In Malaysia’s Budget 2024, the government has introduced the proposed capital gains tax (CGT), which will be imposed on gains or profits derived from the disposal of unlisted shares or capital assets. The Finance (No. 2) Act 2023 was gazetted on 29 December 2023 and is effective from 1 January 2024. However, the Income Tax (Exemption) (No. 7) Order 2023 (“Exemption Order”) exempts companies, limited liability partnerships, co-operative societies, or trust bodies (“Chargeable Persons”) from capital gains tax on any gains or profits derived from the disposal of shares of a company incorporated in Malaysia not listed on the stock exchange that was made on or after 1 January 2024 to 29 February 2024. Individuals are not subject to capital gains tax for the disposal of unlisted shares or capital assets.

In this article, we will discuss the scope and applicability of capital gains tax, the exemptions under the Exemption Order, and the effect of capital gains tax on Real Property Gains Tax with respect to real property companies.

Capital Gains Tax and the Exemption Order

Beginning 1 January 2024, capital gains tax is imposed on all gains or profits received by a Chargeable Person derived from the following:

(a) Disposal of unlisted shares in companies incorporated in Malaysia;

(b) Disposal of shares of a controlled company incorporated outside Malaysia that owns real property situated in Malaysia or shares of another controlled company situated in Malaysia; and

(c) Disposal of capital assets situated outside Malaysia but gains or profits derived from such disposal is received in Malaysia.

However, the Government of Malaysia gazetted the Exemption Order on 29 December 2023, which provides Chargeable Persons with an exemption from incurring capital gains tax on the gains or profits deriving from the disposal of unlisted shares of a company incorporated in Malaysia made on or after 1 January to 29 February 2024. The Exemption Order was intended to provide Chargeable Persons with a grace period to make the necessary adjustments and preparations for the implementation of capital gains tax. Thus, the effective date of capital gains tax technically falls on 1 March 2024.

However, it must be noted that the Exemption Order does not apply to gains or profits considered as business income under Section 4(a) of the Income Tax Act 1967. Also, exemptions from capital gains tax may apply to internal group restructurings, initial public offerings approved by Bursa Malaysia, and venture capital investments subject to certain conditions, as announced during Budget 2024.

On 16 January 2024, it was announced by the Government of Malaysia that unit trusts will be exempted from capital gains tax and taxes on foreign-sourced income, with the exemption on foreign-sourced income being effective from 1 January 2024 until 31 December 2026, whilst the exemption on capital gains tax is effective from 1 January 2024 until 31 December 2028.

Date of Disposal

The date of disposal of unlisted shares or capital assets is subject to two factors: (1) whether there is a written agreement for the disposal of the unlisted shares or capital assets; and (2) whether the disposal or acquisition of such unlisted shares or capital assets requires any regulatory approval.

CGT Tax Rate

A Chargeable Person must provide details of the disposal of unlisted shares or capital assets and make payment of the applicable capital gains tax on the gains or profits derived from such disposal within 60 days from the date of disposal of the unlisted shares or capital asset. The capital gains tax rates are crucial elements to all Chargeable Persons, which are as follows:

In the event a Chargeable Person incurs an adjusted loss from disposing of unlisted shares or capital assets, the adjusted loss can be carried forward as a deduction against the Chargeable Person’s subsequent disposal of unlisted shares or capital assets for a period of ten consecutive years of assessment. Any residual amount at the end of this period will no longer be eligible for deductions.

Effect of Capital Gains Tax on Real Property Gains Tax

Before the introduction of capital gains tax in Malaysia, the disposal of real property or shares in a real property company generally attracted Real Property Gains Tax (RPGT). A real property company (RPC) can be determined as a controlled company that owns property or shares in another real property company, or both, and the defined value of its property or shares in another real property company, or both, is not less than 75% of the value of its total tangible assets.

The coming into force of capital gains tax has resulted in its replacement of real property gains tax with respect to the disposal of shares in a real property company by Chargeable Persons only. Meanwhile, gains or profits derived from the disposal of real property by Chargeable Persons continue to be subject to real property gains tax unless such gains or profits are treated as a revenue receipt, for example, disposals of real property by property developers, which would then be subject to income tax.

For reference, the current real property gains tax rates in Malaysia are provided below:

Please visit our article on Real Property Gains Tax to get a general overview and understanding of real property gains tax in Malaysia.

Conclusion

With the imposition of capital gains tax in Malaysia, the element of capital gains tax will be an added factor to be considered when parties strategize for and engage in negotiations and transactions with respect to acquiring and disposing of unlisted shares and capital assets. As the country begins its navigation through the implementation of capital gains tax, it is important for all businesses, entrepreneurs and investors to understand capital gains tax and its future developments.

If you would like to seek legal advice on strategising or structuring your disposal of unlisted shares or capital assets in light of capital gains tax having come into force, please reach out to us, and we will be pleased to assist you with your enquiry.

By Tommy Wong, Vinson Cheng and Sarah San

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Note: This article does not constitute legal advice to any specific case. The facts and circumstances of each and every case will differ and therefore will require specific legal advice. Feel free to contact us for complimentary legal consultation.