What does it entail?
Although capital gains are generally not taxed in Malaysia, one exception to this is the gains arising from the disposal of either real property OR shares in a Real Property Company (“RPC”).
Under the Real Property Gains Tax Act 1976 (“RPGT Act”), an RPC is a controlled company which the defined value of its real property or shares in another RPC or both is at least 75% of the value of its tangible assets. “Real property” means any land situated In Malaysia, and any interest, option or other right in or over such land.
Acquisition of shares in an RPC is deemed to be an acquisition of a chargeable asset, and any gains arising from disposal of such shares will be subject to real property gains tax (“RPGT”).
Compliance with RPGT Act
Both the seller and buyer of shares in RPC are required to complete and file the requisite RPGT forms to the Inland Revenue Board within 60 days from the date of disposal of shares in the RPC, failing which a penalty may be imposed. The buyer is also required to retain 3% of the consideration sum and remit the amount to the Inland Revenue Board within 60 days after the date of such disposal.
For the disposer, RPGT exposure on the disposal of shares in RPC will be computed based on the gains arising from the disposure, and how long were the shares in RPC held for.
Acquisition Date & Disposal Date
Both “acquisition date” and “disposal date” are important as the length of time the RPC shares are held for will determine the tax rate the disposer is subject to.
Under the RPGT Act, “acquisition date” is the date the company becomes an RPC or the date of acquisition of the chargeable asset. To illustrate, if a company issued shares to its shareholders in year 2012 and subsequently acquired properties in year 2016 which results in the value of its real property exceeding 75% of its tangible assets, the acquisition date will be deemed to be the date the company becomes an RPC in year 2016.
Disposal date is the date the shareholder disposes his shares in RPC to another party.
Under the RPGT Act:
- If the acquisition date is the date the company becomes an RPC, the acquisition price will be computed based on the following formula:
A/B x C
A = the number of shares deemed to be a chargeable asset,
B = the total number of issued shares in the relevant company at the acquisition date of the chargeable asset,
C = the defined value of the real property or shares or both owned by the relevant company at the acquisition date of the chargeable asset
- If the acquisition date is the date of acquisition of the chargeable asset (for example when a party purchases RPC shares from another party), the acquisition price will be the amount paid to acquire the RPC shares or at a consideration deemed to be the market value of the RPC shares
Disposal price is the amount or value of the consideration in money or money’s worth for the disposal of the RPC shares.
If the disposal price exceeds the acquisition price, there is a chargeable gain and RPGT will be imposed.
If the RPC ceases to be an RPC?
A company may only cease to be an RPC if it ceases to be a controlled company or if there is a disposal of its real property or shares resulting in the defined value of its real property or shares in another RPC or both falling below 75% of the value of its tangible assets.
However, shares in an RPC do not cease to be RPC shares just because the company ceases to be an RPC.
If the same RPC shares continue to be held by the same person, even though the RPC may have ceased to be an RPC, the disposer of such shares will still be charged with RPGT upon the sale of shares.
On the other hand, where the shareholder disposes the shares after the company has ceased to be an RPC, such shares will not be RPC shares in the hands of the purchaser (i.e. the new owner).
Before acquiring shares in a company, it will be prudent for both the seller and buyer to check if there are or were (historically) any real property or real property company shares owned by such company, and if so, a thorough consideration and evaluation should be done on whether the company will be considered an RPC under the RPGT Act. If the company is an RPC, both parties should be aware of their respective obligations under the RPGT Act pursuant to the share sale.
This article was written by Shawn Ho and Ee Lyne Chong. 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. We are also ranked a Recommended Firm by IFLR1000 2020.
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. Feel free to contact us if you have any queries.