A number of new tax measures were announced in Budget 2024 as part of the Government’s initiatives for tax reform. This includes broadening the tax base in Malaysia by expanding the coverage of Capital Gains Tax (“CGT”) in Malaysia. Based on the Finance (No. 2) Bill 2023, CGT is applied on capital gains arising from the disposal of capital assets.
The definition of capital assets is defined as [based on the Income Tax (Amendment) Act 2024]:
a) movable or immovable property situated outside Malaysia including any rights or interests thereof;
b) movable property situated in Malaysia which is a share of a company incorporated in Malaysia not listed on the stock exchange (including any rights or interests thereof) owned by a company, limited liability partnership, trust body or co-operative society
Based on the above, CGT shall include the following:
- Unlisted shares -> the disposal of unlisted shares of a company incorporated in Malaysia;
- S15 shares -> the disposal of shares of a controlled company incorporated outside of Malaysia or shares of another controlled company deriving value from real property in Malaysia* ; and
- Foreign capital assets -> the disposal of capital assets situated outside Malaysia.
Note*: The market value of the property should be at least 75% of the total tangible asset determined upon acquisition of the real property.
The effective date based on the Finance Bill is 1 January 2024. An exemption order was issued to exempt capital gains tax for the period of 1 January 2024 to 29 February 2024. As such, the effective date is now 1 March 2024.
Please note that the Income Tax (Amendment) Act 2024 is tabled for first reading in the Parliament on 25 March 2024.
Who will be subject to CGT?
The following categories of person will fall in the scope of CGT:
- Company
- Limited Liability Partnership
- Co-operative Society
- Trust Body
This provides clarity that individual tax payers will not be subject to CGT.
Separately, gains from disposal of Real Property Company (RPC) shares will be subject to CGT under the Income Tax Act 1967 (ITA) instead of the Real Property Gains Tax Act 1976 (RPGT Act).
What is the definition of shares?
The definition of shares under Section 2 of the ITA is applicable for the purposes of CGT whereby shares has “equity” features such as ordinary shares, preference shares, redeemable preference shares, convertible bonds or long term borrowings with equity features.
The CGT guidelines published on 1 March 2024 explains that shares in relation to a company includes stock other than debenture stock. The features of equity is further explained below:
- The shareholder’s right to receive dividend is not fixed;
- The shareholder’s right to the residual assets of the company ranks after other claimants in a liquidation;
- The shares have no maturity date; and
- The shares carry voting rights.
What is the tax rate?
1) Capital assets situated in Malaysia (unlisted shares and S15 shares)
The tax rate is 10% of the chargeable income from the disposal of capital asset. In the event the capital asset is acquired before 1 January 2024, taxpayer has the option to choose either 10% (as above) or 2% on the gross disposal price of the capital asset.
Taxpayer with limited information on the acquisition of the unlisted shares or direct expenses (as it may have been performed many years ago) could apply the second option i.e. 2% on the gross disposal price for simplicity purposes, provided that the capital asset is acquired before 1 January 2024.
2) Capital assets situated outside of Malaysia
The tax rate shall be the prevailing income tax rate for Company, LLP, trust body or co-operative society. It is applicable when gains from the disposal of foreign assets are “received” in Malaysia from outside Malaysia.
What is a disposal?
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.
When is the date of disposal?
The date of disposal is determined based on two scenarios as below:
- With a written agreement : the date of the agreement
- Without a written agreement : the date of completion of the disposal of the capital asset i.e. the date where ownership of the capital asset is transferred or the date in which the whole of the amount has been received by the disposer, whichever is earlier.
Where the disposal is conditional upon the approval by the Government or a State Government, the date of disposal shall be the date of such approval. Where such Government approval is conditional, the date of disposal will then be the date in which the last of such conditions is satisfied.
On the other hand, there will also be deemed disposal on the date when capital asset is taken as trading stock and the market value will be determined on the same date.
What is the consideration for the acquisition or disposal of capital asset?
The consideration for the disposal of capital asset is generally agreed by the disposer and the acquirer.
There are circumstances in which the consideration for the acquisition or disposal of a capital asset shall be deemed to be equal to the market value at the time of the disposal:
- where disposal was not made at arm’s length, in particular by way of gift
- where the disposal is made for a consideration that cannot be valued (wholly or partly)
- where the transfer of assets to trustee is for the creditors in consideration of a debt
- where the disposal was part of a transfer of business for a lump sum consideration
- where the disposal was between connected persons
- where the disposal is taken into trading stock
Further, the IRB may also determine the market value in the following scenarios:
- where the parties (disposer/ acquirer) are not able to agree on the market value
- where there is only one party to the disposal
- where the DGIR is of the opinion that the market value agreed on is incorrect.
In the case where the consideration is by way of an exchange of assets, the consideration shall be the market value of the asset.
The net tangible asset based on the financial statements of the Company is an acceptable valuation method in determining the market value of shares.
How to determine gains / losses for tax purposes?
The high level computation of gains / losses under CGT (for the purposes of applying 10%) is shown below:
| Computation | Details |
| Disposal consideration | The types of expenses allowed are expenditure wholly and exclusively incurred on the capital asset at any time after its acquisition for: 1) enhancing or preserving the value of the capital asset 2) establishing, preserving or defending the disposer’s title to or right over the capital asset 3) incidental cost of disposal e.g. professional fees, cost of transfer (including stamp duty), legal fees, advertising, brokerage and commission fees |
| Less: Acquisition consideration | Consideration in money or money’s worth less: 1) compensation or insurance receipts for damage, loss to the capital asset or depreciation of the asset 2) deposits forfeited |
| Less: Incidental costs | Incidental costs incurred for the purposes of the disposal that include stamp duty, accounting and legal fees, valuer fees, costs of advertising and commission fees. |
| Gains / losses | CGT is a separate source of income. Losses incurred on the disposal of capital asset can only be offset against future gains on the disposal of capital asset. It is only applicable within a 10-year period, after which it will be disregarded. |
Interest / financing costs incurred by the buyer to finance the purchase of unlisted shares was not mentioned in the Finance Bill and the CGT Guidelines.
Are there any exemptions?
There are a few exemptions allowed under CGT (mentioned in the Budget 2024 but not in the Finance Bill No.2) as below:
- Approved initial public offering (“IPO”). For example, a company may dispose unlisted shares while going for an IPO and the company can apply for such exemption from CGT.
- Internal restructuring within a group e.g. merger and acquisition
- Venture capital companies
What should be observed administratively?
The submission of the prescribed form (e-CKM Form) as well as payment of CGT should be made within 60 days from the date of disposal of the capital asset. Further, records of disposal should be kept for 7 years.
What are the potential issues / challenges?
One of the potential focus in future tax audit is the determination of disposal price and the determination of fair market value for an unlisted company. As there are multiple ways to value shares of an unlisted company, more clarity is required from the IRB on methods that can be accepted for the purposes of determining market value.
