Investment Holding Company in Malaysia
An Investment Holding Company (“IHC”) is a company whose principal activity is the holding of investments for long-term purposes, rather than the active conduct of trade or commercial operations. In Malaysia, the classification of a company as an IHC carries specific implications under the Income Tax Act, 1967 (“ITA”), particularly in relation to tax treatment, expense deductibility, and eligibility for capital allowances.
Whether listed or unlisted, a company that meet the IHC criteria is subject to a special provision (Section 60F for unlisted IHC, and Section 60FA for company listed on Bursa Malaysia). These sections impose certain limitations that do not apply to ordinary trading companies (e.g. trading and manufacturing) or investment companies (e.g. unit trust or real estate investment trust).
This article outlines the criteria for determining IHC status, the relevant tax rules under the ITA, and key practical considerations for businesses and tax practitioners alike.
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Determination of an Investment Holding Company
A company is classified as an IHC under the ITA if both of the following conditions are met:
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The company’s main activity is the holding of investments; and
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Not less than 80% of its gross income (excluding business income from the holding of investments) is derived from investments sources such as dividends, interest or rental income.
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The term “gross income from holding of investments” refers to passive income falling under:
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Section 4(c) – Dividends and interest
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Section 4(d) – Rental income (excluding business of holding of investments)
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Income from an active business of investment holding (e.g. maintenance and supporting services are provided) does not count towards the 80% threshold.
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Temporary Cessation of Tenancy and unlisted IHC Status
If a company is not classified as an IHC in a given Year of Assessment (“YA”), but experiences a temporary reduction in investment income due to temporary cessation of tenancy, it may still retain its unlisted IHC status in that YA and subsequent years, provided the temporary cessation of tenancy is due to one of the following circumstances:
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Repair or renovation of the investment property;
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Absence of tenants for up to two years following termination of tenancy;
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Legal injunction or official sanction preventing tenancy; or
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Other circumstances beyond the control of the company.
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Continuity of IHC Status
Once a company is determined to be an IHC for a basis period, it is deemed to remain an IHC in subsequent years unless the company can prove that there is a change of business activity. In other words, the burden of proof lies with the company to demonstrate that it no longer fulfils the IHC criteria in a particular YA (i.e. through a material shift in its income profile or principal activity.
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Tax Treatment of IHC
The tax treatment of an unlisted IHC and listed IHC in Malaysia is significantly different. The ITA provides two distinct regimes:
i. Section 60F: Applicable to unlisted IHC.
ii. Section 60FA: Applicable to listed IHC.
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Each section outlines different rules governing how income is assessed and how expenses and allowances are treated for tax purposes.
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Comparison of Section 60F and Section 60FA
The following table provides a concise comparison between Section 60F for unlisted IHC and Section 60FA for listed IHC.
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Aspect
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Section 60F (Unlisted IHC)
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Section 60FA (Listed IHC)
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Nature of income
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Deemed no gross income from
business source
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Deemed to have gross income
from business (except management income which is genuine and bona fide)
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Management income
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Other income under section 4(f)
of the ITA
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Genuine and bona fide business
income under section 4(a) of the ITA
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Deductibility of expenses
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Accorded to normal rules of
deduction
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Common expenses eligible for
tax deduction is apportioned based on gross income amount from each source
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Permitted expenses deduction rule
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Applicable
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Not applicable
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Capital allowances
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Not applicable
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Applicable, capital allowance
is apportioned based on gross income amount from each source;
Any unabsorbed capital
allowance is disregarded and cannot be carried forward to subsequent year
(except management income which is genuine and bona fide business source)
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Business losses
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Any excess of expenses claim
over income cannot be set off against other source income or carried forward
to subsequent year
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Any excess of expenses claim
over income cannot be set off against other source income or carried forward
to subsequent year (except management income which is genuine and bona fide
business source)
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Tax rate
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24%
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3 tier rate (15%/17%/24%) is
applicable, if the company fulfilled the other condition:
a) Ordinary share capital is less
than RM2.5 million at the beginning of the basis period;
b) Gross income from business
source not exceeding RM50 million;
c) Not more than 20% of the
ordinary share capital is directly or indirectly controlled by a foreign
entity or foreign citizen; and
d) Company is not controlling or
controlled by a related company, which having ordinary share capital
exceeding RM2.5 million at the beginning of basis period.
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IHC not Listed on Bursa Malaysia – Section 60F
For an unlisted IHC, income from dividends, interest, and non-business rental is treated as non-business income. Management fee income is treated as Section 4(f) income.
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Source of income
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Provision under ITA
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Dividend
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Section 4(c)
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Interest
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Section 4(c)
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Rental (without maintenance and
supporting service)
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Section 4(d)
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Management service fees
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Section 4(f)
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A.
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Permitted Expenses
Permitted expenses incurred by an IHC that are not deductible under Section 33(1) may still be allowed under Section 60F through a specific formula:
where:
A：is the total of the permitted expenses incurred for a basis period reduced by any receipts of a similar kind.
B：is the gross income consisting of dividend, interest and rent chargeable to tax for a basis period.
C：is the aggregate of the gross income consisting of dividend and interest (whether such dividend or interest is exempt or not) and rent, and gains from realisation of investments for a basis period.
The amount of permitted expenses allowable as a deduction is capped at 5% of B.
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B.
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Examples of Permitted Expenses
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Directors’ fees
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Wages, salaries, and allowances
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Management fees
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Secretarial, audit and accounting fees
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Telephone, printing and stationery, postage, and rent and other expenses incidental to the maintenance of an office
If there is no aggregate income or if the aggregate income is insufficient to absorb permitted expenses in a YA, the excess cannot be carried forward to future YAs.
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C.
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Treatment of Single-Tier Dividends
From YA2008, single-tier dividend is exempt from tax, and any expenses related to such dividends must be disregarded, including for IHCs. This ensures that no expenses which related to production of gross income from dividend enjoy tax exemption and tax deduction at the same time.
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IHC Listed on the Bursa Malaysia - Section 60FA
For an IHC that is listed on Bursa Malaysia, income is treated as business income, and the company is subject to tax treatment under Section 60FA of the ITA.
A.
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Classification of Income
All income of a listed IHC is deemed to arise from a business source, including dividends, interest, rental, and other investment income. Each source of income has to be assessed as a separate business source.
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Source of income
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Provision under ITA
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Dividend
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Section 4(a)
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Interest
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Section 4(a)
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Rental (with or without maintenance
and supporting service)
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Section 4(a)
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Management service fees
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Section 4(a)
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However, despite this classification, the deductibility of related expenses and allowances is subject to restriction, as explained below.
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B.
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Deduction of Expenses
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Condition
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Tax Treatment
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Income source produces no income
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No deduction allowed for any
expenses incurred for that source.
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Direct expenses exceed income from a
source
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Deduction is restricted to
gross income from that source; excess is disregarded.
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Common expenses allocated across
sources
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Deductible only
proportionately, based on gross income from each source
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Any excess of expenses, whether direct or common, that cannot be deducted in a YA is disregarded and cannot be carried forward to future years except for management income (genuine and bona fide business source).
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Capital Allowances and Industrial Building Allowance
Capital allowances and IBA are available under Schedule 3 of the ITA, but subject to these limitations:
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Capital allowances are allowed only to the extent of adjusted income from the corresponding source;
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If there is no adjusted income or insufficient income, the excess allowances are disregarded and not carried forward [except for management income (genuine and bona fide business source)];
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However, under paragraph 60 of Schedule 3, IBA may still be claimed if the building is used by the tenant as an industrial building.
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Loss Carry Forward Rules (applicable for listed IHC receiving management income only)
From YA 2019 onwards, unabsorbed business losses can be carried forward for up to 10 consecutive YAs, beginning from the year the loss arises. Any balance after the tenth YA will be disregarded.
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Conclusion
In summary, the classification of a company as an Investment Holding Company in Malaysia has significant implications for its tax treatment under the Income Tax Act 1967. Depending on whether the company is listed on Bursa Malaysia, it may be governed by Section 60F or Section 60FA, each with specific provisions on income characterisation, deductibility of expenses, and treatment of business losses.
Accurate determination of IHC status depends on the composition of income, particularly the proportion derived from passive investment sources such as dividends, interest, and rent. Once classified, an IHC is generally deemed to retain that status unless a material change occurs and is supported by evidence.
Given the complexities of IHC tax treatment, including restrictions on deductions, disregard of unabsorbed expenses, and capital allowance eligibility, companies are strongly encouraged to maintain accurate records and seek professional tax advice to ensure compliance and optimise tax planning strategies. In an evolving tax landscape, clear understanding and adherence to these provisions are essential for effective tax governance.
For further information, please visit the official website of the Inland Revenue Board of Malaysia at
https://www.hasil.gov.my/en
KAIZEN Group, together with its associate firms in Malaysia, can help the clients to perform these compliances formalities so as to maintain the Malaysia company in good standing. Please call and talk to our professional accountants in Kaizen for further clarification.
KNOWLEDGE
