Source: The Edge
The state of the Malaysian start-up ecosystem is a point of contention. Some argue that start-ups are undergoing a consolidation phase, where they have either ceased operations or are being acquired by large corporations. Others believe the ecosystem is still in a nascent stage, lacking in variety and innovation.
Despite the numerous government initiatives that accelerate growth, nurture partnerships and provide commercialisation support to vitalise the landscape, the ecosystem is still lagging behind its regional peers. This is where private sector participation is key.
The Malaysian start-up ecosystem is about to get a boost with more private sector involvement, thanks to the rollout of a corporate tax deduction of up to RM20 million, which was introduced in Budget 2018 and gazetted by the Securities Commission Malaysia (SC) last year. However, it is only recently that corporations have started taking advantage of it.
Corporate involvement can identify problems in the ecosystem that are impeding the progress of start-ups and allow them to scale, and investment from the private sector translates into a self-sustaining ecosystem, say industry players.
Conglomerates can offer start-ups industry expertise and resources that they do not usually receive from purely financial investors, says Victor Chua, managing director of venture capital firm Vynn Capital.
“The challenging economic environment is a good backdrop for corporate involvement in the start-up ecosystem. There are two ways to survive any economic downturn. Either you stop investing, cut costs and reduce expenditure, which might help with survival but not long-term growth, or you take a different turn and start investing in long-term solutions that will help with business breakthroughs,” says Chua.
The incentive is to encourage venture capital activities by individuals or companies with a business income.
Essentially, the incentive — or the “Deduction for Investment in a Venture Company (VC) or Venture Capital Company (VCC)” — gives individuals with a business source income and Malaysian incorporated and resident companies a tax deduction of up to RM20 million on the value of investment made in a start-up through a VCC that is registered under the SC. The investments are in the form of seed capital and early-stage financing.
The incentive — which is valid for investment in a VCC made between Oct 27, 2017, and Dec 31, 2026 — can be claimed after the investment has been held for three years.
The start-ups have to be Malaysian companies incorporated under the Companies Act 2016. The start-ups must use the seed capital financing or early-stage financing for activities or products listed in the Promotion of Investment Act 1986; or for technology-based business activities as specified in the guideline issued by SC in relation to venture capital tax incentives; be involved in products or activities that have been developed under the research and development scheme approved by the Ministry of Science, Technology and Innovation (MOSTI); or products, services or activities under the research, development and commercialisation grant scheme approved by the Malaysia Digital Economy Corporation (MDEC).
The only other tax benefits for direct investment in early-stage start-ups are angel tax incentives, which were introduced in 2013. Angel investors are accorded tax exemptions of up to RM500,000 a year in the second year of assessment.