Malaysia’s investment ecosystem has grown into a vibrant and diverse one over the last few years, thanks to the emergence of a host of new investment vehicles and asset classes, such as equity crowdfunding (ECF), peer-to-peer (P2P) financing, cryptocurrencies and robo-advisory platforms.
As these investment vehicles continue to gain traction among the general public, however, some questions on the tax treatment of these vehicles have arisen. A quick check shows that only a few platforms openly provide such information on their websites.
According to Koh Leh Kien, a partner at Ernst & Young Tax Consultants Sdn Bhd, there have been enquiries from investors regarding the tax implications of investing via ECF or P2P platforms, given their growing popularity in recent years. While there are well-defined guidelines as well as public rulings in place that deal with some of the more traditional underlying assets of these emerging investment vehicles, the Inland Revenue Board (IRB) has yet to come up with definitive guidelines or public rulings on the more recent innovations such as cryptocurrencies, ECF and P2P financing, she points out.
“The level of awareness of such tax treatment of these emerging investment platforms among retail investors is probably low. Therefore, any published guidance from the IRB would help raise their awareness of the tax implications,” says Koh.
An ECF platform is an investment vehicle that allows unlisted issuers to raise funds from the general public by offering equity in their companies. According to Koh, under Malaysia’s single-tier tax system, dividend income received by equity investors is exempt from tax.
Capital gains, however, even when achieved via an ECF platform, is a more nuanced issue. Koh explains, “In an exit or buyout situation, the tax treatment on gains arising from the sale of shares will depend on the tax profile of the investor and whether the sale is seen as a capital transaction or a trading transaction (also referred to as ‘adventure in trade’). Generally, gains on the sale will not be subject to income tax for the investor, unless he is a trader or dealer in securities or has a history of buying and selling securities with a profit-making motive, in which case the gains will be treated as revenue in nature and subject to tax.”
While income tax does not apply where the sale is treated as a capital transaction, the applicability of the Real Property Gains Tax (RPGT) still needs to be considered. According to Koh, an investor may be subject to RPGT on the disposal of shares if the company whose shares he is disposing of is a real property company (RPC) as defined under the Real Property Gains Tax Act 1976. Under the law, an RPC is defined as a controlled company whose total tangible assets is at least 75% real property, shares in real property companies, or both.
“Investors should ascertain at the time of acquisition as to whether the company they are investing in is a real property company, as various RPGT compliance and payment obligations may apply upon the acquisition and disposal of RPC shares,” says Koh.
It is worth noting that the existing angel investor tax incentive applies to ECF investments. An angel investor is granted a tax exemption equivalent to the amount of investment made in the investee company against his aggregate income in the second year of assessment following the year of assessment in which the investment is made, says Koh. However, if the investment exceeds the aggregate income of the angel investor, the excess is not allowed to be carried forward.
According to Public Ruling No 11/2015 by the IRB, the amount of tax exemption allowed per annum is the amount of investment made in the investment company or RM500,000, whichever is lower. Prospective angel investors are required to apply to the Malaysian Business Angel Network to be accredited as angel investors and, hence, be made eligible for the tax incentive.
According to the Securities Commission Malaysia (SC), P2P financing refers to market-based financing to help build small businesses which, in turn, help spur the growth of the economy. For now, P2P financing in the country strictly refers to the financing of businesses and does not apply to individuals seeking personal financing.
“In a P2P financing arrangement, the interest income received by an investor who is a Malaysian tax resident would be subject to income tax. For a lender who is not licensed to carry on the business of lending (retail investors at large, in the case of P2P financing), the interest is generally taxed when received and will be treated as income in the relevant period in which the interest income is receivable. The investor will be required to declare the interest income in his income tax return,” says Koh.
It is important to note, however, that losses incurred by an investor from the default of principal repayments on the part of the borrower are generally not deductible by the investor.
As for non-resident investors, the interest on funds invested in a P2P financing platform will be subject to a withholding tax, to be deducted at source by the issuer, says Koh.
Koh says cryptocurrencies such as bitcoin are recognised as intangible assets that can be traded over a digital exchange and, thus, can be taxed. “The tax treatment of the gains or losses of a cryptocurrency investor realised from the disposal of a digital currency (whether it is used to obtain goods or services, exchanged for fiat currency or exchanged for another cryptocurrency) will depend on whether the transaction is capital or revenue in nature for the investor. In the case of a trader or dealer in securities, who trades in cryptocurrencies in the ordinary course of business, such gains may be subject to income tax.”
Robo-advisory platforms are increasing in popularity, thanks to the low cost of entry for investors to access local and foreign exchange-traded funds (ETFs). Robo-advisors in the local market include StashAway Malaysia and MYTHEO.
“For investors on robo-advisory platforms who invest in foreign ETFs, the distributions they receive from the ETFs are considered foreign-sourced income and therefore, tax-exempt in Malaysia. This, of course, is assuming that the income is connected to a business venture that is carried on outside Malaysian shores,” says Koh.
According to her, these distributions may still be subject to foreign taxes or a withholding tax in the jurisdiction that the ETFs are listed. “However, any foreign tax incurred on the distribution is not refundable or creditable to an investor in Malaysia, where the distributions are not subject to Malaysian taxes,” she says.
She adds that distributions received from ETFs listed in Malaysia will generally be subject to the same tax implications as unit trust funds. These tax implications will also apply to locally founded robo-advisory platforms offering local ETFs.
Unit trusts and stocks
Distributions received from a Malaysian-based unit trust will be taxable to the unit holder, says Koh. The distribution amount must be grossed up to account for the underlying tax paid by the unit trust fund. The unit holder will then be taxed on the grossed-up amount.
“Such distributions carry a tax credit, however, which will be available for set-off against any Malaysian income tax payable by the unit holder. Should the tax deducted at source exceed the tax liability of the investor, the excess is refundable to the unit holder,” she says.
“Resident individuals will be liable at the income tax rate of individuals, ranging from 0% to 30%. A non-resident individual, however, will be subject to an income tax rate of 30%. Note that non-resident unit holders may also be subject to tax in their respective countries, depending on the provisions of the tax legislation in the respective countries and any existing double taxation agreements with Malaysia.”
Gains arising from the realisation of investments in a unit trust fund will generally not be subject to income tax at the individual level, assuming that the investor is not a trader or dealer in securities, she adds.
It is important to note that unit holders may receive new units as a result of unit splits or may choose to reinvest their distributions. With unit splits, the tax implications are as follows: new units issued by a unit trust fund pursuant to a unit split will not be subject to income tax in the hands of the unit holders, says Koh.
“Where distributions are reinvested, unit holders may choose to reinvest their income distribution in new units by informing the fund manager. In this event, the unit holder will be deemed to have received the distribution and reinvested it with the unit trust fund, and the relevant tax implications listed above would generally apply.”
In the case of public-listed stocks, Koh reminds investors that local and foreign-sourced dividend income is exempt from tax in Malaysia. Meanwhile, capital gains arising from the sale of shares is generally not subject to income tax in the hands of the investor unless he is a trader or dealer in securities.