In presenting the unity government’s maiden budget for the year 2023, the Prime Minister and Minister of Finance, Dato’ Seri Anwar Ibrahim announced that one of the measures to be introduced to widen Malaysia’s tax base will be to impose capital gains tax (“
CGT”) on the disposal of unlisted shares commencing 2024.
1 The proposal to introduce CGT was reiterated by Dato’ Seri Anwar in his 2024 Malaysian Budget speech.
2
The proposed amendments to be made to the Income Tax Act 1967 to facilitate the imposition of CGT have been set forth in the Finance (No. 2) Bill 2023, which has been passed by both the Dewan Rakyat (House of Representatives) and the Dewan Negara (Senate) and now awaits Royal Assent whereafter the Bill will become law upon its being gazetted.
Understandably, CGT has raised many queries, such as what it is, who is required to pay it, when will it come into force, what the tax rate is and how the gain is to be determined. In this article, we shall attempt to answer some of the frequently asked questions about this proposed new tax.
Unless otherwise stated, all references in this article to statutory provisions are references to the provisions or proposed provisions of the Income Tax Act 1967.
| 1. |
What is the proposed CGT? |
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CGT is a tax levied on gains or profits from the disposal of a capital asset.3 Refer to FAQ 3 for further discussion as to what constitutes a capital asset for the purposes of CGT. |
| 2. |
When does the requirement to pay CGT come into force? |
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The requirement to pay CGT will come into force on 1 January 2024. |
| 3. |
What assets are subject to CGT? |
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CGT applies to a disposal of the following assets: |
| a) |
shares of a company incorporated in Malaysia not listed on the stock exchange; and |
| b) |
subject to conditions, shares of a controlled company4 incorporated outside Malaysia that owns real property in Malaysia or shares of another controlled company or both5.6 |
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In relation to paragraph (b) above, gains or profits accruing on the disposal of shares of a controlled company incorporated outside Malaysia shall be subject to CGT if at the date of acquisition of shares of the foreign incorporated company, such foreign company owns real property (including any right or interest thereof) in Malaysia or shares of another controlled company or both, where the defined value7 of the real property situated in Malaysia, or the shares of the other controlled company, or both, is not less than 75% of the value of its total tangible asset.8 |
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For the purposes of CGT, “shares” are given an extended meaning and includes: |
| a) |
stocks and shares in a company; |
| b) |
loan stocks and debentures issued by a company or any other corporate body incorporated in Malaysia; |
| c) |
a member’s interest in a company not limited by shares whether or not it has a share capital; and |
| d) |
any option or other right in, over or relating to shares as defined in paragraphs (a) to (c) above.9 |
| 4. |
Who is required to pay CGT? |
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A company, limited liability partnership, trust body or co-operative society (severally a “specified entity”) that disposes of a capital asset is required to pay CGT on the chargeable income derived from the disposal.10
Individuals are not subject to CGT but are subjected to the provisions of the Real Property Gains Tax Act 1976 for the disposal of real property or shares in a real property company. |
| 5. |
Are there any exemptions? |
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It was announced during the 2024 Malaysian Budget Speech that the Government will consider granting exemptions from CGT on the disposal of shares related to the following activities, subject to stipulated conditions: |
| a) |
Initial Public Offerings (IPO) approved by Bursa Malaysia; |
| b) |
restructuring of shares within the same group; and |
| c) |
venture capital related investments.11 |
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As these CGT exemptions are not included in the Finance (No. 2) Bill 2023, it is likely that they will be set out in subsidiary legislation to be issued at a later date. |
| 6. |
What is a disposal of a capital asset? |
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“Disposal” means to sell, convey, transfer, assign, settle or alienate whether by agreement or by force of law and includes a reduction of share capital and purchase by a company of its own shares.12
A disposal of a capital asset shall be deemed to take place: |
| a) |
where there is a written agreement for the disposal of the capital asset, on the date of such agreement; or |
| b) |
where there is no written agreement, on the date of the completion of the disposal of the capital asset.13 |
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The date of completion of a disposal means the earlier of: |
| a) |
the date on which the ownership of the capital asset disposed of is transferred14 by the person who disposes the capital asset; or |
| b) |
the date on which the whole of the amount or value of the consideration (in money or money’s worth) for the transfer has been received by the person who disposes the capital asset.15 |
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Where a contract for the disposal of a capital asset is conditional and the condition is satisfied, the acquisition and disposal of the capital asset is deemed to take place at the time the contract was made except in the following circumstances: |
| a) |
where the acquisition or disposal requires the approval by the Government or a State Government, the date of disposal shall be the date of such approval; or |
| b) |
where the approval referred to in paragraph (a) is conditional, the date of disposal shall be the date when the last of all such conditions is satisfied.16 |
| 7. |
What is the rate of CGT? |
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The rate of CGT is as follows: |
| a) |
for the disposal of a capital asset situated in Malaysia acquired before 1 January 2024, the rate of 10% of the chargeable income from the disposal of the capital asset, or 2% of gross on the disposal price of the capital asset, as elected by the specified entity making the disposal17; and |
| b) |
for the disposal of a capital asset situated in Malaysia acquired on or after 1 January 2024, the rate of 10% of the chargeable income from the disposal of the capital asset; and |
| c) |
for the disposal of a capital asset other than those referred to in paragraphs (a) and (b), the prevailing income tax rate applicable to the specified entity.18 |
| 8. |
Are there any permitted deductions that a specified entity can claim in determining the gains from disposal of a capital asset? |
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Yes. The gains or profits from the disposal of a capital asset in the basis period for a year of assessment shall be: |
| a) |
ascertained by reference to each disposal separately; and |
| b) |
treated as a separate source of gains or profits, from the disposal of a capital asset for that year of assessment.19 |
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The adjusted income of a specified entity from a source consisting of gains or profits from the disposal of a capital asset, shall be ascertained by: |
| a) |
deducting from the amount or value of the consideration for the disposal of the capital asset at the time of disposal:
- any expenditure wholly and exclusively incurred on the capital asset at any time after its acquisition by or on behalf of the specified entity to enhance or preserve the value of the capital asset;
- any expenditure wholly and exclusively incurred at any time after the acquisition of the capital asset by the specified entity to establish, preserve or defend its title to, or to a right over, the capital asset; and
- the incidental costs to the specified entity.
|
| b) |
thereafter, deducting therefrom the value of the consideration for the acquisition of the capital asset (together with incidental costs to the specified entity) less:
- any sum received by the specified entity as compensation for any damage or injury to the asset or for destruction or dissipation of the asset or for any depreciation or risk of depreciation of the asset;
- any sum received by the specified entity under a policy of insurance for any kind of damage or injury to or the loss, destruction or depreciation of the asset; and
- any sum forfeited to the specified entity as a deposit made in connection with an intended transfer of the capital asset.20
|
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It is to be noted that the abovementioned deductions do not apply in ascertaining the chargeable income of a specified entity from the gains or profits from the disposal of capital assets where the specified entity has elected for CGT to be charged at the rate of 2% of the gross disposal price from the disposal of the capital asset.21 |
| 9. |
What happens if a specified entity incurs a loss on the disposal of a capital asset? |
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A specified entity that incurs a loss on a disposal of a capital asset is allowed to utilise the loss as a deduction to reduce its adjusted income in the subsequent disposal of capital asset in the same basis period for a year of assessment in which the disposal was made.22
However, where by reason of an insufficiency or absence of adjusted income in a subsequent disposal of a capital asset in the same basis period for a year of assessment in which the adjusted income arose, effect cannot be given in full to the above, the amount of adjusted loss which has not been so allowed (or so much thereof as has not been so allowed for that year) shall be allowed as a deduction to reduce the adjusted income of a specified entity from the disposal of a capital asset for a period of ten consecutive years of assessment and any amount or balance of the amount which is not deductible at the end of that period shall thereafter be disregarded.23 |
| 10. |
How is the disposal of a capital asset to be reported? |
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Every specified entity which disposes of a capital asset must furnish a return in the prescribed form to the Director General of Inland Revenue within sixty (60) days (or extended period allowed by the Director General) of the date of disposal of that asset. The form is to be submitted by electronic medium or electronic transmission.24 |
| 11. |
When is CGT payable? |
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The due date for the payment of CGT is sixty (60) days from the date of disposal of the capital asset.25 |
| 12. |
Is a specified entity that own shares in “real property companies” required to pay real property gains tax upon disposal of shares in such companies? |
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With the introduction of the CGT, the Real Property Gains Tax Act 1976 will not apply to any acquisition or disposal of shares by a specified entity. However, a Labuan entity carrying on a business activity under the Labuan Business Activity Tax Act 1990 remains subject to assessment under the Real Property Gains Tax Act 1976 for disposal of a chargeable asset.26 |
Comments
The proposed scope of CGT can be said to be groundbreaking in Malaysia as this is the first time that a ‘
broad-based’ tax has been imposed on the disposal of shares in Malaysian incorporated companies that are not listed on Bursa Malaysia, regardless of the business carried on by such companies. Presently, only gains from the disposal of shares in real property companies are subject to tax under the Real Property Gains Tax Act 1976.
27
While the concept of a ‘
broad-based’ tax on gains or profits from the disposal of shares may be novel in Malaysia, it is not a new concept. Many Asian countries, including several of our ASEAN neighbours like Thailand, Indonesia, Vietnam, Cambodia and Myanmar, have already implemented CGT with varying rates and scopes.
28 Hence the introduction of CGT
per se may not reduce Malaysia’s competitiveness in relation to its ASEAN neighbours.
Whilst the imposition of CGT on profits from the disposal of unlisted shares may have a short-term impact on mergers and acquisitions due to increased tax costs, it is expected that over time, the market will adjust to take these costs into account.
29
It is to be noted that double taxation agreements may impact the actual amount of CGT payable, particularly for international transactions or for foreign entities operating in Malaysia. The exact details would depend on the specifics of each double taxation agreement. As this is a new development, further details and clarifications from the Malaysian government or tax authorities are likely forthcoming. As Malaysia prepares for this new tax regime, it is essential for businesses and investors to stay informed about the evolving tax landscape.
Article by Sheba Gumis (Partner) of the Corporate Practice and Victoria Low (Associate) of the Tax Practice of Skrine.
1 Paragraph 32 of the 2023 Malaysian Budget Speech, 24 February 2023.
2 Paragraph 27 of the 2024 Malaysian Budget Speech, 13 October 2023.
3 Proposed new section 4(aa).
4 Section 2(1) defines “controlled company” as a company having not more than 50 members and controlled in the manner described in section 139 by not more than five persons.
5 Proposed new section 15C(1).
6 Proposed new paragraph 38(2) of Schedule 6. It should be noted that the capital assets that are subject to CGT are determined in the following manner:
first, the proposed new section 4(aa) imposes CGT on gains or profits derived from the disposal of a capital asset; and
second, the proposed new paragraph 38(1) of Schedule 6 exempts gains or profits from the disposal of a capital asset situated in Malaysia from CGT
other than the disposals set out in paragraph 38(2) of Schedule 6, which are reproduced in sub-paragraphs (a) and (b) of the first paragraph of FAQ 3.
7 The proposed new section 15C(5) states that “defined value” is the market value of the of the real property or the acquisition price of shares of another controlled company as determined under the proposed new section 15C(2).
8 Proposed new sections 15C(2) and 15C(3).
9 Definition of “share” in proposed new section 65C.
10 Proposed new section 6(1)(q).
11 Paragraph 27 and Appendix 9 of the 2024 Malaysian Budget Speech.
12 Definition of “disposal” in proposed new section 65C.
13 Proposed new section 65F(1).
14 The proposed new section 65F(3)(b) provides that the ownership of a capital asset is deemed transferred on the date when the last of all such things shall have been done under any written law as are necessary for the transfer of ownership of the capital asset.
15 Proposed new section 65F(3)(a).
16 Proposed new section 65F(4).
17 Proposed new section 65E(3).
18 Proposed new Part XXI of Schedule 1.
19 Proposed new section 65E(1).
20 Proposed new section 65E(2).
21 Proposed new section 65E(3).
22 Proposed new section 65E(5).
23 Proposed new section 65E(6).
24 Proposed new section 77A(1B).
25 Proposed new section 103(12)(aa).
26 Proposed amendment to the Real Property Gains Tax Act 1976, Schedule 2.
27 Prior to the extension of the scope of the Real Property Gains Tax Act 1976 to include tax on gains from the disposal of shares in real property companies, the disposal of shares in a land-based company was subjected to tax under the Share (Land Based Company) Transfer Tax Act 1984 which was in force from 19 October 1984 to 21 October 1988.