Introduction of Capital Gains Tax on Sale of Unlisted Shares (Malaysia)

New Capital Gains Tax on Unlisted Shares

On 13th October 2023, the Prime Minister of Malaysia presented the country’s Budget for the year 2024 and amongst the measures announced was the implementation of capital gains tax on unlisted shares from 1st March 2024. During the tabling of the Budget, it was announced that effective from 1st March 2024, a capital gains tax (“CGT on Unlisted Shares”) will be imposed on the net gains derived from the disposal of unlisted shares in local companies as follows:

The Prime Minister also announced that there may be exemptions on the implementation of the CGT on Unlisted Shares above and at this stage, the exemptions being considered are disposal of shares related to:

• (i) Initial Public Offering (IPO) approved by the Malaysian stock exchange authority;
• (ii) internal restructuring of shares within the same group of companies; and
• (iii) venture capital companies.

Pending the issuance of further legislation and relevant guidelines on this implementation and exemption of CGT on Unlisted Shares by the Malaysian authorities, the applicability of the exemptions above may be subject to fulfilment of certain conditions and the scope of applicability of CGT on Unlisted Shares will require further review.

For example, the question remains whether the Seller may deduct their capital losses in respect of sale of shares in other unlisted local companies, against the net gains in respect of sale of shares in a company to reduce the imposition of CGT on Unlisted Shares, and whether such capital losses can be carried forward.

Interplay of CGT on Unlisted Shares with Relevant Existing Legislation

As set out above, the current Real Property Gains Tax is chargeable upon the gains obtained in respect of the sale of shares in a real property company (“RPC”). RPC is generally a controlled company where its total tangible assets consist of 75% or more in real property and/or shares in another RPC. A controlled company is a company having not more than 50 members and controlled by not more than 5 persons.

As the scope of CGT on Unlisted Shares covers disposal of shares in local companies, this seems to also cover sale of shares in an RPC. Therefore, the upcoming legislation and guidelines on CGT on Unlisted Shares and the RPGT Act will need to be reviewed to avoid double imposition of tax on a share sale transaction involving RPC.

Level-Playing Field

If the relevant Real Property Gains Tax involving RPC is repealed following the commencement of CGT on Unlisted Shares to avoid the double imposition of tax, this appears to draw a more level-playing field for foreign investors in RPC. This is because currently, non-Malaysian citizens, non-Malaysian permanent residents and companies not incorporated in Malaysia are subject to generally higher Real Property Gains Tax rate (e.g. up to 30% rate against a Malaysian citizen who may be subject to 15% rate for the disposal after the same period of ownership), as compared to Malaysian citizens, Malaysian permanent residents and Malaysia-incorporated companies, when they dispose of their shares in an RPC.

A more level-playing field can be achieved with the same CGT rate applying across disposal of shares in companies (including RPC) irrespective of nationality and residency of the sellers.

Requirements to Withhold Cash Consideration

Under the current RPGT Act, a purchaser of real property or shares in an RPC is required to withhold certain percentage of cash consideration from the total purchase price, to be remitted to the Director General of the Malaysian Inland Revenue Board and such amount will be applied against the Real Property Gains Tax payable by the Seller.

It is currently not determined whether the upcoming legislation on CGT on Unlisted Shares will adopt the same framework as the RPGT Act as above, but the adoption of such withholding provision may have some bearing on the Seller’s request for deposit or advance payment in a share sale transaction.

Conclusion

As at the date of this newsletter, there is no publicly available draft bill and/or guidelines issued by the Malaysian authorities on the conditions and requirements in respect of the implementation of CGT on Unlisted Shares. Nonetheless, stakeholders should be mindful of the potential cost implications and effects on their investment strategy that may arise from the introduction of CGT on Unlisted Shares.