Investment incentives

Enjoying tax exemption on investments into certain companies

This article is relevant to candidates preparing for P6 (MYS) and the laws referred to are those in force at 31 March 2016. This article discusses only the provisions in the Income Tax Act 1967 (the Act). While reading this article, candidates are expected to make concurrent references to the relevant provisions of the Act, as amended.

This article is relevant to the section of the Syllabus and Study Guide falling under items A1(g) and A2(c).

Section A1(g) of the syllabus and study guide requires candidates to apply further knowledge with regard to individuals in situations involving the use of exemptions and reliefs in deferring and minimising income liabilities relating to angel investors.

Section A2(c)(x) and (xi) requires candidates to be able to determine tax liabilities of companies involving the application of exemptions and reliefs involving:

(x) deduction for the cost of acquisition of a foreign-owned company, and
(xi) exemption of an approved food production project and the deduction for the investment in an approved food production project.

Candidates are reminded that they must first peruse closely the source authority for these incentives – ie the relevant laws, and the respective IRB public rulings or guidelines, where available, to obtain a good general understanding. This article aims to augment that understanding by presenting the key points in a more ‘digestible’ manner, highlighting particular areas worth noting, comparing and contrasting, where relevant.

The incentive measures included in this article all involve investing in activities deemed important to the Malaysian economy. The mode of incentive is similar in that the assessable income equal to the quantum of the investment is tax exempt. This is indeed very attractive.

However, it is worth noting that the eligibility for each incentive differs and more importantly, the timing and mechanism of the exemption vary. A discerning understanding of each incentive measure is therefore crucial before an informed decision may be made to invest to maximise the benefits therefrom.

The following abbreviated terms are used in this article.  

  • CA – Capital allowance
  • DGIR – Director-general of Inland Revenue
  • IRB – Inland Revenue Board
  • ITA – Investment Tax Allowance
  • MIDA – Malaysian Investment Development Authority
  • MoF – Minister of Finance
  • PIA – Promotion of Investments Act
  • PR – Public Ruling
  • QP – Qualifying Person
  • RA – Reinvestment Allowance
  • RPGT – Real Property Gains Tax
  • SI – Statutory income
  • The Act – Income Tax Act 1967
  • YA – Year of assessment

In the tables in this article, the columns entitled ‘Who qualifies’ and ‘conditions’ together form the eligibility for the incentive measure.

Angel investor

The angel investor incentive measure was introduced through the Income Tax (Exemption)(No. 3) Order 2014 with effect from 1 January 2013. The IRB issued the PR 11 of 2015 on 16 December 2015 to explain this incentive.

Table A shows the salient features. (View Table A)

It should be pointed out that Paragraph 7.1 of PR 11 of 2015 asserts that ‘The amount of tax exemption allowed per annum is the amount of investment made or RM500,000, whichever is the lower’. However, the law [Gazette order 167 of 2014 as amended by order 42 of 2015] as written does not stipulate such a restriction. Presumably this maximum amount is stipulated administratively in the letter of approval.

Investment in a foreign-owned company

The objective of this incentive is encourage Malaysian companies to buy high technology used in manufacturing and selected services by acquiring foreign companies, which already possess such technology. The incentive was previously available from 2002 until 2008. It lapsed but was re-introduced on 3 July 2012 through the gazette order Income Tax (Deduction for cost of acquisition of foreign owned company) Rules 2013 which is effective for applications received by MIDA during the period of 3 July 2012 to 31 December 2016. (View Table B)

Approved food production project (AFPP)

Food production

In item A2 of the Syllabus and Study Guide, candidates are required to determine the income tax liabilities of companies in situations involving exemptions, and in relation to food production items (xi), to identify the eligibility conditions for the exemption of the related company carrying out the AFPP and the deduction for investment in an AFPP.

Despite the drive for industrialisation by Malaysia, agriculture, especially the plantation sector, remains important to the Malaysian economy. During the Asian financial crisis in the late 1990s, the sharp hike in the cost of importation of food and animal feed sent shock waves, culminating in the introduction of tax incentives for food production in Schedule 4C of the Act in 1999. Interestingly, this saw the first introduction of group relief in Malaysian taxation.

In YA 2006, Schedule 4C was deleted, and replaced by gazette orders Income Tax (Exemption) (No 9) Order 2006 [PU (A) 50/2006] and the Income Tax (Exemption) (No 10) Order 2006 [PU (A) 51/2006].

These were in turn replaced by gazette orders  Income Tax (Exemption)(No. 3) Order  2011 [PUA 166/2011] and Income Tax (Deduction for investment in an AFPP) Rules 2011 [PUA 167/2011], which are currently applicable.

In the 2016 Budget speech, it was stated that the incentive for food production will be extended for five years for applications received by the Ministry of Agriculture & Agro-based Industry from 1 January 2016 until 31 December 2020. The list of qualifying AFPPs was also expanded to include additional agro-based activities.

Pending the publication of the new gazette orders, the 2011 orders will be deemed to continue to apply for exam purposes. There are two gazette orders:

  • one to exempt the income of the project to the qualifying person (QP) who carries out the project, and
  • the other to provide exemption for the investor.

The salient features of the orders are summarised in Table C and Table D.

Summary (Table E)

Written by a member of the P6 examining team