mutual funds or closed-end funds by Singapore-based managers is due to the flexibility of the Cayman regulations. In general, Cayman does not require mutual funds or closed end funds to be managed by a manager established within its jurisdiction.

In addition, Singapore, as a jurisdiction within the Third Schedule to the Cayman Money Laundering Regulations, is perfectly suited to provide service providers to Cayman entities. Against this backdrop, a typical structure is to have a Cayman fund with a Singapore manager, and with a Singapore-based administrator and custodian. 

While there is no doubt that the Cayman funds’ industry has faced tough challenges in recent years, as has the industry generally, the jurisdiction remains strong. Recent statistics from the Cayman Islands Monetary Authority show registered fund numbers hovering around 9,300, a drop of only 7 per cent below the high figures of mid-2008, reflecting Cayman’s continuing market dominance.

Considering the massive economic turmoil of the past three years, this is not a dramatic decrease in numbers. Reflecting this, in Singapore, Cayman remains as the offshore jurisdiction of choice for mutual funds and closed-end funds. Coupled with the growing familiarity and acceptance of offshore vehicles and the increasing sophistication of investors in Singapore, Singapore managers are able to offer and market interests in Cayman funds to Singapore-based investors without any difficulty.

Other positive factors include the fact that Cayman does not impose withholding taxes, or income or capital gains taxes. This allows investors to receive the full benefit of all gains from a fund. In addition, there is no exchange control.

The framework of the solvency and insolvency legislation in Cayman is modelled upon English legislation. Upon the termination of a fund, solvent liquidations may also be carried out fairly easily and quickly, instituted by the passing of members’ or directors’ resolutions, a concept familiar to Singapore.

In relation to mutual (open-ended) funds, the attraction of Cayman is strong, in large part because setting up a Cayman fund is relatively simple. Registration with CIMA under the most-used category of registration, being Section 4(3) of the Mutual Funds Law, involves a straightforward submission of the relevant documents, including an offering document setting out the material terms of the offering.

In addition, Cayman has long had flexible legislation for lightly-regulated funds as an alternative to fully-registered funds, namely, the “private funds” structure under Section 4(4) of the MF Law. Singapore fund managers use private funds to establish a trading history and track record as the basis for subsequently expanding its investor base to that of a registered fund.

The government of Singapore has promoted, and continues to promote, the country as a leading financial centre in Asia. Tax incentives have been introduced and are continually reviewed and revised to ensure that they remain effective to promote Singapore’s competitiveness.

One of the tax incentives available to promote the growth of the funds industry is a tax exemption scheme applicable to income earned from managing non-resident funds, for example, a Cayman fund. Under this tax exemption scheme, “specified income” derived by a “qualifying fund” from funds managed by a fund manager in Singapore in respect of “designated investments” is exempt from tax in Singapore.

A “qualifying fund” is generally a non-resident fund which is not 100 per cent beneficially owned, directly or indirectly, by investors in Singapore (including investors who are resident individuals, resident non-individuals and permanent establishments in Singapore). Qualifying funds must be companies, trusts or individual accounts.

Under the enhanced tier scheme (applicable to funds with a minimum size of S$50 million at the point of application), there are no restrictions imposed on the residency status of the fund vehicles as well as that of investors. The enhanced tier also applies to funds that are constituted in the form of limited partnerships.

The Minister for Finance in his Budget Speech 2012 introduced enhancements to the existing incentive schemes.

Firstly, the criteria for “specified income” which can qualify for tax exemption has been simplified. The prescribed list of income has been replaced with an exclusion list. Accordingly, with effect from 17 February 2012, any income which is not specifically prohibited will qualify for tax exemption under the various fund management tax incentives.

Secondly, the list of “designated investments” which qualify for the tax concessions has been expanded to include, among others, private trusts that invest wholly in designated investments.

A “fund manager” for the purpose of the tax exemption schemes means a company holding a capital markets services licence under the Securities and Futures Act of Singapore for fund management or one that is exempt under the SFA from holding such a licence (exempt fund manager). Under the Financial Sector Incentive Scheme for Fund Managers, fund managers in Singapore are taxed at a concessionary rate of 10 per cent on fee income, subject to certain conditions and MAS approval.

The 2012 enhancement of the tax exemption laws will continue to provide fund managers in Singapore with more opportunities and good reason to establish offshore funds.

In April 2010, the Monetary Authority of Singapore (MAS) issued a proposal to strengthen regulatory oversight over exempt fund managers and in general, to improve the standards of the industry.

In relation to exempt fund managers, those managing more than S$250 million in assets will be required to apply for a licence from MAS. Stricter capital competency requirements and business conduct rules will also be imposed.

Exempt Fund Managers will be known as “registered FMCs” under the proposed new legislation. In a second proposal issued in September 2011, MAS proposed that all fund management companies should develop a robust risk management framework and be subject to independent annual audits. The roles and responsibilities of chief executive officers and directors in meeting the regulatory requirements will also be specified in the proposed new legislation.

The changes will have an impact on the smaller fund managers in Singapore as the changes require these managers to have a more formal internal infrastructure in place for their operations, for example, to have at least two directors with requisite experience, to establish risk management procedures and arrangements for internal audit etc.

A registered FMC’s auditors must submit a report on the manager’s compliance with the relevant operating requirements.

Operating costs are likely to increase as a result, and some consolidation in this area of the industry is expected when the proposed new legislation comes into effect, expected to be in 2012.

Whilst there is some concern among the smaller managers, the proposed new legislation has generally been well-received and viewed as a necessary development to raise professional standards in the industry, for greater investor protection.

As a result of the new Cayman regulations introduced in December 2011 requiring registration with CIMA of master funds whose feeder funds are registered with CIMA, this will mean increased compliance and on-going operating costs for Singapore fund managers managing such Cayman master-feeder funds, in addition to the proposed new Singapore legislation. Overall, the funds industry is in general on a trend towards more regulation and compliance.

Cayman, with its observance of recognised international standards and full IOSCO membership, and with its ability to adapt, coupled with the Singapore government’s commitment to promote the fund management industry, should support the continued use of Cayman vehicles in Singapore.