Capital Gains Tax: What You Need to Know for Disposal of Shares of Unlisted Companies in Malaysia

Capital gains tax (“CGT”) was introduced into the Malaysian tax regime through amendments to the Income Tax Act 1967 (“ITA”), following the gazetting of the Finance (No. 2) Act 2023 on 29 December 2023. This development has significant implications for how mergers and acquisitions (“M&A”) transactions are conducted in Malaysia.

In this article, we answer the following key questions arising from the introduction of CGT in the context of M&A transactions in Malaysia and in particular, disposal of shares of unlisted companies incorporated in Malaysia.

1. What is CGT?

 In general, CGT is a type of tax imposed on capital gains derived from disposals of investments.

The new section 4(aa) of the ITA introduces a new class of income on which tax is chargeable under the ITA, namely gains or profits from the disposal of capital assets.

“Capital asset” means:

• moveable or immovable property situated outside Malaysia including any rights or interests thereof; or
• moveable 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[1], limited liability partnership[2], trust body[3] or co-operative society[4] (as defined under the ITA).[5]

“Share” in relation to a company, includes stock other than debenture stock.[6]

Shares of unlisted companies incorporated in Malaysia is one of the classes of capital assets which are subject to CGT.

2. Are there any exemptions for disposal of shares of unlisted companies incorporated in Malaysia?

Although the ITA is amended to impose CGT on the disposal of capital assets on or after 1 January 2024, CGT is applicable to disposal of shares of unlisted companies incorporated in Malaysia starting on 1 March 2024. The Income Tax (Exemption) (No. 7) Order 2023 exempts a company, limited liability partnership, trust body or co-operative society from the payment of CGT received from the disposal of shares of unlisted companies incorporated in Malaysia made on or after 1 January 2024 to 29 February 2024.

The Government of Malaysia has indicated, in its Budget 2024 speech, that it will consider exemptions for disposal of shares in connection with approved initial public offering, internal group restructuring and venture capital related investments. However, these proposed exemptions have yet to be incorporated into any legislations as of the date of this article.

3. When is the effective date?

 In respect of the disposal of shares of unlisted companies incorporated in Malaysia, the effective date for the application of CGT is 1 March 2024 due to the two months’ exemption discussed above.

4. Who is chargeable with CGT for disposal of shares of unlisted companies incorporated in Malaysia?

 In general, sellers as described below which dispose of shares of unlisted companies incorporated in Malaysia are subject to CGT.

Companies, limited liability partnerships, trust bodies or co-operative societies (as defined under the ITA[7]) which receive gains or profits from the disposal are chargeable with CGT.[8] It should be noted that for the purpose of ITA, a company includes a corporation established outside Malaysia and a business trust.[9]

Labuan entities that are subject to Labuan Business Activity Act 1990 and individuals are not subject to CGT but will continue to be subject to real property gains tax (“RPGT”) for disposal of real property or shares in a real property company (“RPC”).[10]

Please refer to question 5 on the application of RPGT and CGT on the various entities.

5. Whether RPGT or CGT applies for disposal of shares of unlisted companies in Malaysia?

The following diagram depicts whether RPGT or CGT regime applies depending on:

• whether the target company is a RPC or non-RPC company; and
• whether the seller is a company, limited liability partnership, trust body or co-operative society (as defined under the ITA).

6. What constitutes disposal for the purpose of CGT?

 For the purpose of CGT, “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.[11] 

7. What is the rate of CGT for the disposal of shares of unlisted companies incorporated in Malaysia?

8. What are the filing and payment requirements for CGT?

Taxpayers or through their tax agents are required to submit CGT return form through e-Filing at the MyTax portal (https://mytax.hasil.gov.my) together with the CGT payment within 60 days from the date of disposal of shares in unlisted companies incorporated in Malaysia.[13] 

9. What is the date of disposal?

 The date of disposal for the purpose of submission of CGT return and payment of CGT to the Inland Revenue Board of Malaysia is as follows: 

  Commentary

The introduction of CGT marks a significant development with notable implications for M&A transactions in Malaysia. Some of the key considerations for disposal of unlisted companies incorporated in Malaysia include:

• whether there is any CGT exemption for disposal of shares of unlisted companies incorporated in Malaysia;
• the pricing of disposals, as sellers will take into consideration the CGT payable when negotiating deals; and
• whether there are any capital losses from previous restructuring exercises which may be utilised.

Several aspects remain unclear and are subject to further clarification. For instance, it is unclear whether the redemption of redeemable preference shares constitutes disposal for the purpose of CGT. Additionally, the exemptions in respect of internal group restructurings, approved initial public offering and disposals by venture capital companies are still pending formalisation.

It is prudent to continuously monitor the legislative updates on CGT and seek professional advice to ensure that all considerations are taken into account before undertaking disposals of shares of unlisted companies incorporated in Malaysia.

[1] A “company” means a body corporate and includes any body of persons established with a separate legal identity by or under the laws of a territory outside Malaysia and a business trust (section 2 of the ITA)

[2] A “limited liability partnership” means a limited liability partnership registered under the Limited Liability Partnerships Act 2012 (section 2 of the ITA)

[3] “trust body”, in relation to a trust, means the trust body provided for by section 61 of the ITA (section 2 of the ITA)

[4] “co-operative society” means any co-operative society registered under any written law relating to the registration of co-operative societies in Malaysia (section 2 of the ITA)

[5] Section 2 of the ITA

[6] Section 2 of the ITA and paragraph 3.2(e) of the Guidelines on Capital Gains Tax for Unlisted Shares issued by the Inland Revenue Board of Malaysia with effect on 1 March 2024

[7] Please refer to footnotes 1 to 4.

[8] Section 65D(1) of the ITA

[9] Section 2 of the ITA

[10] A “real property company” means a controlled company which as at 21 October 1988, owns or at any later date, acquires real property (in Malaysia) or shares in an RPC or both, whereby the defined value of real property or shares or both, owned at that date is not less than 75% of the value of its total tangible assets.

“Defined value” means the market value of the real property or the acquisition price of the RPC shares.

“Value of total tangible assets” refers to the aggregate of the defined value of real property and/or RPC shares and the value of other tangible assets.

(Paragraph 34A, Schedule 2 of Real Property Gains Tax Act 1976).

For RPGT purpose, “real property” means any land situated in Malaysia and any interest, option or other right in or over such land.

[11] Section 65C of the ITA

[12] Section 6(1)(q) and Part XXI, Schedule 1 of the ITA

[13] Section 77A(1B) of the ITA and CGTRF Submission Guide Notes published by Inland Revenue Board of Malaysia at https://www.hasil.gov.my/en/forms/cgt-return-form-filing-programme/

[14] Section 65F(1)(a) of the ITA

[15] Section 65F(4) of the ITA

[16] Section 65F(1)(b) of the ITA

[17] Section 65F(3)(a)) of the ITA

By Tay & Partners, Malaysia, a Transatlantic Law International Affiliated Firm.

For further information or for any assistance please contact malaysia@transatlanticlaw.com

Disclaimer: Transatlantic Law International Limited is a UK registered limited liability company providing international business and legal solutions through its own resources and the expertise of over 105 affiliated independent law firms in over 95 countries worldwide. This article is for background information only and provided in the context of the applicable law when published and does not constitute legal advice and cannot be relied on as such for any matter. Legal advice may be provided subject to the retention of Transatlantic Law International Limited’s services and its governing terms and conditions of service. Transatlantic Law International Limited, based at 84 Brook Street, London W1K 5EH, United Kingdom, is registered with Companies House, Reg Nr. 361484, with its registered address at 83 Cambridge Street, London SW1V 4PS, United Kingdom.