LAW KUAN YEW & CO.
THE INTRODUCTION OF CAPITAL GAINS TAX ON DISPOSAL OF UNLISTED SHARES IN MALAYSIA
Capital gains tax
The proposal to implement the capital gains tax on disposal of unlisted shares in Malaysia was first introduced last year in Budget 2023. Pursuant to the recent Budget 2024 announcement made on 13th October 2023 by YAB Dato’ Seri Anwar Bin Ibrahim, the Prime Minister and Finance Minister of Malaysia, capital gains tax (“CGT”) will be imposed on disposal of unlisted shares in Malaysian companies with effect from 1 March 2024.
Currently, there is no CGT imposed on gains from disposal of shares in companies, except tax on gains from the disposal of real property and shares in real property companies under the Real Property Gains Tax Act 1976 at a rate of 10% to 30% depending on the holding period.
(A company is a ‘real property company’ where, as at or after 21 October 1988, it owns or acquires real property or shares or both, the defined value of which is not less than 75% of the value of its total tangible assets (i.e., the aggregate of the defined value of real property or shares or both and the value of other tangible assets).
Capital gains tax
According to the Government, to reduce the cost of doing business, CGT exemption is considered for disposal of shares relating to the following:
(i) Initial Public Offering (IPO) approved by Bursa Malaysia;
(ii) Restructuring of shares within the same group; and
(iii) Venture capital companies
(To note that all or any of the above may be subject to certain conditions)
CGT rates
Under the implementation of the CGT on the disposal of unlisted shares in Malaysian companies, the CGT rate to be imposed was proposed as follows:
| Shares Acquisition Date | CGT Rate |
|---|---|
| Before 1 March 2024 | The taxpayers may choose: i. 10% on the net gain of the disposal of shares; or ii. 2% on the gross sales value. |
| From 1 March 2024 | 10% on the net gain of the disposal of share |
The above tax measures provided by the Government would suggest that, with effect from 1 March 2024:
- If a shareholder in a company (“Selling Shareholder”) wishes to sell his shares, the Selling Shareholder will be subject to CGT at the rate of either 10% on the net gain of the disposal of shares or 2% on the gross sales value, if the Selling Shareholder had acquired the shares in the company before 1 March 2024.
- If the Selling Shareholder wish to sell his shares, the Selling Shareholder will be subject to CGT at the rate of 10% on the net gain of the disposal of shares, if the Selling Shareholder had acquired the shares in the company after 1 March 2024.
There are still many uncertainties at this moment on the application, operation and implementation of the CGT on disposal of unlisted shares in Malaysian companies. Perhaps the following areas (among others) require further explanation and guidance from the Government:
- The definition of ‘acquisition’ – whether this applies to the scenario where the Selling Shareholders are also the founders/first subscribers of the shares in the company? If so, what is the method of computation or valuation of the net gain?
- Who will be defined as ‘taxpayers’ - whether they include individuals and entities who are Malaysians and non-Malaysians?
- Indirect disposal of shares, for e.g., share swaps or issuance of shares as settlement of consideration in a transaction – will CGT apply?
- In the sale of shares in a real property company – whether RPGT or CGT applies?
In view that the effective date of CGT on disposal of shares is less than 5 months, we can anticipate further developments at least through the finance bill which should be issued soon (hopefully) and guidelines by the Government.
16 October 2023
Elaine Law
Partner
elainelaw@lkyco.com.my