Public Ruling No. 7/2022 : Venture Capital Tax Incentives

The objective of Public Ruling No. 7/2022 is to explain the tax incentives in relation to the venture capital industry in Malaysia.

A Venture Capital Companies (“VCC”) means a company that is:

1. Incorporated under the Companies Act 2016 to obtain funds from investors (equity capital) or loan capital, which is invested in one (1) or more than one (1) Venture company (“VC”) in the form of seed capital financing, start-up financing, or early stage financing;
2. Registered with the Securities Commission Malaysia (“SCM”); and
3. Verified by the SCM that the company has complied with the qualifying conditions under P.U.(A) 115/2022 or P.U.(A) 117/2022.

A VC means a company that is:

1. Incorporated under the Companies Act 2016;
2. Resident in Malaysia in the basis year for a YA; and
3. Involved in utilising seed capital financing, start-up financing or early stage financing for the following: (i) Activities or products promoted under the Promotion of Investment Act 1986 where a VC has been granted tax incentives such as pioneer status or investment tax
   allowance;
   (ii)  Technology-based business activities as specified in the Venture Capital Tax  Incentive Guidelines issued by the SCM;
   (iii) Products or activities which have been developed under the research and development scheme, approved by the Ministry of Science, Technology and Innovation;
   (iv) Products, services or activities which have been developed under research, development and commercialisation grant schemes approved by Malaysia Digital Economy Corporation Sdn Bhd.

A Venture Capital Management Company (“VCMC”) means a company that is:

1. Incorporated under the Companies Act 2016 to manage on behalf of a VCC the investments in securities of a VC in different business stages, i.e. seed capital, start-up or early stage financing;
2. Registered with the SCM; and
3. The purpose of tax exemption, has been verified by the SCM:
   (i)   To have an adequate number of full time employees in Malaysia; and
   (ii) To have incurred an adequate amount of annual operating expenditure in  Malaysia, for each YA in which the VCMC is exempt from payment of income tax.

The following definitions apply to the terms “seed capital financing”, “start-up financing”, and “early stage financing” that were previously mentioned:

“Seed Capital Financing” refers to

• Financial support given by an individual or business to a VC for the purpose of research, evaluation, and the creation of an early concept or prototype in the absence of a formalized organizational framework for the VC.
  

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“Start-up financing” refers to

• Funds given by an individual or business to a venture capitalist (VC) for product development and initial marketing while the VC is still in the process of formalizing its organizational structure or, if it has been formalized, while the VC has not yet sold its products on the open market.
  

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Early stage financing is defined as funding given to a VC in the following:

• Capital expenditure or working capital to initiate commercialization of a technology or
  product;
• Additional capital expenditure or additional working capital to increase production capacity, marketing or product development; or
• An interim financing for a VC that is expected to be listed on the official list of a stock exchange.

Regulatory Framework for the Venture Capital Industry

The SCM has been tasked with evaluating and certifying applications for tax incentives for the venture capital business in accordance with the pertinent Income Tax Rules and Income Tax (Exemption) Orders. SCM has issued the Guidelines on the Registration of VC and Private Equity Corporations and Management Corporations (revised on 16 April 2020), and the Venture Capital Tax Incentives Guidelines (revised on 28 June 2022), which are available from the SCM’s website at www.sc.com.my.

Tax Exemption Incentive for a Venture Capital Company Investing in a Venture Company

An application for exemption under this Order shall be made to the Minister through SCM on or after 27 October 2017 but not later than 31 December 2023.

A VCC is exempted from the payment of tax in respect of the statutory income:

• Starting from the YA in the basis period, the VCC receives its first certification from the SCM, and the first certification shall not be later than 31 December 2026, from all sources of income excluding interest income arising from savings or fixed deposits and profits from Syariah-based deposits; and
• For a period of five (5) YA or the remaining life of the fund established for the purpose of investing in a VC, whichever is the lesser.

Conditions to qualify for the tax exemption

During the period of exemption, the VCC shall obtain certification for each YA from the SCM confirming that:

• The VCC has invested at least 50% of its invested funds in the form of seed capital financing, start-up financing, early stage financing or any combination of such financing in VC;
• The VCC is registered with the SCM on or after 27 October 2017 but not later than 31 December 2023; and
• The VCC has not invested in a VC which is its related company at the point of the first investment.

Loss from disposal of investments

Where a VCC incurs a loss from the disposal of investments in a VC in the basis period for any YA within the exempt period, such loss shall be carried forward to the post-exempt period and deducted from the statutory income on all sources of income.

Tax Deduction Incentive for an Individual or a Company Investing in a Venture Company or Venture Capital Company

At present, after the third year from the date the investment is made and the investment holding period is certified by SCM, the investment made shall be deemed to be incurred.

Regardless of whether the investment is sold or otherwise after the third year, tax deduction is given after the third year from the date the investment is made, as recommended by the SCM, and not at the time the investment is made.

Tax Incentive for a Venture Capital Management Company

A VCMC must be registered with the SCM pursuant to the Guidelines on the Registration of VCC and Private Equity Corporations and Management Corporations issued by the SCM.

Tax Exemption

From the YA 2018 to YA 2026, in accordance with the Income Tax (Exemption) (No.3) Order 2022 [P.U.(A) 116/2022], the VCMC that is registered with the SCM will be exempted from the payment of income tax in respect of the statutory income derived from the management of VCC fund in relation to share of profits, management fees and performance fees, including performance bonus and carried interest on any investment made by the VCC as stipulated in the agreement entered into between the VCMC and the VCC.

Losses in the exemption period

Where a VCMC incurs a loss from the management of VCC fund in the basis period for any YA within the exempt period, the loss shall be carried forward to the post-exempt period and deducted from the statutory income derived from the management of VCC fund.

The VCMC shall maintain a separate account for the income derived from the management of VCC fund in the basis period for each YA and that income shall be treated as a separate and distinct source of business for the VCMC.