BDO Corporate Tax News

Effective 1 January 2024, Malaysia introduced a capital gains tax (CGT) through the Finance (No. 2) Act 2023 under which gains or profits from the disposal of capital assets are treated as income chargeable to income tax under the Income Tax Act 1967 (ITA). “Capital asset” means moveable or immovable property, including any rights or interests thereof.

It was originally announced in the 2024 Budget Speech that CGT would be introduced with effect from 1 March 2024 (for prior coverage, see the article in the October 2023 issue of Corporate Tax News). The earlier effective date for the Finance Act reflects Malaysia’s commitment to the EU’s Code of Conduct Group (Business Taxation) (COCG) to amend its legislation to tax foreign capital gains by the end of 2023, with effect from 1 January 2024. Nevertheless, an exemption is granted under Income Tax (Exemption) (No. 7) Order 2023 to a company, limited liability partnership (LLP), trust body or co-operative society in respect of any gains or profits from the disposal of unlisted shares in Malaysian companies during the period 1 January to 29 February 2024.

The scope of CGT is wider than originally announced in the 2024 Budget Speech of taxing only companies on gains from the disposal of unlisted shares in Malaysian companies. However, an exemption is given under the ITA on gains or profits from the disposal of capital assets situated in Malaysia, except for:

• Disposals of shares of an unlisted company incorporated in Malaysia; and
• Disposals of shares of a controlled company incorporated outside Malaysia (referred to as the “relevant company”) that derives its value from real property in Malaysia, which are deemed to be derived from Malaysia under the ITA. The rules for determining whether the relevant company derives its value from real property in Malaysia and the acquisition date and acquisition price of the shares in the relevant company are similar to the rules applicable for a real property company under the Real Property Gains Tax Act 1976 (RPGT Act).

The broader scope of CGT reflects Malaysia’s commitment to the COCG to amend its legislation to impose tax on foreign capital gains. Therefore, gains or profits from the disposal of capital assets situated outside Malaysia will be subject to CGT when received in Malaysia. It is anticipated that an exemption would be given for foreign capital gains received in Malaysia if economic substance requirements are met but to date no legislation for this exemption has been released.

It was also recently announced that unit trusts will be exempt from tax on foreign-source income and CGT. The exemption on foreign-source income tax is effective during the period 1 January 2024 to 31 December 2026, while the exemption on CGT is effective 1 January 2024 to 31 December 2028. The legislation for these exemptions is pending.

The CGT rates on the chargeable income of a company, LLP, trust body or co-operative society from the disposal of capital assets are as follows:

 

Disposal of capital assets situated in Malaysia that were acquired before 1 January 2024	10% on the chargeable income from the disposal of the capital asset; or 2% on the gross disposal price of the capital asset.
Disposal of capital assets situated in Malaysia that were acquired on or after 1 January 2024	10% on the chargeable income from the disposal of the capital asset.
Disposal of capital assets other than the above	At the normal income tax rate to the company, LLP, trust body or co-operative society as specified in the ITA on the chargeable income from the disposal of the capital asset.

A company, LLP, trust body or co-operative society is required to file a CGT return and pay the applicable CGT within 60 days from the date of disposal of a capital asset under a self-assessment system separate from its annual income tax return and income tax payments.

To facilitate the filing and payment of CGT by a company, LLP, trust body or co-operative society, provisions for ascertaining the chargeable income from gains or profits from the disposal of capital assets are specified in the Finance Act. The notable provisions are:

• “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;
• “Shares” means all or any of the following:
  • stock and shares in a company;
  • loan stock and debentures issued by a company or any other corporate body incorporated in Malaysia;
  • a member’s interest in a company not limited by shares whether or not it has share capital;
  • any option or other right in, over or relating to shares as defined above;
• Each disposal will be treated as a separate source of gain or profit;
• Where there is a loss on the disposal of a capital asset, the loss can be set off against any subsequent gain on the disposal of another capital asset in the same year of assessment or in the subsequent 10 consecutive years of assessment;
• A capital asset taken into trading stock will be deemed to be a disposal at a consideration equal to the market value of the capital asset on the date it is taken into trading stock; and
• The provisions in relation to the disposal price, acquisition price, certain transactions to be at market value, date of disposal and acquisition, conditional contracts and part disposals that are copied, with necessary modifications, from the provisions for computing the chargeable gain under the RPGT Act.

Given that CGT is new in Malaysia and there may be certain areas of uncertainty that could require further analysis, professional advice should be sought as needed.

David Lai
BDO in Malaysia