The recent budget 2023 by the Malaysian prime minister mentioned that a new capital gains tax (CGT) will be imposed on all shareholders selling shares in private companies.
Starting 1 March 2024, any disposal of shares will be subjected to capital gains tax (CGT) of the indicative 10% tax rate on the gains of the shares sold from an unlisted equity.
The rest of the details such as what type of unlisted equities will be subjected to the CGT will be issued by the government in the future statement in due course (for instance, more clarity as to what type of “unlisted equities” will be subjected to CGT).
From a taxation standpoint, CGT isn’t a new tool or mechanism as most developed countries have already implemented this tax as a way to boost and increase the government’s source of income. Malaysia is one of a few countries in the region that only recently decided to introduce this CGT. On a side note, Singapore’s CGT regime will be effective from 1 January 2024. However, its scope is strictly limited to sale of foreign assets in Singapore, while Malaysia’s CGT scope may be said to be more broader as it is aimed to capture any disposal of shares in unlisted equities in entities formed in Malaysia.
So what do you need to know about CGT if you’re an investor in a startup?
Currently, all tax advisers from tax lawyers to tax firms are still waiting for the definitive CGT tax framework to be ironed out before we can better advise our clients. For instance, the phrase or definition “unlisted equities” needs to more elaborated. There is a big question among investors if CGT also extends to unitholders that invests in mutual funds. The repercussion on the definition may also dampen or affect future investments decisions.
When it comes to startup investing, the government has made several tax incentives available to a list of categories of investors: angel investors, equity crowdfunding investors and venture capital funds are several investors that already enjoy certain tax incentives to encourage them to make more investments in startups.
Considering that CGT is a new tax regime, it is unclear if the same tax incentives will also be extended to these current categories of investors.
For example, an existing equity crowdfunding investor already enjoy a tax deduction against his her investment in a company invested in a crowdfunding campaign so long as he or she holds the investment for at least three years. Once the CGT takes place, it may be likely that the disposal of the shares in the business may be subject to the CGT. Therefore, it is unclear if the same CGT exemption may be extended to this group of investors.
Also, existing investors that have invested in a venture capital fund registered with the Securities Commission of Malaysia (SC) enjoy tax incentives on the investments made in the venture capital funds. However, the venture capital tax incentives guidelines SC’s website only mentions the tax exemptions for the management fees and carried interest (these are earned by the fund managers) and also the capital contributions i.e. investments made by the investors into the venture capital funds. Therefore, the regulator may likely have to update the SC’s tax incentives guidelines to further clarify if the same tax exemption to CGT will also be enjoyed by the investors and also the venture capital funds.
The budget announcement also mentions exemptions for CGT when it comes to an internal restructuring or if the company’s shares are listed on an initial public offering approved by the Bursa Malaysia stock exchange. This move may be included to encourage more local companies to list locally and allow the local shareholders to enjoy the tax exemption.
These are some of the likely scenarios that may happen. If you’re planning to invest in a startup, the CGT should not discourage you to invest in startups as the potential upside is still higher if you end up investing early in a growth company as an early stage investor. If you’re already invested, you may want to wait until the final framework is out before talking to your usual tax adviser to explore what are the ways you can anticipate and minimise your tax exposures.
I’ll do a separate post about this CGT topic once the final framework is issued by the tax department.