EFFECTIVE Jan 1, capital gains arising from disposal of foreign assets are subject to capital gains tax (CGT) at the prevailing income tax rate (for example, 24% if the disposer is a non-SME company).
This includes all movable & immovable assets; including shares of companies listed in any overseas stock exchange and real estate situated outside of Malaysia.
The tax applies only when the gain is remitted into Malaysia, and exemption applies if the disposer meets the economic substance requirements.
Effective March 1, CGT also applies on gains arising from disposal of domestic assets.
The key features are: CGT on domestic gains is limited to gains arising from shares of companies not listed on Bursa (i.e. privately held companies); the tax rate is 10% of gain; for assets acquired prior to Jan 1, the taxpayer may choose to pay tax on any subsequent disposal at the rate of 2% of the disposal value and exemptions apply in respect of internal restructuring, approved IPOs & venture capital companies. Conditions to qualify for these exemptions are yet to be legislated.
CGT applies only in respect of gains derived by a company, limited liability partnership (LLP), trust body or cooperative society.
Individuals are not subject to CGT. Recognising the impact on individual’s personal savings and retirement planning, the government has recently announced for a CGT exemption for unit trusts.
Given that trust bodies are still in-scope for CGT and hence there are implications on legacy planning or wealth succession planning.
For avoidance of doubt, individuals who are active in trading of shares may be regarded as carrying on a business and be subject to income tax (not CGT). This is determined based on the principles of badges of trade.
Real Property Gains Tax (RPGT) applies on disposal of real property as well as shares of property-rich companies (technically termed as Real Property Companies or RPC Companies).
Gains arising from disposal of real property such as land & building continue to be in the scope of RPGT and is not affected by the introduction of CGT.
Given that shares are in-scope of CGT, an exclusion clause been included in the RPGT Act effective Jan 1 to exclude gains arising from disposal of RPC shares from the scope of RPGT in cases where the disposer is a company, LLP, trust body or cooperative society. This ensures there is no double taxation between CGT and RPGT.
RPGT continues to apply in respect of sale of real properties and, for certain category of disposers (e.g. individuals), on sale of shares of RPC Companies – i.e. transactions which are not in-scope of for CGT.
The nature of CGT does not affect the prices of goods or cost of living. It may have an impact on the investment climate though, but the impact may be limited given the wide treaty network that Malaysia has in place, the exclusion of Malaysian listed companies from the scope of CGT and the exemptions made available. It is hoped the conditions to qualify for exemption would not be too stringent.
Further, the introduction of CGT on foreign source income effective Jan 1 ensures that Malaysia is compliant with the international best practices. In fact, Singapore introduced CGT effective Jan 1 for the same reason. Hong Kong too made substantial changes to its CGT regime to be in line with the international best practices, i.e. EU’s Code of Conduct on Business Taxation. Compliance to these is vital for any open economy to be attractive to foreign direct investments and for international trade.
Taxpayers should be aware that the scope of CGT on foreign-source gains is much wider than domestic gains. For domestic transactions, the wide definition for the term “disposal”, which is the trigger for CGT should not be overlooked. It is vital to obtain professional inputs prior to undertaking any transaction or restructuring exercise.
This article is contributed by Tratax Sdn Bhd executive director Thenesh Kannaa, author of the RPGT handbook & chairman of the Chartered Tax Institute of Malaysia’s technical committee on direct tax.
