Malaysia Capital Gains Tax Guidance Leaves Unanswered Questions

Malaysia has implemented a new capital gains tax regime with effect from Jan. 1 following the EU Code of Conduct Group on Business Taxation’s issuance of its Code of Conduct, designed to reduce preferential tax measures around the world. This new CGT has extended its scope far beyond that required by the EU group, heralding a sea change from the traditionally territorial tax system of the country.

The Inland Revenue Board also recently issued two sets of guidelines, on March 1 and March 27. Despite this, concerns continue to arise.

The lack of clarity on numerous aspects of the CGT regime has failed to give taxpayers much-needed certainty, and spells interesting times ahead for tax disputes and litigation.

New CGT Regime

Before Jan. 1, real property gains tax was the only form of CGT in Malaysia. As its name suggests, real property gains tax applies to capital gains accruing on the disposal of any real property in Malaysia or shares in a “real property company”—RPC shares.

While the real property gains tax regime continues to exist after Jan. 1, disposals of RPC shares by a company, limited liability partnership, trust body, or cooperative society are no longer subject to it, as they now fall within the scope of CGT. Individuals, however, continue to be subject to real property gains tax on such disposals.

Under Section 4(aa) of the Income Tax Act 1967, CGT is imposed as an income tax on gains or profits from the disposals of capital assets, on disposals made by a company, limited liability partnership, trust body, or cooperative society. As mentioned above, disposers who are individuals aren’t caught.

“Capital assets,” though broadly defined to mean “movable or immovable property including any rights or interests thereof,” are subject to CGT on the following assets only:

• Shares of a company incorporated in Malaysia that aren’t listed on the Malaysian stock exchange
• Shares of a controlled company incorporated outside Malaysia that owns Malaysian real property and/or RPC shares, above the specified threshold relating to the value of its total tangible assets
• All types of capital assets situated outside Malaysia (foreign assets)

Gains from the first two categories of assets are essentially treated as “domestic” gains and taxed at 10% of the net gain. The disposer may however opt to be taxed at 2% of the gross disposal price on disposing of assets acquired before Jan. 1. As the exemption available for these two categories of assets expired on Feb. 29, any disposal of assets under these two categories is taxable with effect from March 1.

For the third category, gains on the disposal of foreign capital assets that are received in Malaysia are taxable at the prevailing income tax rate. For instance, the gains realized by a tax-resident company are taxed at the prevailing corporate tax rate when the proceeds are received in Malaysia.

Tax-resident taxpayers—other than resident persons carrying on banking, insurance, sea transport, or air transport business—disposing of foreign assets may take advantage of an exemption until Dec. 31, 2026, on gains received in Malaysia from outside Malaysia if the relevant substance requirements are met.

While these requirements have now been provided in the Guidelines on Tax Treatment on Gains from the Disposal of Foreign Capital Assets Received From Outside Malaysia issued on March 27, it is unclear what “employing adequate number of employees with necessary qualifications to carry out the specified economic activities in Malaysia” or “incurring adequate amount of operating expenditure” means.

Given the limited period of the CGT exemptions, it’s also crucial to ascertain the disposal date of the asset. Generally, the disposal date is the date of the written agreement for disposal of the asset or, in the absence of such agreement, the date of completion of the disposal. Where such disposal requires approval by the government or a state government, the disposal date is when approval has been obtained.

Losses arising from such disposals may be set off against the taxpayer’s adjusted income from subsequent disposals of capital assets within the same basis period, with any balance to be carried forward up to 10 consecutive years of assessment to be similarly set off against the taxpayer’s adjusted income.

Guidelines on ‘Shares’

In an attempt to provide clarity, the Inland Revenue Board issued the Guidelines on Capital Gains Tax for Unlisted Shares on March 1, indicating that ordinary shares, preferential shares, redeemable preferential shares, and convertible bonds would likely fall within the scope of CGT.

The revenue further provided the attributes of a “share” constituting equity, such as having no rights to a fixed dividend, priority of the shareholder over the remaining assets of the company in the event of a winding-up, absence of a maturity/expiry date on the shares, and having the right to vote.

However, the revenue’s guidelines aren’t binding on taxpayers and are still subject to the governing legislative provisions under the Income Tax Act.

Potential Issues

At the outset, there must be “disposal” of the asset, the ordinary natural meaning of which necessitates the transfer of ownership of the asset from one person to another.

However, for CGT purposes, a “disposal” encompasses not only a sale, conveyance, assignment, settlement, or alienation, but also any reduction of share capital or purchase by a company of its own shares.

Given this artificially enlarged definition, it is crucial for businesses to take CGT into account when planning any corporate undertaking—CGT may hamper its viability, given the ambiguity around how such gains or profits (if any) are to be determined.

“Shares” has also been given a wide meaning beyond its ordinary meaning of stocks and shares, to include even loan stock and debentures issued by a company in Malaysia, member’s interest in a company not limited by shares, and any option or other right in respect of these. Again, such an artificially wide definition may have unintended consequences for ordinary commercial undertakings.

Looking Ahead

Despite the issuing of the guidelines, concerns continue to revolve around issues including acceptable valuation methods, applicable economic substance requirements to qualify for exemption for “foreign-sourced” capital gains, internal restructuring and venture capital companies, and conditions of exemptions for disposals of shares relating to approved initial public offerings, announced in the Budget Speech 2024 but yet to be implemented.

Taxing trust bodies is also diametrically at odds with the underlying principle of not subjecting individuals to CGT, who remain taxable under the real property gains tax regime. This may have unintended adverse consequences for family wealth planning, as trusts are commonly used in Malaysia for such purposes.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Irene Yong is partner with Shearn Delamore & Co.

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