Six public rulings prs updated and two new prs issued by the irb

The IRB has published PR No. 7/2022: Venture Capital Tax Incentives, dated 23 December 2022. This new 17-page PR replaces PR No. 2/2016, which was issued on 9 May 2016 (see Tax Alert No. 11/2016). The new PR comprises the following paragraphs and sets out six examples:

1.0 Objective
2.0 Related provisions of the law
3.0 Interpretation
4.0 Venture capital industry in Malaysia
5.0 Regulatory framework for venture capital industry
6.0 Tax exemption incentive for a venture capital company (VCC) investing in a venture company (VC)
7.0 Tax deduction incentive for an individual or a company investing a VC or VCC
8.0 Mutually exclusive
9.0 Tax incentive for a venture capital management company (VCMC)
10.0 Application for certification of investment for tax exemption and tax deduction in a VC and VCC
11.0 Updates and amendments
12.0 Disclaimer

The new PR is broadly similar to the earlier PR and explains the tax incentives for the venture capital industry in Malaysia. Venture capital is early-stage financial capital provided by individuals, companies or VCCs to high-potential and potentially higher-risk start-up VCs. A VCC is a company incorporated to obtain funds in the form of equity capital or loan capital, which are then invested in the VC in the form of seed capital, start-up or early-stage financing. A VCMC manages, on behalf of a VCC, the investments of a VC at different stages of the life-cycle, i.e., seed capital, start-up or early-stage financing.

The new PR was updated to reflect, explain and provide examples on the new P.U. Orders gazetted in 2022 (see Tax Alert No. 9/2022), as follows: 

(a) Income Tax (Exemption) (No. 2) Order 2022

This replaced Income Tax (Exemption) (No. 11) Order 2005, Income Tax (Exemption) (Amendment) (No. 2) Order 2006 and Income Tax (Exemption) (Amendment) Order 2009

The Order provides that a VCC is exempted from the payment of income tax in respect of statutory income on all sources of income, other than interest income arising from savings or fixed deposits and profits from syariah-based deposits, commencing from the YA the VCC obtains its first certification from the Securities Commission Malaysia (SC). 

(b) Income Tax (Exemption) (No. 3) Order 2022

This replaced Income Tax (Exemption) (No. 12) Order 2005

The Order provides that a VCMC is exempted from the payment of income tax in respect of the following statutory income derived from the management of VCC funds:

(a) Share of profits,

(b) Management fees, and

(c) Performance fees (including performance    bonus and carried interest)

(c) Income Tax (Deduction for Investment in a Venture Company or Venture Capital Company) Rules 2022

This replaced Income Tax (Deduction for Investment in a Venture Company) Rules 2005

The Rules provide that in ascertaining the adjusted income of a company or an individual from its business for a YA, there shall be allowed a deduction equivalent to the:

(a) Value of investment made in a VC, or

(b) Value of investment or RM20 million, whichever is less, made in a VCC

The new PR also stipulates that the following updated guidelines have been issued by the SC, which is the body entrusted to assess and certify applications for the tax incentives for the venture capital industry:

• Guidelines on the Registration of VC and Private Equity Corporations and Management Corporations
• Venture Capital Tax Incentives Guidelines

The Guidelines are available on the SC’s website via the following link: Venture Capital/Private Equity - Guidelines | Securities Commission Malaysia

The IRB has published PR No. 8/2022: Taxation of Limited Liability Partnership, dated 23 December 2022. This new 25-page PR replaces PR No. 5/2015, which was issued on 14 August 2015 (see Tax Alert No. 18/2015). The new PR comprises the following paragraphs and sets out 11 examples:

1.0 Objective
2.0 Related provisions of the law
3.0 Interpretation
4.0 Limited liability partnership (LLP)
5.0 Partners’ contribution of capital
6.0 Distinction between an LLP, a partnership and a company
7.0 Compliance officer of an LLP
8.0 Conversion of a conventional partnership or a company to an LLP
9.0 Change of partners in an LLP
10.0 Tax treatment of an LLP
11.0 Tax treatment of partners of an LLP
12.0 Bilateral credit and unilateral credit
13.0 Updates and amendments
14.0 Disclaimer

The new PR is broadly similar to the earlier PR and explains the tax treatment of an LLP. Some of the key changes are outlined below.

• The new PR was updated to reflect the legislative changes since the earlier PR was issued, including the following:

(a)   Effective 28 December 2018, Section 75B(1)(a)(i) of the ITA was amended to extend the responsibility for doing all acts and things required to be done by or on behalf of an LLP to a person qualified to act as a secretary under the Companies Act 2016, who is a citizen or permanent resident of Malaysia and ordinarily resides in Malaysia.

(b)  Effective YA 2019, the carry-forward period for unabsorbed business losses is limited to ten, instead of seven, consecutive YAs.

(c)  Effective YA 2019, if an LLP changes its accounting year-end, the IRB is to be notified via a prescribed form, i.e., Form CP204B, and the Form CP204B has to be submitted to the IRB no later than:

-   30 days before the date of commencement of the new accounting period, if the accounting period is shortened, or
-  30 days before the closing date of the original accounting period, if the accounting period is extended.

(d)  Effective YA 2020, an LLP, with a total capital contribution of RM2,500,000 or less at the beginning of the basis period for a YA and gross income from business sources not exceeding RM50 million in the basis period for that YA, will be eligible for the preferential tax rate of 17% on the first RM600,000 of chargeable income, and 24% on the remaining chargeable income. 

(e)   Effective YA 2021, an LLP is required to furnish its tax return in the prescribed form in an electronic medium or by way of electronic transmission in accordance with Section 152A, i.e., e-filing. An LLP may thus no longer file a tax return manually.

• The new PR stipulates that for income tax purposes, an LLP is required to prepare complete accounting records comprising the profit and loss account, balance sheet and explanatory notes to the accounts (either physically or electronically). Otherwise, the LLP is required to retain the following records:

-        Information on partners and trustees*

-        Information on income

-        Information on expenditure

-        Information on rental, leasing and staffing*

-        Bank statement, interest and other related banking information*

-        List of debtors and creditors / liabilities

-        List of all assets (current and fixed)

-        Percentage of capital contribution by each partner

-        Explanatory notes to the items above

-        Other supporting documents to prove the business transactions for tax purposes

*Additional items included in the new PR

•  The new PR elaborates on the requirements of an LLP to furnish its estimates of tax payable

The IRB has published PR No. 9/2022: Property Development, dated 23 December 2022. This new 47-page PR replaces PR No. 1/2009, which was issued on 22 May 2009 (see Tax Alert No. 12/2009). The new PR comprises the following paragraphs and sets out 30 examples:

1.0 Objective
2.0 Related provisions of the law
3.0 Interpretation
4.0 Date of commencement of business
5.0 Separate source of income of a property development project
6.0 Recognition of income prior to completion of project
7.0 Estimated loss from uncompleted project
8.0 Revision of estimate and tax computation
9.0 Cancellation of purchase
10.0 Completion of project
11.0 Adjusted income
12.0 Development expenditure
13.0 Tax treatment on stock
14.0 Other issues related to property development
15.0 Joint venture project
16.0 Updates and amendments
17.0 Disclaimer

The new PR is broadly similar to the earlier PR and explains the basis of ascertaining gross income for the purpose of computing adjusted income derived from the business of property development. Some of the key changes are outlined below.

• The new PR states that in a situation where a development unit buyer surrenders or cancels his purchase and forfeits the payment that has been made to the property developer, for income tax purposes, the property developer shall make the adjustment in the basis period the cancellation takes place.

In the earlier PR, it was stipulated that for income tax purposes, the adjustment is given effect in the YA in which the adjustment to the annual account is made.

The new PR also reiterates that in a case where a purchaser defaults on his payments, the gross profit is still to be assessed in full as there is no cancellation of the purchase. 

• The new PR stipulates that where a loss is ultimately incurred upon completion of the project, a company may opt not to reopen the prior YAs and instead make an adjustment to the gross profit in the year the project is completed, on condition that there are no tax implications for all the relevant YAs.
• The new PR stipulates that for income tax purposes, the provision for land premium is not an allowable expense.
• The new PR clarifies the tax treatment for show house expenditure, including the following:

-           Show house built outside the development project area
-           Show house which is trading stock and subsequently transferred to be               used as the property developer’s business asset
-           Furniture, fittings and fixtures, interior design and decoration expenses
-           Construction of sales gallery or management office

• The new PR includes guidance on the tax treatment of compensation receivable arising from stock-in-trade parted with by compulsion under Section 4C of the ITA, which will be treated as gross business income.
• For joint venture (JV) projects:

(a)   Where a landowner takes an active role in the property development activities together with the property developer, the landowner is deemed to be undertaking the business of property development.
(b)   Where a landowner does not take an active role in the development activities and the land is not a trading stock of his business, the landowner is deemed to not be undertaking the business of property development.

The new PR clarifies that “active role” refers to the following:

(a)   The landowner has significant influence, amongst others:

-  Determining the planning of the property development project such as the concept, type, nature and duration

-   The appointment of contractors involved in the JV project such as consulting companies, contractors and subcontractors.

-   Involvement in marketing activities for the whole development project.

-   Determining the selling price of development units.

or

(b)   The existence of badges of trade in the JV project transaction.

• The following paragraphs in the earlier PR have been removed:

     -  Paragraph 12.4 – Tax treatment for the transfer of land as fixed asset to trading account

     -   Paragraph 14 – Information and documents to be made available for examination during an audit

The IRB has published the following PRs, both dated 27 December 2022, to provide guidance to Malaysian resident companies engaged in manufacturing and agricultural activities in determining their eligibility to claim reinvestment allowance (RA):

• PR No. 10/2022: Reinvestment Allowance Part I – Manufacturing Activity
• PR No. 11/2022: Reinvestment Allowance Part II – Agricultural and Integrated Activities 

The new PRs No. 10/2022 and No. 11/2022 replace PRs No. 10/2020 (dated 6 November 2020) and 11/2020 (dated 10 November 2020) respectively. The IRB has advised that PR No. 11/2022 should be read together with PR No. 10/2022.

The contents of both the new PRs are broadly similar to the earlier PRs. Both PRs have, however, been updated to explain and provide examples to demonstrate the application of the “Special” RA announced under the Short-term Economic Recovery Plan (PENJANA) stimulus package. A company will be eligible to claim the Special RA from YA 2020 to YA 2024 if the company has:

• Incurred qualifying expenditure for manufacturing projects or agricultural activities as specified in Schedule 7A of the ITA, and
• Exhausted its existing 15-year RA period and the “additional” RA granted from YA 2016 to YA 2018.

Effective YA 2019, the carry-forward of unutilized RA is restricted to seven consecutive YAs upon expiry of the qualifying period, with any unutilized allowances to be disregarded thereafter. The new PRs also clarify and provide examples to demonstrate that unutilized PENJANA Special RA are to be tracked separately from the normal unabsorbed RA balances. Any PENJANA Special RA that has not been utilized by YA 2024 can be carried forward for a maximum period of seven consecutive YAs, beginning from YA 2025.

PR No. 10/2022 has also been updated to amend Diagram 2 and include two new Diagrams (i.e., Diagrams 3 and 4) (refer to Paragraph 8.2 of the PR). The diagrams (replicated in the Appendix to this Alert) are consistent with the examples outlined in Practice Note (PN) No. 1/2022: Explanation in relation to the definition of factory for the purpose of RA claim under Schedule 7A, ITA (see Tax Alert No. 3/2022). The PN was issued to explain the “factory” definition in Paragraph 9 of Schedule 7A of the ITA. The PN also clarified that in a situation where the storage space in an extended area exceeds 10% of the total floor area of the extension, RA claims would still be allowed for the portion of the extension used for the purpose of a qualifying project (excluding the storage space).

The IRB has published PR No. 12/2022: Commercialization of Public Resource-Based R&D Findings, Part I – Tax Incentive for Investor Company, dated 29 December 2022, to explain the tax incentive available to a company that invests in its related company for the sole purpose of financing the commercialization of public resource-based R&D findings in Malaysia. This new eight-page PR comprises the following paragraphs and sets out two examples:

1.0 Objective
2.0 Relevant provisions of the law
3.0 Interpretation
4.0 Introduction
5.0 Eligible investor company
6.0 Public resource-based R&D findings and commercialization
7.0 Application and grant of approval for tax deduction
8.0 Deduction allowable to an investor company
9.0 Disclaimer

Some of the key points are outlined below. 

• The PR explains that in ascertaining the adjusted business income of an investor company for a YA, a deduction shall be allowed, equivalent to the value of investment made in a related company for the sole purpose of financing a project on commercialization of public resource-based R&D findings in the basis period for that YA
• The PR explains the criteria for an investor company to be eligible for the tax incentive
• The PR elaborates on the definition of “public R&D findings” and “commercialization” for the purpose of the tax incentive
• The PR clarifies the application and approval process for the tax incentive
• The PR explains and provides examples to demonstrate the period of commencement and cessation of the tax incentive

This PR should be read together with PR No. 13/2022: Commercialization of Public Resource-Based R&D Findings, Part II – Tax Incentive for Eligible Company (see below).

The IRB has published PR No. 13/2022: Commercialization of Public Resource-Based R&D Findings, Part II – Tax Incentive for Eligible Company, dated 29 December 2022, to explain the tax incentive available to a company, in which its holding company has made investments for the purpose of financing a project on the commercialization of public resource-based R&D findings in Malaysia. This new 21-page PR comprises the following paragraphs and sets out three examples:

1.0 Objective
2.0 Relevant provisions of the law
3.0 Interpretation
4.0 Introduction
5.0 Qualifying criteria of an eligible company
6.0 Application and grant of approval for tax incentive
7.0 Ascertainment of tax-exempt income
8.0 Disclaimer

Some of the key points are outlined below. 

• The PR explains that an eligible company will be granted 100% tax exemption on its statutory income derived from the pioneer business for a period of five years (extendable for a further five years).
• The PR explains the criteria for a company to be eligible for the tax incentive
• The PR clarifies the application and approval process for the tax incentive
• The PR explains and provides examples on the methodology to ascertain the tax-exempt income, including the:

-        Treatment of income from pioneer business and post-pioneer business

-        Capital allowances

-        Treatment of losses incurred during the tax relief period

As highlighted above, this PR should be read together with PR No. 12/2022: Commercialization of Public Resource-Based R&D Findings, Part I – Tax Incentive for Investor Company.