It is still unclear if Malaysia’s Capital Gains Tax, enforced from the 1st January 2024, will apply to venture capital (VC) and private equity (PE) operations within the country — including those which are Shariah compliant.
This issue was raised by the Securities Commission Malaysia (SC) with its first edition of the ‘Practical Guide on Venture Capital and Private Equity in Malaysia’, released on the 13th June 2024.
“In the Budget 2024 speech, it was indicated that the government is considering exemptions for share disposals in connection with venture capital-related investments as well as in other specified circumstances, subject to stipulated conditions. At the time of writing, legislation on these proposed exemptions is still in progress.”
The SC noted that a VC or PE fund, or investors who are a company, a limited liability partnership, a trust body or a cooperative society, who invest in an investee corporation and thereafter dispose of the shares in a transaction of a capital nature, may be subject to the new capital gains tax, unless exempted.
The new tax applies to disposal of shares of a Malaysia-incorporated company (including any rights or interests thereof) not listed on the stock exchange and also shares of a foreign-controlled company which directly or indirectly owns real property in Malaysia.
Gains or profits from the disposals of such shares are exempt if the disposal took place between the 1st January 2021 and the 29th February 2024.
The capital gains tax is payable only for share disposals from the 1st March 2024 — with the amount applied for shares acquired before the 1st January 2024 set at either:
- 10% of chargeable income from disposal, or
- 2% of gross proceeds from disposal.
A flat 10% of chargeable income from disposal applies for shares acquired on or after the 1st January 2024.
Disposal of all capital assets (movable or immovable property) situated outside Malaysia including any rights or interest thereof, where the gains are received in Malaysia, is similarly hit by the new capital gains tax.
Gains from disposal of capital assets situated outside Malaysia will be exempted from tax from the 1st January 2024 to the 31st December 2026, subject to certain as-yet unspecified economic requirements.
Such gains will be imposed the prevailing tax rate of the disposer (generally 24% if the disposer is a Malaysian company) on chargeable income.
Chances are high that the capital gains tax will be applied as the government has granted income tax exemption for a VC company on all sources of income, other than interest income arising from savings or fixed deposits and profits from Shariah-based deposits, for a five-year period from 2018.
Further, where a VC incurs a loss from the disposal of investment in a venture company anytime within the five-year exemption period, this loss can be carried forward to the post-exemption period and can be deducted against the statutory income on all sources of income in the following tax assessment year.
These financial matters will be tracked as all VC and PE firms must submit to the SC the following:
- Form 3 – Annual Activity Report (by 30th January each year)
- Form 3A – Mid-year Filing (by 14th July each year)
- Audited financial statements (within three months from financial year-end), and
- Shariah advisor annual report (for VC or PE firms managing Islamic VC and PE funds). The SC sets out rules applicable to Islamic VC and PE funds and other Islamic products in the capital markets under the Guidelines on Islamic Capital Market Products and Services.
In 2023, the total fund commitments for VC and PE totaled RM17.85 billion (US$3.79 billion), up from RM16.08 billion (US$3.41 billion) in 2022. VC and PE investments accounted for RM5.9 billion (US$1.25 billion) of total funds raised in Malaysia’s capital markets between 2017 and 2023.
