The incentives for the venture capital incentives that were announced during the Malaysian Budget 2018 have been formalised with the publication of the following subsidiary legislation on 15 April 2022:

All three subsidiary legislation are deemed to have come into effect from year of assessment (‘YA’) 2018.
 
The incentives announced during the Malaysian Budget 2018 are as follows:

Exemption Order No. 2
 
The Exemption
 
Exemption Order No. 2 exempts a venture capital company from the payment of income tax in respect of the statutory income on all sources of income, commencing from the YA in the basis period in which the venture capital company obtains its first certification from the Securities Commission Malaysia (‘SC’).
 
The first certification from the SC shall be obtained no later than 31 December 2026 and the exemption period shall be five YAs or the YAs comprised in the remaining life of the fund established for the purpose of investing in a venture company, whichever is the lesser (‘E.O. No. 2 Exemption Period’).
 
The exemption under Exemption Order No. 2 shall not apply to interest income arising from savings or fixed deposits and profits from syariah-based deposits.
 
Conditions for exemption
 
The venture capital company must, for each YA in the E.O. No. 2 Exemption Period, obtain a certification from the SC to confirm that: (a) it 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 venture companies; (b) it is registered with the SC on or after 27 October 2017 but not later than 31 December 2023; and (c) it has not invested in a venture company, which is a related company of the venture capital company at the point the first investment is made.
 
Losses from disposal of investment
 
A venture capital company that incurs a loss from the disposal of an investment in a venture company in the basis period for any YA within the E.O. No. 2 Exemption Period is entitled to carry forward the loss to the YA after expiry of the E.O. No. 2 Exemption Period and deduct the loss from its statutory income on all sources of income.
 
Revocation, savings and transitional
 
Exemption Order No. 2 revokes the Income Tax (Exemption) (No. 11) Order 2005 [P.U. (A) 75/2005] (‘Order No. 11/2005’) with effect from YA 2018.
 
Any exemption granted to a venture capital company under Order No. 11/2005 shall remain in effect for the remainder of the YAs in the exemption period of that venture capital company under Order No. 11/2005 as if the said order had not been revoked.
 
Any application for an exemption under Order No. 11/2005 which is pending on the date of the coming into operation of Exemption Order No. 2 shall be dealt with under Exemption Order No. 2.

Exemption Order No. 3
 
The Exemption
 
Exemption Order No. 3 exempts a venture capital management company from the payment of income tax in respect of the statutory income derived from the management of a venture capital company fund received by the venture capital management company from a venture capital company in relation to (a) the share of profits; (b) management fee; and (c) performance fee (including performance bonus and carried interest), as stipulated in the agreement entered into between the venture capital management company and the venture capital company on the management of the investment of the venture capital company.
 
The exemption under Exemption Order No. 3 shall be for a period from YA 2018 until YA 2026 (‘E.O. No. 3 Exemption Period’).
 
For the purposes of Exemption Order No. 3, a venture capital company must, in addition to satisfying the conditions set out in the definition of a ‘venture capital company’ (see below), also be one that has obtained certification from the SC that it has complied with the conditions to qualify for tax exemption under Exemption Order No. 2.
 
Losses
 
A venture capital management company that incurs a loss from the management of a venture capital company fund in the basis period for any YA in the E.O. No. 3 Exemption Period is entitled to carry forward the loss to the YA after expiry of the E.O. No. 3 Exemption Period and deduct the loss from the statutory income derived from the management of the venture capital company fund.
 
Revocation, savings and transitional
 
Exemption Order No. 3 revokes the Income Tax (Exemption) (No. 12) Order 2005 [P.U. (A) 77/2005] (‘Order No. 12/2005’) with effect from YA 2018.
 
Any exemption granted to a venture capital management company under Order No. 12/2005 shall remain in effect for the remainder of the YAs in the exemption period of that venture capital management company under Order No. 12/2005 as if the said order had not been revoked.
 
Any application for an exemption under Order No. 12/2005 which is pending on the date of the coming into operation of Exemption Order No. 3 shall be dealt with under Exemption Order No. 3.
 
The Rules
 
The Deduction
 
In ascertaining the adjusted income of a company or an individual from his business in a basis period for a YA, the Rules allow such company or individual to deduct an amount in that basis period which is equivalent to: (a) the value of investment made in a venture company; or (b) the value of investment or RM20 million, whichever is lesser, made in a venture capital company.
 
The deduction under the Rules is claimable in the YA where the investment has been held for a period of three years from the date the investment is made. For the aforesaid purpose, the deduction the investment made shall be deemed to be incurred in the YA where the investment is held for a period of three years from the date the investment is made. In addition, the investment holding period must be certified by the SC.
 
Conditions for deduction
 
To qualify for deduction under the Rules, the investment must have been made by the company or individual on or after 27 October 2017 but no later than 31 December 2026.
 
In relation to a claim for deduction for an investment in a venture company, the company or individual must obtain certification from the SC confirming that: (a) the investment is in the form of the holding of shares which at the time of acquisition are not listed for quotation in the official list of a stock exchange; (b) the investment, in relation to a company, was not made in a venture company which is its related company at the point the first investment is made; (c) the investment was made by providing seed capital financing, start-up financing or early stage financing; and (d) the investment was held for at least three years from the date the investment is made.
 
In relation to a claim for deduction an investment in a venture capital company, the company or individual must obtain certification from the SC confirming that: (a) the investment is in the form of the holding of shares which at the time of acquisition are not listed for quotation in the
official list of a stock exchange; (b) the investment, at the point of the first investment in relation to a company, is made by the company in a venture capital company which is not its related company and the investment by the said venture capital company is made in a venture company which is not a related company of the first-mentioned company; (c) the investment was made by the venture capital company in a venture company by providing seed capital financing, start-up financing or early stage financing; (d) the venture capital company had maintained, on average over a three year period based on the venture capital company’s annual audited financial statement, at least 50% of the venture capital company’s investment, is in one or more venture companies; and (e) the investment was held for at least three years from the date the investment is made.
 
Non-application
 
The Rules shall not apply to a venture capital company to which the Exemption Order No. 2 applies for the whole of the E.O. No. 2 Exemption Period.
 
Revocation and savings
 
The Rules revoke the Income Tax (Deduction for Investment in a Venture Company) Rules 2005 [P.U. (A) 76/2005] (‘2005 Rules’) with effect from YA 2018.
 
A company or an individual who has made an investment in the basis period for any YA before YA 2018 and complied with the provisions of the Rules but has not applied for a deduction under the 2005 Rules is entitled to apply for a deduction under the Rules.
 
Key Definitions
 
The following definitions apply in respect of all of the above subsidiary legislation where the respective terms are used:

The following definitions apply in respect of Exemption Order No. 2 and Exemption Order No. 3: 

The following definition applies in respect of Exemption Order No. 3: 

Malaysia; and (ii) has incurred an adequate amount of annual operating expenditure in Malaysia.
 
The following definitions apply in respect of the Rules: 

Write-up by Sheba Gumis (Partner) and Faith Chan (Associate) of the Corporate Practice of Skrine.  

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