There are different types of crowdfunding in Malaysia, namely i) reward-based, ii) equity-based, iii) donation-based and iv) lending-based. Reward-based crowdfunding enables the investors to contribute to projects and to receive non-financial rewards in return, for example a product or service that the company offers. An equity-based crowdfunding (also known as equity crowdfunding, ECF) allows the investors to invest in the company in exchange for equity/shares, and ultimately profit/revenue sharing in businesses or projects if the company does well.
A donation-based crowdfunding allows charities, or those who raise money for social or charitable projects, to gather a community from the public and to enable them to donate to a specific project. Whereas for lending-based crowdfunding, individuals will lend money to businesses or other individuals with the expectation that the investors will gain back the principal loan sum plus interest.
You might be wondering, is crowdfunding legal in Malaysia? For the purpose of this article, we focus on just equity crowdfunding, which is regulated by the Securities Commission Malaysia where equity crowdfunding platform operators must be licensed and approved by the SC before they can run their ECF platforms in Malaysia.
ECF allows start-ups and MSMEs to raise early-stage financing from a group of crowd investors, mainly the general public. Based on equity crowdfunding guidelines Malaysia, there are three types of investors namely i) retail investors, ii) angel investors and iii) sophisticated investors. Each of them comes with their own criteria.
Apart from receiving equity, shares or ultimately dividends from the company, what are the other benefits for the equity crowdfunding investors? One of such benefits comes in the form of tax exemptions for retail investors. The Malaysian Government recently gazette the Income Tax (Exemption) (No. 4) Order 2022 [P.U. (A) 142] (‘Order’) on 28 April 2022. This Order reflects the position proposed in Budget 2021, wherein the purpose is to encourage more retail investors to make investments in equity crowdfunding projects.
The Order is effective from the year of assessment (‘YA’) 2021. What does the Order really cover?
The Exemption Order
The Order exempts a qualifying individual from paying income tax in relation to 10% of his aggregate income (the total of all taxable income from employment, rent, royalties, and so on) where the basis of such calculation is made based on 50% of the amount of the investment made, capped at RM50,000 for each YA. If the aggregate income of the qualifying individual is lesser than the amount exempted, the difference will not be given back or used to set off his tax liability for that YA or any subsequent YA.
This exemption is available only in the second YA subsequent to the YA in which the qualifying individual made the investment.
Conditions for Exemption
To be qualified for the tax incentive, the following conditions must be fulfilled:
- The qualifying individual must have made an investment in:
- a company hosted on the ECF platform to offer its shares between 1 January 2021 and 31 December 2023; and
- the form of holding shares which are paid in cash to the company hosted on the ECF platform to offer its shares through the platform or through a nominee company;
- The qualifying individual obtains an annual certification from the ECF operator in relation to the investment and the amount of investment, the annual certification must be verified by the Securities Commission Malaysia (‘SC’);
- The qualifying individual is required to maintain his shareholding in the company for 2 years from the date of investment; and
- The parent (including in law), child, sister, grandparent, grandchild or spouse of the qualifying individual did not invest in the company hosted on the ECF platform to offer its shares.
Non-application
An individual is not eligible for this income tax exemption if he has claimed 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 is exempted to pay income tax under the Income Tax (Exemption) Order (No. 3) 2014 [P.U. (A) 167/2014].
Interpretation
For the purposes of this Order:
- Qualifying individual
An individual who is resident in Malaysia and makes an investment in the company hosted on the ECF platform to offer its shares.
- ECF operator
A company incorporated under the Companies Act 2016 (‘CA 2016’) and registered with the SC as a recognized market operator to operate an ECF platform in Malaysia.
- ECF platform
An online equity fundraising platform operated by an ECF operator.
- Nominee company
A company which is incorporated under the CA 2016, resident in Malaysia and established by an ECF operator in Malaysia to receive investments from qualifying individuals for investment purposes through an ECF platform into an investee company.
- Investee company
A company incorporated under the CA 2016 (excludes an exempt private company defined in Section 2 of the CA 2016), resident in Malaysia and hosted on an ECF platform to offer its shares.
- Shares
Shares offered in the ECF platform.
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About the author:
This article was written by Edwin Lee Yong Cieh, Partner and Eileen Yew, Trainee Lawyer – law firm in Kuala Lumpur, Malaysia.
The view expressed in this article is intended to provide a general guide to the subject matter and does not constitute professional legal advice. You are advised to seek proper legal advice for your specific situation.
