Stamp duty exemption for SMEs on any instrument executed for M&A

Guidelines on stamp duty exemption for Small and Medium Enterprises on any instrument executed for mergers & acquisitions

Under the Short-term Economic Recovery Plan (PENJANA) announced on 5 June 2020, the Government proposed to waive the stamp duty on any instrument executed by Small and Medium Enterprises (SME) for mergers & acquisitions (M&A) (see EY Take 5: COVID-19: Short-term Economic Recovery Plan). The exemption would apply between 1 July 2020 and 30 June 2021.

Following the above, SME Corporation Malaysia (SME Corp) has published on its website the “Guidelines & Procedures on Incentive of Stamp Duty Exemptions on M&A by SMEs” (Guidelines) to provide guidance on the above-mentioned exemption. Some of the key points are outlined below.

The Guidelines provide that the stamp duty exemption would apply to the following M&A-related instruments:

• Contract or agreement for the sale or lease of property (including land, building, machinery and equipment);
• Instruments of Transfer and Memorandum of Understanding (MoU);
• Loan or financing agreements
• First tenancy agreements

The Guidelines stipulate that all economic sectors are eligible for the incentive. The following conditions must be met in order to qualify for the incentive:

• The SME must be 100% Malaysian-owned; and
  • Have an annual sales turnover of less than RM50 million or full-time employees of less than 200, as per the definition of SMEs in the manufacturing sectorNote; or
  • Have an annual sales turnover of less than RM20 million or full-time employees of less than 75, as per the definition of SMEs in the services sectorNote
• The SME status of the entity must be validated through the SME Registration Status System; and
• The M&A exercises are undertaken between 1 July 2020 and 30 June 2021.

Note:

It is noted that per the definition of SME by SME Corp, the criteria are for the SME to:

• Have an annual sales turnover not exceeding RM50 million or full-time employees not exceeding 200, for the manufacturing sector; or
• Have an annual sales turnover not exceeding RM20 million or full-time employees not exceeding 75, in the services sector

This initiative is led by the Ministry of Entrepreneur Development and Cooperatives (MEDAC), and SME Corp is the Secretariat to the Joint Verification Committee (JVC) meeting. The Guidelines stipulate that all applications are to be submitted to SME Corp for verification purposes. Qualified and eligible applications will be tabled at the JVC meeting for endorsement and approval.

The Guidelines provide that upon approval or rejection by the JVC, MEDAC will issue a letter notifying the applicant accordingly. If rejected, the said applicant may re-apply. Successful applicants are required to submit the relevant chargeable and eligible instruments together with a copy of the approval letter, to the IRB for approval. Upon obtaining IRB’s approval, the applicant will receive a stamp certificate endorsement.

The Guidelines also outline the M&A exercises that would qualify for the incentive, as well as a flowchart to demonstrate the process of the application, which are outlined in Appendices I and II to this Alert.

                                                                                                                                                                                                                                                                                                                                                                                                                                                                           APPENDIX I

Types of M&A exercises that would qualify for the stamp duty exemption

Option 1 – Two business entities merged to become a new business entity

Business entity A merged with business entity B to become a new business entity C. Both individual business entities A and B will be dissolved to form business entity C. In order to enjoy the incentive, the existing business entities A and B need to be dissolved to form business entity C. This applies to all existing sole proprietorships, partnerships, limited liability partnerships (LLPs) and private limited companies (PLCs) in the eligible service sub-sectors or areas.

The documentation checklist for a merger activity is as follows:

• MoU or legal contract between the interested parties to formalize the merger process
• Notice of termination of registered business for sole proprietor, partnership, LLP or PLC
• Certificate of Incorporation of Private Company (Form 9)
• Latest audited or management accounts of existing business entities
• New license or permit or approval from Ministries and Agencies, professional bodies, regulatory boards and associations for the new entity
• A copy of the latest corporate information (business information, LLP information, company information) and organization chart of the business entity

Option 2 – Merger of two or more existing business entity

Business entity A acquires business entity B to become a new bigger business entity A. Business entity B need to be dissolved for business entity A to qualify for this incentive. This applies to all existing sole proprietorships, partnerships, LLPs and PLCs in the eligible service sub-sectors or areas.

The documentation checklist for an acquisition activity is as follows:

• MoU or legal contract between the interested parties to formalize the acquisition process
• Notice of termination of registered business for sole proprietor, partnership, LLP or PLC
• Latest audited or management accounts of existing business entities
• Valid license or permit or approval from Ministries and Agencies, professional bodies, regulatory boards and associations
• A copy of the latest corporate information (business information, LLP information, company information) and organization chart of the business entity

                                                                                                                                                                                  APPENDIX II

Flowchart on the process of application for the stamp duty exemption in relation to M&A exercises