PRINT THIS PAGE Developments in tax incentives for Malaysian venture capital companies31/05/2005. Source: Baker & McKenzie.
In Malaysia, three legislative Orders were issued recently that amended the tax incentives for venture capital investments introduced in 2001, says Baker & McKenzie. The Income Tax (Exemption) (No. 11) Order 2005, and Income Tax (Deduction for Investment in a Venture Company) Rules 2005 have revoked similar 2001 orders, and have retrospective effect from the year of assessment (YA) 2003.The Income Tax (Exemption) (No. 12) Order 2005, also effective from YA 2003, introduces a new tax incentive for venture capital management companies (VCMC).
Tax Exemption for Venture Capital Companies (VCC)
Under the 2001 order, a VCC was exempted from payment of income tax for a period of ten years of assessment or the years of assessment equivalent to the life of the fund, whichever is the lesser. The exemption is still available; however some of the qualifying conditions have changed.There are two
Major changes:
i. Previously the tax exemption was for income tax on all sources of income. This has been amended to exclude interest income arising from savings or fixed deposits and profits from syariah-based deposits.
ii. The tax exemption used to be available to Malaysian incorporated VCCs, a partnership, and schemes or arrangements investing in venture companies. The new exemption is only applicable to a Malaysian incorporated company that invests in venture companies in the form of seed capital, financing, start-up financing, or early stage financing, and is registered with the Securities Commission.
Tax Deduction for Venture Capital Investments
The Income Tax (Deduction for Investment in a Venture Company) Rules 2001 had offered a tax deduction to a company or an individual resident in Malaysia, of an amount equivalent to its investment in a venture company, that has received the Securities Commissions certification,
i. That the investment was in the form of the holding of shares which at the time of acquisition were not listed for quotation in a stock exchange;
ii. That the investment, in relation to a company, was not made in a venture company which is its related company at the point of first investment;
iii. That the investment was made for seed capital financing, start-up financing or early stage financing; and
iv. That it has provided an early stage financing to a venture company which is involved in activities not listed under the MESDAQ Market or Bursa Malaysia as technology-based activities, from the seed capital or start-up stage where such early stage financing is provided as:
• Additional capital expenditure or additional working capital to increase production capacity, marketing or product development; or
• An interim financing for the purpose of being listed on the official list of a stock exchange.
These conditions still apply, but in addition, the 2005 Rules make it a condition that the investment must have been made at least two years prior to the date of its disposal.
A company or an individual that has made a qualifying investment in the basis period for YA2001 or YA2002 but has not applied for the deduction under the old Rules may apply for a deduction under the new Rules.
Tax Exemption for VCMC
VCMCs are now eligible for a tax exemption on the share of profits received by it from a VCC on any investment made by the VCC as stipulated in the agreement between them.This is a new incentive.
Conclusion
In issuing the new orders, it appears that the intention of the government remains the same. Except for the VCMC tax exemption, the same incentives are being offered but the phrasing of the incentives has been refined, and conditions have been made clearer, even though some ambiguities still remain.
Brian Chia (Kuala Lumpur) Tel: +603 2055 1999 brian.chia@wongpartners.com
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