The Inland Revenue Board (“IRB”) has issued a new guideline that provides clarity on the tax treatment of various financial instruments (“Guideline”). The Guideline begins by outlining the general characteristics of equity and debt instruments, emphasizing the importance of considering these features before determining the appropriate tax treatment.
Key Highlights from the Guideline
The Guideline identifies instruments like preference shares, bonds, perpetual notes, and profit-participating loan notes as hybrid instruments due to their mixed debt and equity characteristics. For instance, preference shares with redemption features including maturity dates are classified as having debt features.
The determination should be based on the substance and not solely on the legal form of the instrument. Helpfully, the Guideline lists a number of factors that IRB may consider when assessing the true nature of such a hybrid instrument, a few of which are as follows:
- Source from which the principal will be repaid and the distributions or profits that will be paid out, as well as the order of payout;
- The right to enforce payment of distributions or profits;
- Right to recover in the event of default;
- Maturity date of the instrument and the terms of redemption (if any);
- Whether the terms are on arm’s length if it is a financing instrument.
Implications for Businesses
These clarifications from the IRB would have significant implications for businesses dealing with or issuing hybrid financial instruments, as businesses would now have to carefully analyse the characteristics of their financial instruments to determine the appropriate tax treatment. This classification as either equity or debt could also impact the issuer’s and holder’s accounting treatment and give rise to tax implications. We foresee that this development would also impact the assessment of stamp duty on hybrid instruments, which could attract ad valorem stamp duty in some instances.
Sources:
https://www.hasil.gov.my/media/hszfvtn5/guidelines-on-tax-treatment-of-hybrid-instrument.pdf
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This article was written by Sylvia Lock (Senior Associate) from Donovan & Ho’s corporate practice group.
Donovan & Ho is a law firm in Malaysia, and our employment practice group has built a reputation for providing strategic employment advice to local and global organisations. Our team of employment lawyers provide advice on employment law and industrial relations including review of employment contracts, policies and handbooks, advising on workforce reductions, and managing dismissals of employees for poor performance or misconduct. We also represent clients in unfair dismissal claims and employment-related litigation. Have a question? Please contact us.
