Capital Gains Tax and the Exemption

Order
Beginning 1 January 2024, capital gains tax is imposed on all gains or profits
received by a Chargeable Person derived from the following:

(a) Disposal of unlisted shares in companies incorporated in Malaysia;

(b) Disposal of shares of a controlled company incorporated outside Malaysia

that owns real property situated in Malaysia or shares of another controlled
company situated in Malaysia; and

(c) Disposal of capital assets situated outside Malaysia but gains or profits
derived from such disposal is received in Malaysia.

However, the Government of Malaysia gazetted the Exemption Order on 29

December 2023, which provides Chargeable Persons with an exemption from
incurring capital gains tax on the gains or profits deriving from the disposal of
unlisted shares of a company incorporated in Malaysia made on or after 1
January to 29 February 2024. The Exemption Order was intended to provide
Chargeable Persons with a grace period to make the necessary adjustments and
preparations for the implementation of capital gains tax. Thus, the effective
date of capital gains tax technically falls on 1 March 2024.

However, it must be noted that the Exemption Order does not apply to gains or
profits considered as business income under Section 4(a) of the Income Tax Act
1967. Also, exemptions from capital gains tax may apply to internal group
restructurings, initial public offerings approved by Bursa Malaysia, and venture
capital investments subject to certain conditions, as announced during Budget
2024.

On 16 January 2024, it was announced by the Government of Malaysia that unit

trusts will be exempted from capital gains tax and taxes on foreign-sourced
income, with the exemption on foreign-sourced income being effective from 1
January 2024 until 31 December 2026, whilst the exemption on capital gains tax
is effective from 1 January 2024 until 31 December 2028.
Date of Disposal
The date of disposal of unlisted shares or capital assets is subject to two factors:
(1) whether there is a written agreement for the disposal of the unlisted shares
or capital assets; and (2) whether the disposal or acquisition of such unlisted
shares or capital assets requires any regulatory approval.

CGT Tax Rate

A Chargeable Person must provide details of the disposal of unlisted shares or
capital assets and make payment of the applicable capital gains tax on the gains
or profits derived from such disposal within 60 days from the date of disposal of
the unlisted shares or capital asset. The capital gains tax rates are crucial
elements to all Chargeable Persons, which are as follows:
In the event a Chargeable Person incurs an adjusted loss from disposing of
unlisted shares or capital assets, the adjusted loss can be carried forward as a
deduction against the Chargeable Person’s subsequent disposal of unlisted
shares or capital assets for a period of ten consecutive years of assessment. Any
residual amount at the end of this period will no longer be eligible for
deductions.

Effect of Capital Gains Tax on Real Property

Gains Tax
Before the introduction of capital gains tax in Malaysia, the disposal of real
property or shares in a real property company generally attracted Real Property
Gains Tax (RPGT). A real property company (RPC) can be determined as a
controlled company that owns property or shares in another real property
company, or both, and the defined value of its property or shares in another real
property company, or both, is not less than 75% of the value of its total tangible
assets.

The coming into force of capital gains tax has resulted in its replacement of real
property gains tax with respect to the disposal of shares in a real property
company by Chargeable Persons only. Meanwhile, gains or profits derived from
the disposal of real property by Chargeable Persons continue to be subject to
real property gains tax unless such gains or profits are treated as a revenue
receipt, for example, disposals of real property by property developers, which
would then be subject to income tax.

For reference, the current real property gains tax rates in Malaysia are provided
below:

Please visit our article on Real Property Gains Tax to get a general overview and
understanding of real property gains tax in Malaysia.

Conclusion
With the imposition of capital gains tax in Malaysia, the element of capital gains
tax will be an added factor to be considered when parties strategize for and
engage in negotiations and transactions with respect to acquiring and disposing
of unlisted shares and capital assets. As the country begins its navigation
through the implementation of capital gains tax, it is important for all
businesses, entrepreneurs and investors to understand capital gains tax and its
future developments.

If you would like to seek legal advice on strategising or structuring your disposal
of unlisted shares or capital assets in light of capital gains tax having come into
force, please reach out to us, and we will be pleased to assist you with your
enquiry.