How to Qualify for ECF Tax Incentive in Malaysia?

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Many ECF investors are questioning why we cannot see the new ECF tax incentive category for ECF investments in the e-BE form when e-filing our income tax this year? Are you wondering the same also?

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[Crowdfunding] What is Equity Crowd Funding (ECF)?

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Let's find out the answer here...

Historically, tax incentives were only available to investors through the Malaysian Business Angel Network (MBAN). The MBAN network was made up of high net worth individuals capable of investing anywhere upwards of RM500,000 (which was the income tax relief rate offered to Angel Investors for their investment into a single company). 

The good news is here for retail investors.

During the Budget 2021 announcement, the Government widens the tax exemptions to include retail investors as well, offering up to a 50% income tax exemption in order to encourage individual investors to invest in the ECF and to continue funding high-potential startups.

The income tax exemption to be given is subject to meeting the following:

1. The exemption amount is only limited to a maximum of RM50,000 for each year of assessment;
2. The deduction is limited to 10% of the aggregate income for that year of assessment;
3. The investor, investee company, and amount of investment must be verified by SC;
4. The investor must not have any family relationship (see bottom of this post) with the investee company;
5. The investment must be made through SC approved ECF platform; and
6. The investment must not be disposed of, in full or in part, within 2 years from the date of investment.

And most importantly, the new ECF tax incentive is only applicable for investments made from 1 January 2021 to 31 December 2023.

I need to reiterate again here. The reason for the 2-year gap is because in order to be eligible for the tax incentives, the government requires that:

• The ECF investment must be made within the period of 1 January 2021 to 31 December 2023.
• An investor must fully hold the ECF investment for 2 YEARS from the date of investment.

Therefore, the earliest investment that would be eligible would be those made in January 2021, and because investors must hold the investment for 2 YEARS, the earliest they would become eligible to claim the benefit would be JANUARY 2023.

Thus, investors should expect the ECF tax benefit to appear in next year’s form onwards. (e-Filing form for YA2022 onwards)

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Update

We have recently received information that the tax order in relation to investment in ECF has been gazetted on the Federal Legislation Portal. You may click the link here to view the full information.  

Further clarifications / highlights:

1. What is the definition of family relationships?
   
   Parent (including a parent-in-law), child (including a stepchild, or a child adopted in accordance with any law), brother or sister, grandparent or grandchild, or spouse.
   
   
2. How do we prove to the regulator the qualified investment amount?
   
   The qualifying individual obtains an annual certification from the equity crowdfunding (ECF) operator in relation to the investment and the amount of investment, and that annual certification is verified by the Securities Commission Malaysia.

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