50% tax exemption on investments in shares offered on Equity Crowdfunding Platforms
09 May 2022
The Income Tax (Exemption) (No. 4) Order 20221
(‘the Exemption Order’) which exempts investments made by an individual who is resident in Malaysia and makes an investment in an investee company (‘qualifying individual’) on an equity crowdfunding platform was gazetted on 28 April 2022 and has effect from year of assessment (‘YA’) 2021.
Details of the Exemption Order are set out below.
The Exemption Order exempts a qualifying individual in respect of an amount of his aggregate income in a basis period for a YA, from the payment of income tax in the second YA after the YA in which an investment is made by the qualifying individual.
The investment in an investee company must be made by the qualifying individual on or after 1 January 2021 but not later than 31 December 2023, and is to be in the form of holding shares which are paid in cash to the investee company through an equity crowdfunding platform or through a nominee company (‘investment’).
Limit on amount exempted
The amount of the aggregate income that is exempted from income tax under the Exemption Order is 50% of the amount of investment made (subject to a maximum of RM50,000) for each YA and is limited to 10% of the aggregate income of the qualifying individual in the basis period for a YA in which the exemption is granted. Any amount exceeding the aforesaid limits will not be refunded or be available to set off the tax liability of a qualifying person in the relevant YA or subsequent YAs.
Conditions for exemption
The exemption under the Exemption Order is subject to the following conditions:
- the qualifying individual obtains an annual certification from the equity crowdfunding operator in relation to the investment and the amount of investment, and that annual certification is verified by the Securities Commission Malaysia (‘SC’);
- the investment is not disposed of, in full or in part, within two years from the date the investment is made; and
- the qualifying individual does not have a parent, including a parent in law, a child, including a stepchild, or an adopted child, a brother or sister, or a grandparent or grandchild, or a spouse, who makes any investment in the investee company.
The Exemption Order shall not apply to a qualifying individual who has made a claim for deduction under the Income Tax (Deduction for Investment in a Venture Company or Venture Capital Company Rules 2022 [P.U.(A)117/2022], or has been granted exemption under the Income Tax (Exemption) Order (No. 3) 2014 [P.U.(A)167/2014].
For the purposes of the Exemption Order:
- ‘equity crowdfunding operator’ means: (a) a company incorporated under the Companies Act 2016 (‘CA 2016’); and (b) registered with the SC as a recognised market operator to operate an equity crowdfunding platform under the SC’s Guidelines on Recognised Markets;
- ‘equity crowdfunding platform’ means an online equity fundraising platform operated by an equity crowdfunding operator;
- ‘nominee company’ means a company which is: (a) incorporated under the CA 2016; (b) resident in Malaysia; and (c) established by an equity crowdfunding operator in Malaysia to receive investments from a qualifying individual for investment into an investee company through an equity crowdfunding platform;
- ‘investee company’ means a company which is: (a) incorporated under the CA 2016, not including an exempt private company as specified in section 2 of the CA 2016; (b) resident in Malaysia; and (c) hosted on an equity crowdfunding platform to offer its shares;
- ‘shares’ means shares offered on the equity crowdfunding platform.
It is hoped that the exemption from tax under the Exemption Order will enhance the popularity of equity crowdfunding platforms as a marketplace for investments. Individuals who intend to take advantage of this exemption should note that they are required to retain ownership of all the shares acquired by them in the investee company for a period of two years from the date the investment is made.
Alert by Lee Ai Hsian (Partner) of the Fintech Practice and Desmond Liew (Senior Associate) of the Tax Practice of Skrine.