An investment holding company (IHC) is a business whose primary activities involve the holding of investments, and from which not less than 80% of its gross income, other than income from sources derived from conducting a business or holding investments (whether exempt or not), is derived.
Refer to the investment holding company in Malaysia for more information.
An organization that is owned by individuals, families, or a small number of investors is known as a private ownership company. It operates in a certain sector or industry and is actively involved in carrying out commercial operations relating to that sector or industry.
CHARACTERISTICS OF AN INVESTMENT HOLDING COMPANY (IHC)
- IHCs focus on holding stakes in a variety of companies across many industries in order to build a diverse investment portfolio.
- IHCs generate passive income from their investment holdings through dividends, capital gains, and interest payments.
- IHCs often don’t participate in the daily operations of the companies they invest in. Despite having a seat on the board of directors, they don’t really have a say in how the company is run.
- IHCs may benefit from capital gains and dividends receiving favorable tax treatment.
- Investment diversification can lessen the risks associated with the success of particular businesses.
CHARACTERISTICS OF A PRIVATE OWNERSHIP (PO)
- In privately held companies, the owner is actively involved in all aspects of management, operations, and business decisions.
- Private enterprises engage in active operation in a particular economic sector, providing customers with goods or services.
- Private businesses can make decisions and changes quickly since they are not subject to the same reporting and regulatory requirements as public corporations.
- In contrast to organizations that are publicly listed, privately owned businesses are not required to disclose as much financial and operational information.
- Private businesses may have less access to finance than publicly traded businesses, which could restrict their capacity to grow.
ADVANTAGES OF IHC VS PRIVATE OWNERSHIP (PO)
- IHC is capable of managing risk and sustainability as long as the Board of Members has selected Directors to oversee the company’s operations. Private ownership is vulnerable to the risk of death, unexpected demise, and bankruptcy.
- IHC receives funding from membership investments, bank loans, or director loans to the company, whereas PO must make their own investments and will face financial restrictions when purchasing properties with higher selling prices. Stronger financial standing will give IHC a better opportunity to generate capital gains or higher rental returns.
- The tax rate for Sdn. Bhd. is only 18%, while there is no expenditure deduction for PO because all income will be considered other income and will be taxed at 24-25%. Therefore IHC collects allowable expenses like salaries, management fees, or maintenance fees in not more than 5% of the gross income. IHC reduces its total tax liability by 7%.
DISADVANTAGES OF IHC VS PRIVATE OWNERSHIP (PO)
- In order to pay for accounting, audit, COSEC, and audit fees as well as time allocation, IHC must set aside between RM 4,000 and RM 7,000 each year, while PO must merely proceed with paying tax filing fees.
- While it is unrelated to PO, IHC must not carry losses over to the following year in order to benefit from capital allowances.
- For IHC, the bank’s finance margin for residential properties is 60% for the first three properties and 80% to 85% for commercial buildings. For PO, residential properties from the first to the third are worth 90%, and commercial assets from the first to the third are worth 80-85%. From this point on, IHC will require a larger paid-up capital to finance the purchase of properties, either through the allocation of shares to investors or through obtaining formal loans from lenders.
- If IHC has a low financial credit score, banks will require a corporate guarantee from them, which might be costly for the directors.
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