10 Pros And Cons Of Investing In Property In Malaysia Through A Private Company
In recent years, due to the various macro-economic and political factors including the global drop in oil prices, change of ruling government, a weakening ringgit, and the property overhang in certain segments of residential and office units in the Klang Valley, there have been a rise in the number of property investors, both local and foreign, who have expressed interest in setting up companies in Malaysia to directly invest OR to collectively pool investments into Malaysian property with the intention to ‘buy to rent’ property for the mid-long term.
In this article, we have tabled a list of some pros and cons of buying and holding property in Malaysia through a Malaysian private limited company (as known as a ‘Sendirian Berhad’):
|1||Multiple investors / owners||The investors are able to pool their money together with multiple investors/ owners (up to 50 persons) as paid up share capital into a private limited company, to purchase one or more properties. This allows for the diversification of risks in the illiquid property asset and reduces the initial cash outlay for each investor.
There will be typically be a professional manager engaged to make decisions in respect of the investment & property in such pool investment structure.
|Finding like-minded individual investors who are willing to enter into a collective investment into property may be difficult.
As a precaution, offerings of such collective investments must be kept strictly private, as under Section 43(1) of the Companies Act 2016, a company is not allowed to:
i. offer its shares or debentures to the public
ii. allot or agree to allot any shares or debentures of the company with a view to offer such securities to the public
iii. invite the public to deposit money with the company
|2||Executing documents||The investors / shareholders of the company can delegate the signing authority to the directors of the company or confer powers of attorney to professional managers, to execute legal documents, agreements, cheques and other operational matters, relieving the shareholders from such matters.||The company’s actions require the passing of the board of directors and/or members’ resolutions, which will usually be delegated to professional managers and correspondingly may incur costs (such as company secretarial fees / property management fees etc).|
|3||Easy & flexible disposal / transfer||If the investor wants to exit the investment, it can be done by way of transfer of the investment company’s shares instead of transfer of property or fractional interests in the property, which results in considerable savings on stamp duty and are generally less time-consuming.
The current stamp duty rates for the year 2020, applicable for transfer of property, are as follows:
1) First RM100,000.00 = 1%
2) Next RM400,000.00 = 2%
3) Next RM500,000.00 = 3%
4) Anything above RM1,000,000.00 = 4%
On the other hand, the stamp duty rates for the transfer of a company’s shares is at a much lower rate of 0.3% of the consideration or market value of the company, whichever is higher.
|Shares of a private company are not openly tradable and may be difficult to find buyers to take over minority shareholding in a company. However, the same thing can be said about finding a buyer for a fractional interest in a property.
Furthermore, the disposal of shares of a private company will likely be subjected to restrictions against transfer, pre-emption rights, early exit penalties or tag-along clauses that are found in the shareholders’ agreement or constitution of the investment company.
|4||Costs||The upfront cost of setting up a company in Malaysia ranges between RM2,000 to RM3,000.
The estimated cost of maintaining a company (including company secretary fees, filing fees, minimal statutory compliances, tax filings, basic bookkeeping and preparing audited accounts) can range from anywhere between RM3,000 to RM5,000 a year.
|5||Profit Distribution||The company may issue preference shares with specific dividend rights as a tool for profit distribution to investors.
Preference shares can be conferred with a right to a fixed rate of dividends that must be paid to their preference shareholders before they are paid out to ordinary shareholders. While dividends are only paid out if the company generate profit, some types of preference shares (with cumulative dividends rights) allow for the accumulation of unpaid dividends.
Upon the disposal of the property, any accrued profits may then be distributed by the company back to the shareholders by dividends or other methods.
|Under the Companies Act 2016, the company needs to fulfil the following requirements in order to declare the dividends:
i. Only make a distribution to the shareholders out of profits; and
ii. The directors are the ones who are allowed to authorise the payment of dividends. The directors must also be satisfied that the company will be solvent for a period of 12 months after the distribution is made.
|6||Estate Planning||A company with at least 1 minimum shareholder can survive in perpetuity which can be a useful tool for estate planning.
If one out of a group of the investors or shareholders in a company passes away, the share transfer can be easily done by the beneficiaries after obtaining the grant of probate, compared to the passing of interests in a property.
|7||Debt Service Ratio (“DSR”)||The debt servicing ratio is a ratio used by Banks to determine a person’s ability to produce enough cash to cover its debt payments and if a new loan can be obtained with the current earnings.
The DSR of a company will generally be assessed based on several factors, which include any existing assets or business incomes (including rental income from other properties), as well as the financial strength of the individual directors or shareholders of the company.
|Have to provide company accounts to show their credit capability but if the company decides to obtain a loan from the Bank, the appointed directors will likely be required as personal guarantors for the loan obligation.
For companies with foreign individuals as shareholders or directors, there may be additional limitations imposed based on several factors such their respective personal incomes, personal debt gearing, country in which salary is earned, exchange rate on salary earned etc. In some cases, an additional personal guarantee from a local resident may be required for a foreign owned company.
|8||Loan financing / Loan to Value Ratio||Incorporating a company with higher paid up share capital may put the company on a better footing to secure bank financing.
However, there are other strict financial requirements imposed by the bank for the company, its shareholders and directors to fulfill in getting a corporate loan to purchase property.
With a good financial track record and especially with a portfolio of properties generating strong rental income, securing financing using a company, over time, may become easier.
|Loan financing for companies are more limited often with higher interest and lower borrowing limits compared to individual financing. For example, the maximum loan financing that is allowed by banks is 70% whereas for individuals, it can be as high as 90%-95%.
For a company purchasing residential property, the LTV is usually a maximum of 70%, but could go up to 80% for commercial properties.
A personal guarantee by directors (or even individual shareholders) is required as a security to the loans. There may also be distinctions in lending criteria between foreign owned companies and resident owned companies to be aware of.
|9||Income Tax on rental income||Company tax rate may be lower than personal income tax rate, depending on the individual’s personal income tax bracket.
The maximum personal income tax rate in Malaysia is 30% (based on a graduated income scale) while the corporate tax rate in Malaysia are as follows:
If structured properly, a company could potentially enjoy more tax deductibles than under personal income tax, such as the employee payroll, capital allowances, and other operating expenses.
|10||Real Property Gains Tax (“RPGT”) on shares of a Real Property Company (“RPC”)||
|Losses on disposal of RPC shares is not allowed as deduction in the computation of chargeable gains on the disposal of other assets (including other RPC shares).
The RPGT exemption which is the relief of either RM10K or 10% of net chargeable gain (whichever higher) only applies to individuals and not a company. A company is also not granted the ‘once in a lifetime exemption’ for residential property.
The RPGT rates for company to dispose of the property is higher in the 6th year and beyond compared (at 10%) to citizens / PR individuals rate (at only 5%).
However, RPGT rates for foreigner individuals who are not citizens or PRs are generally worse off compared to a company’s RPGT rates (at 30% for the first 5 years, and 10% for 6th year and beyond).
In conclusion, there are several pros and cons to consider for each particular situation when choosing to invest in Malaysian property via a company or as an individual investor. Getting expert advice from relevant professionals including tax consultants, company secretaries’ lawyers and bankers will be useful and highly encouraged.
This article was written by Shawn Ho (Partner) & Suzanne Fam (Senior Associate) from the corporate practice group of Donovan & Ho. Shawn leads the corporate practice group of Donovan & Ho, and has been recognised as a Notable Practitioner, whilst the firm has been recognised as a Notable Firm for Corporate and M&A by Asialaw Profiles 2020 and 2021. We are also ranked as a Recommended Firm by IFLR1000 2020 and 2021.
Our corporate practice group advises on corporate acquisitions, restructuring exercises, joint venture arrangements, shareholder agreements, employee share options and franchise businesses, Malaysia start-up founders and can assist with venture capital funds in Seed, Series A & B funding rounds. We also advise on property transactions and real-estate related tax planning. Feel free to contact us if you have any queries.