Venture capital refers to financial capital that individuals offer, companies or Venture Capital Companies (VCCs) to the potentially higher-risk and high-potential Venture Companies (VCs) and start-ups. This capital is provided at the initial stage of company incorporation.
A Venture Capital Company (VCC) is specifically incorporated to gain loan or equity capital. Once obtained, these funds are then invested in Venture Capital (VC). This is a type of start-up or seed capital financing.
The Venture Capital Management Corporation manages the investment offered to a VC (VCMC). This is done at various stages of the life cycle of the VCs (Venture Companies). These include start-up, seed capital, or early-stage financing.
These types of incentives were previously offered in the Budget 2018. The government has proposed the extension of the Venture Capital incentives. This is done to encourage the activities like these. A VCC is exempted from income tax. This exemption relates to all types of income but excludes income generated through savings or fixed deposit profits.
The proposed investment limit of a VC is reduced from 70% to 50%. A VCMC is also exempted from income tax regarding the income generated through the profits obtained after investing in a VCC. Further, it was also proposed to exempt income related to receiving performance and management fees while managing the VCC funds.
In addition, another proposal refers to offering a tax deduction to a company or individual if the income is generated from an investment made to VCC funds. The tax deduction is equivalent to the amount invested. However, each individual or company shouldn’t exceed RM20 million/year.
To legislate the above, the following Orders and Rules were gazetted on 15 April 2022 and are deemed effective from the year of assessment (YA) 2018.
Income Tax (Exemption) (No. 2) Order 2022 [P.U.(A) 115]
The Order mentioned above ensures that a VCC is exempted from income tax, excluding income sources related to interest, savings profits, or fixed deposits. A VCC must receive the first certification from the Securities Commission Malaysia (SC). The first certification received shall not be later than 31 December 2026.
The exemption would be available for the five YAs or last for the remaining life of the fund created for the VC investment. The lesser of these two durations for exemption would prevail.
The VCC must receive a certificate from the SC to qualify for this exemption:
- The VCC needs to invest not less than 50% of its invested funds. These funds should exist in the shape of start-up financing, seed capital financing, early-stage financing, or a combination of these financings.
- The VCC was previously registered by the SC. The registration was done between Oct-27-2017 and Dec-31-2023.
- The VCC shouldn’t invest in its related company when making the initial investment.
If a VCC faces a loss after disposing of the investment while investing in a VC when the exemption period is intact, the loss could be carried forward to a YA after the post-exemption period. The loss is deducted against all statutory income sources.
The terms defined in this order are as under:
This term relates to the financing offered by a VCC to a VC. This includes:
- Working capital or capital expenditure starts with the commercialization of a particular product, technology, or product
- It is the interim financing, covering a VC, which is capable of securing a place in the stock exchange’s official list
- Additional working capital or additional capital expenditure to improve and enhance the productivity and development
Seed Capital Financing
A VCC offers this type of financing to a VC for researching, assessing, and developing the preliminary technology.
Start-up financing includes instances where a VCC invested in a VC for initial marketing and product development.
Venture Capital Company (VCC)
A VCC must meet the following criteria:
- It should be incorporated under the rules mentioned in the Companies Act 2016 (CA).
- A VCC also needs to be registered with the SC.
- A VCC should be capable of investing in various VCs through start-up financing, seed capital financing, or early-stage financing.
- Venture Company (VC)
It includes a company that is:
- Created under the Companies Act
- The VC is located in Malaysia or stays there during the whole period for a YA
- Utilizes the start-up financing, seed capital financing, or early-stage financing for the following activities:
- PIA promoted activities or products
- The activities related to technology-based business activities, especially those specified in the guideline of VC tax incentives related to the SC
- Products or activities developed through the R&D (Research and Development) scheme. It should be approved by the Ministry of Technology and Innovation or Ministry of Science
- Products, activities, or services developed through the Research, Development, and Commercialization grant scheme. Such a scheme should be approved by the “Malaysia Digital Economy Corporation Sdn Bhd.”
This Order also explains that the exemption doesn’t relieve a VCC from submission of tax returns. A VCC is bound to submit a ‘Statement of Accounts’ or any other information as mentioned in the Income Tax Act 1967 (ITA).
Income Tax (Exemption) (No.3) Order 2022 [P.U. (A) 116]
This Order relates to the tax exemption offered to a VCMC concerning the statutory income obtained by utilizing the VCC funds. The term statutory income includes the following:
- Shared profits
- Performance fees (carried interest and performance bonus)
- Management fees
The exemption is available from YA 2018 to YA 2026.
The terms defined in the Order are as under:
A company which:
- Is created under the Company’s Act
- Registered with the SC
- Has invested in one or more VC in the form of start-up financing, early-stage financing, seed capital financing
- Has received certification from the SC, showing that such a company is eligible for the exemption under P.U.(A) 115
- A VCMC is a company registered with the SC
- The SC must verify that the company:
- Has employed a sufficient number of employees (full-time)
- Has incurred a sufficient amount of operating expenditure (annual)
Income Tax (Deduction for Investment in a Venture Company or Venture Capital Company) Rules 2022 [P.U. (A) 117]
The Rules in this Order suggest that while ascertaining a company’s adjusted income or that of an individual from its business, there must be a deduction equal to:
- The total investment made in a VC
- RM20 million or value of investment (whichever is less) made in a VCC
The investment is deemed to be made in the YA. The investment should be held for three years. The holding of such investment needs to be certified by the SC.
While investing in a VC, the individual or company must obtain a certificate from the SC. Such certification must confirm that:
- The investment is made via holding the shares. When acquired, the company should not be available on the official list of a stock exchange
- The investment in a company was not made in a VC, which is its related company at the time when the first investment was made
- The investment was made by providing seed capital financing, start-up financing, or early-stage financing
- The investment was held for at least three years from the date when the investment was made
For investments in a VCC, the company or individual shall obtain a certification from the SC confirming that:
- The investment is in the form of the holding of shares. In addition, the company was not listed for quotation in the official list of a stock exchange
- Such an investment was made in a VC by the VCC in the form of start-up financing, seed capital financing, or early-stage financing
- On average, the VCC maintained at least 50% of VCC’s investments in one or more VCs
- The period for which the investment was held shouldn’t be less than three years
The terms defined under these Rules are as under:
An Individual should be a Malaysian resident earning business income.
Seed capital financing
See P.U. (A) 115
See P.U. (A) 115
See P.U. (A) 115
- Incorporated under the Company’s Act
- Malaysian-resident, and
- Carries out a business
See Section 2(1) of the PIA
See P.U.(A) 115
See P.U.(A) 115