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How is it violating license terms? As far I know, vscode is released under a permissive open source license.

Isn't the situation similar to Brave et al built on top of Chromium but supports Chrome extensions?

Vscode is permissively licensed, but some of the Microsoft created extensions are proprietary, e.g. the C/C++ extension and the Pylance extension. They state in their license that they can only be used with Visual Studio and Visual Studio Code and crash if you try to use them with VSCodium for example.

There are open source alternatives, the basedpyright extension is better than Pylance and I've heard the clangd extension is good.

It is violating the license terms of the official MS extensions like Pylance, C/C++ suite, Jupyter, remote development suite ...etc. They state that they must be used with the official release of the VSCode and not any fork.

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