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2023 Regulatory Updates Impacting Startups in Malaysia: A Year in Review

As 2023 is coming to an end, this article sets out the following regulatory updates involving changes to the current laws and policies, including a few cases decided by Malaysian courts that may likely affect local startups in Malaysia. Amendments to Malaysia’s Employment Act and revisions to the minimum wage The new amendments to the Employment Act took effect from the start of this year. To recap, major changes include revising the wages threshold to qualify for overtime payments, which was increased from RM2,000 (US$429) to RM4,000 (US$858), paid paternity leave, and extension of maternity leave to a new flexible working arrangement (which can cover changes in working hours, days and workplace location).

 

Separately, the minimum wage for employees was also increased from RM1,200 to RM1,500 and came into force on 1 July 2023 for employers who employ less than five employees after several deferments. Further, the government also announced that it is seeking to introduce a new progressive wage model that will be outlined in the future. New capital gains tax for unlisted equities Starting 1 March 2024, any disposal of shares in unlisted private companies will be subject to an indicative rate of 10 per cent (calculated on the net profits) as capital gains tax (CGT).  The government said that VC funds would be exempt from CGT. However, the announcement is silent on the same exemption, which may also be extended to startups such as the founders and angel investors. The government also said that a startup that exits in an initial public offering on  Bursa Malaysia, the local bourse, may likely get exempted from CGT. 

Also Read: “Consolidation and explosion”: SEA startup investors reveal 2023 trends they are keeping close watch of Considering the lack of clarity on the CGT implications, we may have to wait until the final framework is issued next year to understand how the new CGT tax will be implemented and if CGT may affect founders’ decision as to whether to move to a new domicile to avoid the CGT. Long-term social visit pass for international graduates To fill the skilled workers’ gap needed by the labour market, the government has launched a new long-term social visit pass aimed at attracting highly skilled international graduates. The visa may likely increase the chances for a foreigner to work in local high-growth startups so long as the startup’s business is within an “approved industry” that will be outlined in the future. Extension on tax incentives for angel investors, equity crowdfunding (ECF) investors and VC investors in startups  To encourage more funding in startups, existing and new angel investors, ECF investors and VC investors can qualify and apply to get tax incentives on their investments until 31 December 2026. Gig economy: Gig worker as an independent contractor  The gig economy business model relies on the concept of a gig worker being an ‘independent contractor’ (i.e. a self-employed person contracted to work or provide services to another entity as a non-employee).  On 27 November 2023, the Court of Appeal in Malaysia reaffirmed an earlier court decision by the High Court that the claimant, a former Grab driver who sued Grab, was not a Grab employee but instead an independent contractor. It was further reported that as she was an independent contractor, she was not entitled to claim unfair dismissal with the industrial relations department or to seek reinstatement as a driver by Grab as there was never any employment contract between the claimant and Grab.

 

The position is also similar to California’s appeals court. In the decision, the court reaffirmed the referendum vote that drivers for startups like Uber and Lyft are independent contractors. Therefore, the drivers were not entitled to paid sick leave and unemployment insurance.  To date, we have yet to see any indication if the gig economy will be further regulated. New rules that enhance gig workers’ rights may likely affect the business models involving the gig economy in the country, and may be a lower priority as startups are crucial to Malaysian long-term economic growth.  Simplified Environmental, Social, and Governance (ESG) Disclosure Guideline Without a doubt, ESG is here to stay, and it is only going to get more important. On 19 October 2023, Capital Markets Malaysia (CMM), an affiliate of the SC, launched the Simplified ESG Disclosure Guide, a free guide aimed toward helping small and medium enterprises adopt ESG-related frameworks and reporting.  There has yet to be any legal obligation for startups to adopt the ESG framework. As more VC funds adopt ESG reporting in their investments, the guideline may be a useful guide to help founders decide on sustainability goals for adoption (based on the maturity of their startup’s business) and if you are dealing with larger companies (that are usually already ESG compliant). Drone permit requirement for both leisure and commercial use Every drone owner in Malaysia, starting this year, will need to get a permit from the Civil Aviation Authority of Malaysia (CAAM), the aviation authority in Malaysia. It appears that the permit is needed if the drone is used, whether for commercial or even non-commercial use. Failure to obtain a permit may result in fines and imprisonment.  As the approval authorities may likely include several authorities, including other land-related authorities, it is unclear if the government is planning to streamline these separate approvals under a single approval process in the future to boost the drone industry. Responsibilities of digital and online platforms when it comes to clients’ funds On 31 October 2023, Luno, one of the licensed crypto exchanges in Malaysia, was held liable by a court for negligence due to several unauthorised transactions involving one of its customers’ accounts. It was reported that the crypto exchange was liable to compensate for over RM600,000 (US$1,28,659) worth of crypto holding lost in the customer’s portfolio. The news reported that the court had granted an interim stay on the award to allow Luno to appeal against the court’s decision. Therefore, we may have to wait to see if the appellate court may take a different approach to the judge’s decision.  The outcome of this Luno case may be significant to other digital and online platforms that may be involved in managing clients’ funds (whether in digital assets form or not) as the court appears to impose a higher duty on the platforms to ensure that the customer’s account is safeguarded against any scam or hacking incident. New entrants in the crypto space in Malaysia Considering that the SC had made several updates to the crypto regulations in the past year,  we are seeing several newly approved entrants in the crypto space this year. Malaysia’s first Shariah-compliant Bitcoin fund was launched this year by Halogen Capital, the first crypto asset fund manager licensed by the SC. The fund is also open to retail investors who want to have exposure to crypto investment. Also Read: Navigating the AI landscape in 2024: Why there is an urgency for enhanced governance In the initial coin offering (ICO) space, the regulator also approved both Kapital DX and pitchIN as registered initial exchange operator (IEO) operators. As IEO operators, they will be able to provide alternative fundraising options for companies by issuance of digital tokens in Malaysia. It is worth noting that pitchIN is also registered to provide ECF platform services.  Another notable entity includes CoKeeps, a new entrant that became the first approved digital asset custodian in Malaysia and is offering its custody services to both retail and institutional investors.  The regulator usually imposes nine months for these licensees to comply with all the SC’s guidelines before they can go live. Therefore, we may likely see more activities in the crypto space in the coming months next year. “MYStartup” as a ‘single window’ platform The role of the current “MYStartup” platform, a startup ecosystem directory platform formed by Cradle Fund, a government funding agency, would be enhanced to serve as a ‘single window’ or a ‘one-stop resource’ platform (like Enterprise Singapore) to help startups source for funding and other business needs.  It is unclear if all the existing grants and funding schemes from other agencies will also now be handled under this platform. We may have to wait further for more details from the authority on how the new platform will look. National Digital ID for all Malaysians On… 

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