Clarity for Capital Gains Tax

1. Tax returns for CGT will need to be filed electronically within 60 days from the date of disposal of capital asset and the tax must be paid within 60 days from the date of disposal. The 60-days rule applies to disposal of unlisted shares of a company incorporated in Malaysia and disposal of Section 15C shares.

For disposal of foreign capital assets, we understand that the gains arising from the disposal is only subjected to CGT when remitted into Malaysia. However, we are still awaiting further clarification on the reporting / declaration mechanism and whether the 60-days rule is applicable.

2. The law requires the market value be taken as the disposal and acquisition consideration in certain circumstances where the transactions are not at arm’s length, or between connected persons, or by way of gift, or the consideration cannot be valued.

The market value of transfer prices is an obvious area of scrutiny by Malaysia’s Inland Revenue Board (IRB). We foresee that the valuation of shares in unlisted companies would attract disputes where the IRB may impute its own market value if they believe the prices are distorted.

Also, where it’s an internal restructuring transaction, it’s common for transfer to be effected at Net Tangible Asset. To require valuation for companies would be additional cost to businesses.

3. Although the tax net has been widened to capture gain on disposal of Section 15C shares (i.e., shares of a controlled company incorporated outside Malaysia which owns real property situated in Malaysia or shares of another controlled company, subject to meeting the 75% threshold conditions), there are questions about how IRB intends to capture this tax revenue. This is especially if the transaction takes place entirely outside Malaysia between two foreign parties. A clear and well-thought-out mechanism must be put in place to enable effective tax collection by the IRB in this context.

Based on the Budget 2024 announcement, the proposed exemptions in respect of the Malaysian CGT are expected to cover disposals of shares as part of an approved initial public offering and intragroup restructuring exercises.

We expect detailed guidelines to be released by the tax authority soon and not near to March 2024 to address the proposed exemption urgently. As a point of reference, the tax authorities in Singapore and Hong Kong have released their guidelines in respect of the application of their respective CGT provisions and we hope Malaysia's guidelines will be just as detailed to erase ambiguities.

Based on the current drafting of the Real Property Gains Tax Act 1976 and the CGT provision in the Income Tax Act 1967 (the Acts), I would say yes.

For a company holding real estate, if the disposer is a company, limited liability partnership, trust body or co-operative, it’s now under capital gains tax because regardless of whether the company is a real property company (RPC), disposal of unlisted shares will be covered under CGT.

If the disposer is an individual or if it’s a Labuan company (fulfil substance requirement), then they are still subject to RPGT on disposal of shares in a RPC. The current Acts seems to provide that RPGT cannot be charged on disposal of real property so I hope the authority can review and update the relevant legislation quickly.

Caveat: The above applies on the assumption that the real estate held are not the company’s stock in trade. Because gain on disposal of stock in trade would be assessable as income from business source, and not CGT.