Tax Matters – Opportunity to restructure shareholdings without CGT

CAPITAL Gains Tax (CGT) has been implemented effective Jan 1, 2024 for companies, limited liability partnerships (LLP), trust bodies and cooperative societies on the disposal of unlisted shares of Malaysian incorporated companies.

However, the Ministry of Finance recently issued a gazette order exempting such gains from CGT until Feb 29, 2024. This provides a golden opportunity for companies to restructure their shareholdings. Effectively, this allows them to restructure their shareholdings without incurring capital gains tax.

For companies, LLP, trust bodies and cooperative societies which are disposing of shares of an unlisted real property company (i.e. company mainly holding real estate/real properties), such gains will no longer be subject to Real Property Gains Tax (RPGT) from Jan 1, 2024 onwards as they will be subject to CGT. However, this exemption allows the sale of such real property company shares to be exempt from both CGT and RPGT until Feb 29, 2024.

From March 1, 2024, the CGT rate will be 10% of the chargeable gain from the disposal of the unlisted shares if they are acquired after Jan 1, 2024. If the unlisted shares were acquired before Jan 1, 2024, then there is an option of paying CGT at either 2% of the gross disposal price or 10% of the chargeable gain.

The coverage of CGT

Effective Jan 1, 2024 onwards, CGT applies on the following capital gains:

a) Shares of a company incorporated in Malaysia not listed on the stock exchange.

b) Shares of a controlled company incorporated outside Malaysia which owns real property situated in Malaysia or shares of another controlled company or both, subject to certain conditions

c) Capital gains from disposal of all foreign capital assets which are remitted into Malaysia

The exemption mentioned above will be confined to the shares in category (a) above.

Other exemptions announced

The finance minister announced during the tabling of Budget 2024 in October last year that CGT exemption would be extended for the disposal of shares for internal restructuring of shares within the same group of companies, any initial public offering approved by Bursa Malaysia and venture capital companies.

However, there are still no gazette orders issued by the ministry yet to provide further details on how these CGT exemptions will work.

Issues to consider when transferring or disposing of shares

Although taxpayers will be exempted from CGT during the disposal period, there are still other potential tax implications that they need to be aware of before making such transfers, such as stamp duty, income tax, withholding taxes, transfer pricing issues and indirect taxes.

Tax savings should not be the only matter to consider when transferring shares. Taxpayers also need to consider the potential impact the share transfer will have on the respective shareholders. An example could be the dilution of their interests.

Taxpayers also need to consider the post-transfer consequential effect from the transfer of shares, such as how monies flow back to shareholders.

Time is running out

There is only 1½ months left to complete any restructuring. There is no time to waste as there will be other related issues you would need to examine, such as stamp duty, income tax issues, and possibly indirect tax issues which may take time to come up with the optimum restructuring plan.

This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (www.thannees.com).