GAINS on sale of investments such as shares are generally not subject to any tax in Malaysia, other than gains on disposal of real property in the country or shares in a real property company where the Real Property Gains Tax is applicable at rates from 30% to 10% or 0%, depending on the ownership period and the profile of the seller.In Budget 2024, it was announced that the capital gains tax (CGT) would be introduced from March 1, on the sale of shares in unlisted Malaysian companies.

The CGT will be imposed on the disposal of unlisted shares by companies, limited liability partnerships, cooperatives and trust bodies (see table).

Exemptions from the CGT will be accorded for gains on disposals in relation to restructuring within the same group, initial public offerings approved by Bursa Malaysia and venture capital companies (subject to conditions to be stipulated).

Malaysia is one of the few remaining countries in Asia which has not implemented the CGT.

Interestingly, Singapore is also proposing to tax capital gains with effect from Jan 1, 2024.

However, the scope of taxation would be limited to gains on sale of foreign assets that are received in Singapore.

Additionally, domestic groups, standalone entities and pure equity holding entities in the city-state are to be excluded.

Budget 2024 also introduced the expansion of the scope of taxation of foreign sourced income to include gains from disposal of capital assets with effect from March 1.

However, taxpayers that meet prescribed economic substance requirements, would be exempted.

Why CGT?

Malaysia’s revenue base is primarily focused on income tax collection from businesses and individuals.

However, corporations and individuals who have the financial capacity to make long-term capital investments are not taxed on their gains from investments.

The introduction of CGT thus, not only increases the country’s revenue collection, but also seeks to reduce any perceived inequalities between the different income groups by ensuring fair treatment between taxation of business profits and capital gains.

How does this impact the fund management industry?

Currently, gains on sale of investments by unit trust funds are not subject to income tax, providing investors with a higher rate of return on their investments.

Although most funds’ investments are geared towards listed shares, funds that have invested in unlisted shares could now be subject to the CGT as it is still unclear whether it would supersede the non-taxation of gains made by unit trusts under the income tax regime.

A similar dilemma would also be faced by investors in private equity (PE) funds.

Simply put, PE investors buy a stake in a private company and hold it on a long-term basis.PE funds would typically help such private companies grow their business and eventually dispose of their stake to other investors.

This is because PE funds normally have a lifecycle, which is long-term, and need to dispose of their investments eventually before the lifecycle is over.

Gains from disposal of shares are generally seen as capital gains from long-term investments and currently, are not subject to income tax.

With the introduction of the CGT, PE funds who invest in Malaysian unlisted companies will now have to shoulder additional and unexpected costs on their investments.

This is especially for funds which may still be on their investment journey and could have anticipated a certain return for their investors.

Additional cost of tax

The CGT would likely mean that fund managers would need to search for higher return investments to counter the additional cost of the tax.

As announced, to qualify for exemption for gains from disposal of foreign assets, companies need to meet economic substance requirements namely a sufficient number of full-time employees and annual operating expenditure.

How would the impact of the non-labour intensive nature of unit trusts and private equity funds impact the satisfaction of the exemption condition?This leaves the taxability of gains from disposal of foreign capital assets uncertain.

With the introduction of CGT, fund managers need to consider its implications on their existing portfolio of investments and how this would impact returns.

To promote Malaysia as a hub for funds and fund management, it is important for certain existing exemptions to continue to be applicable (for example non-taxability of individual unitholders).

Preserving the exemption for individual unitholders would be in line with the government’s objective of not imposing the CGT on individuals.

Clear guidance

It would be helpful to have clear guidance on a number of scenarios after the Finance Bill is issued – whether unit trusts would still be able to rely on the existing non-taxability of gains or whether specific exemptions would be accorded to individual unitholders on the CGT.

What is the treatment for indirect transfers that happened overseas? Would the sale of Malaysian unlisted shares by foreign companies be exempted?

It is hoped that all key stakeholders will continue engaging the government in dialogue around a preferential tax treatment, particularly to reduce the tax burden of individual investors.

Jennifer Chang and Lim Phaik Hoon are tax partners while Aruna Panjanathan is a tax managing consultant of PwC Malaysia. The views expressed here are the writers’ own.