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A holding company in Malaysia is commonly registered with the sole objective and intention of controlling and managing the assets and investment policies of another company. 

Such structures are usually set up by a parent company for specific purposes and holding shares of other businesses. 

A holding company does not offer services or produce goods on its own. Holding companies will usually earn their income from managing the assets and investments of other companies.

It is common in Malaysia to establish a holding company with the main intent of owning various property types in copyright fields and real estate.

What Exactly Is A Holding Company In Malaysia?

According to Lembaga Hasil Dalam Negeri Malaysia (LHDN), an investment holding company (IHC) is a company whose primary activities are the holding of investments. At least 80% of its gross income, other than the gross income from a source consisting of a business of holding of investment (whether exempt or not), is based on the holding of those investments.

Holding companies generally oversee and control the investment plans of other companies. Malaysian holding businesses are no exception. These businesses do not provide self-service. They don’t even have any things to manufacture. These companies are simply engaged on a contractual basis by another parent or host company to handle the investment plans of the other company and maintain track of the client company’s assets.

WHY INCORPORATE A HOLDING COMPANY IN MALAYSIA?

Financial accessibility

• In contrast to the requirement of three years of financial accounts for a typical running company, an IHC is legally permitted to ask for financing and loans as soon as it is incorporated.
• Individuals may also be eligible for financial advantages, particularly if they are regarded to have a high capital risk due to existing financial problems.
• By moving current assets to a properly created IHC, the individual may find themselves in a more advantageous position when applying for future funding.

Tax advantages

• LHDN-allowed expenses can be deducted against rental revenue from business sources, which would otherwise count against an IHC’s gross income limits.
• Consider that the capital rate of taxes for corporations with less than RM2.5 million in the capital, which applies to IHCs under this level, is now 17%.
• This contrasts with the 21% tax rate for individual incomes between RM50,000 and RM70,000 and the 24%-30% tax band for individual earnings over that number.
• Depending on the IHCs and individuals’ specific income and earnings levels, this might result in tax savings.

Risk mitigation

Person A and Person B would own a property (and maybe a home loan) under their joint names in a typical joint ownership property transaction. Person B would have to go through the laborious legal processes to secure ownership of the property if Person A died.

An IHC avoids these issues. With an IHC, Person A’s death would only have a direct impact on the company’s shareholding, rather than its property ownership. Person B would still be in charge if not for the delays and difficulties caused by lengthy bureaucratic formalities connected to inheritance and property ownership.

What are the permitted activities for a holding company in Malaysia?

• Hold assets in securities. 
• Hold assets in stocks. 
• Hold assets in shares. 
• Hold assets in deposits. 
• Hold assets in loans. 
• Hold assets in immovable properties. 
• Offer management services that are related to accounting or support.

TYPES OF HOLDING COMPANIES IN MALAYSIA

There are two types of investment holding companies, each with its own set of rules under the Income Tax Act of 1967.

• Listed investment holding company

Section 60FA says that an IHC is assumed to be a listed IHC if it is listed on Bursa Malaysia for any period throughout the base period for a year of evaluation. The revenue of the mentioned IHC will be considered as company income, and the expenses will be tax deductible in full. On the other hand, unabsorbed losses and capital allowances will not be carried forward.

• Unlisted investment holding company

Section 60F of the Income Tax Act of 1967 stated that an IHC is permitted to claim a deduction for a percentage of your administrative expenditures, such as director’s fees, wages and allowances, management fees, secretarial, audit, accounting fees, and other incidental expenses related to office upkeep. However, such a deduction will be limited to a maximum of 5% of total gross income, which includes dividends, interest, and rent. Any unabsorbed expenditures will be forfeited and will not be carried forward.

How Is A Holding Company In Malaysia Taxed?

• The income tax will be based on the company’s status. That means if the company is enlisted in the Malaysian stock exchange, the company will be considered under Section 60FA of the Income Tax Act.
• However, if the company is not listed on the stock exchange, it will fall under Section 60F of the Income Tax Act of Malaysia. In both cases, the taxation for holding companies will depend on the fact that whether the holding company is listed on Bursa Malaysia or not.
• A holding company in Malaysia incorporated outside of Labuan is also not subjected to the Labuan Business Activity Tax (Requirements for Labuan Business Activity) Regulations 2018.

WHAT ARE THE MAIN ACTIVITIES OF AN INVESTMENT HOLDING COMPANY IN MALAYSIA?

• Holding shares and exercising control over other businesses is a holding company’s core activity. By purchasing their shares or stocks, it can make investments in subsidiary businesses.
• The holding company has the ability to actively manage its subsidiary businesses. This might include financial planning, overall corporate governance, and making strategic decisions for its subsidiaries.
• Holding companies can diversify their investment portfolio by making investments in a range of financial instruments, including stocks, bonds, and other securities.
• Holding corporations can manage and maximize the assets owned by the companies they control.
•  In accordance with applicable laws and regulations, holding corporations may lend money to or offer financial support to its subsidiary businesses.
• Depending on their shareholdings, holding companies may be eligible to earn dividends from their subsidiaries.
• Holding businesses may use various financial techniques, such as tax planning, to improve the company’s tax situation.

WHAT ARE THE TAX REQUIREMENTS FOR MALAYSIAN ICHS?

Whether or not an IHC is listed on the Bursa Malaysia will affect how the IHC is taxed. The following conditions apply to an IHC’s tax treatment:

(a) Section 60F of the ITA, which is applicable to IHCs that are not listed on Bursa Malaysia, and

(b) for an IHC listed on the Bursa Malaysia, section 60FA of the ITA.

Section 60F of the ITA governs the tax treatment of investment holding companies that are not listed on the Bursa Malaysia

Interest, dividends, rental income, including non-business and business-related rental income, and rental income from holding investments are all considered non-business sources of income. Whereas revenue from sources other than the ownership of investments is considered a source of income under section 4(f) of the ITA.

Allowable Expenses

An amount of permissible expenses calculated using the set formula may be deducted from the IHC’s overall income when determining its total income for the assessment year.

The following expenses are permissible for an IHC to incur:

• directors’ fees;
• wages, salaries, and allowances;
• management fees;
• telephone charges, printing and stationery costs, postage, and secretarial, audit, and accounting fees; and
• rent and other costs related to maintaining an office,

Those are not tax deductible in accordance with ITA’s section 33(1).

The following is the formula that must be used to calculate the amount of permissible expenses that can be deducted:

A X B / 4C

where:

A is the total of all permissible expenses paid within a basis period minus any corresponding revenues;

B is the gross income made up of rent, interest, and dividends that is subject to tax during a base period;

C is the sum of the gross income from rent, dividend, and interest (whether or not they are tax-exempt), plus profits on investment realization over a basis period.

The maximum deduction allowed should not be more than 5% of the gross income for that basis period made up of dividends, interest, and rent.

Single-tier Dividend Income

Income from single-tier dividends is not subject to taxation, and any costs incurred in obtaining the payout should not be taken into account.

Any excess of the permissible expenses cannot be carried over to later years of assessment if there is no aggregate income or if the aggregate revenue is insufficient to cover the permitted expenses for a given year of assessment.

Capital Allowance

In general, the applicant is eligible to receive a capital allowance and industrial building allowance for qualified capital expenditures made in relation to assets used for his business. 

The conditions in the basis period for that year of assessment will determine whether or not rental income from the letting of real property is considered a person’s business source for that year of assessment. The applicant’s eligibility for capital allowances and industrial building allowances for his rental income would then be determined by this.

When a company receives rental income (from a business, holding, or investment) from a building and claims capital allowances and/or industrial building allowance, and the rental income is later no longer considered a business source because the company has turned into an IHC in that year of assessment, the company is not eligible for capital allowances in regard to its plant and machinery in that year of assessment, unless the company is listed on the Bursa Malaysia. 

However, as long as the tenant uses the premises for industrial purposes, the company can still claim the industrial building allowance on it.

Interested to form a holding company in Malaysia? If the answer is yes, call us at +65 8756 2027 to set an appointment with our agents. Here at Relin Consultants, we have a lot of experience in helping our clients to set up a holding company in Malaysia, and we would love to help you out as well.