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What Determines If Your Sdn Bhd Is an Investment Holding Company in Malaysia?

A Malaysian Investment Holding Company (IHC) describes a form of company which has the purpose of holding investment assets. There are two major criteria that will determine if your company is a IHC, your investment income earned would be taxed differently from a normal Sdn Bhd. Knowing this can save you a whole lot of tax money. Let's look at the two criteria with a real life scenario.
kuala lumpur skyline, Petronas Tower, Four Seasons Hotel text written on image: Investment Holding Company

Question:

Hi, I’m John, a businessman and a real estate investor. I have a family of six who consists of my wife and four children. I have incorporated John & Family Estates Sdn Bhd (JFE) for estate planning purposes. Presently, the company holds onto a portfolio of investment assets which include:

  • Investment asset 1: John & Jack Empire Sdn Bhd (J&J)
    JFE owns 60% shareholdings of J&J, a company that operates two cafes and two restaurants in Penang under the J&J brand. In year assessment (YA) 2019, JFE has earned a total of RM 120,000 in dividend income and earned RM 30,000 in management fees.
  • Investment asset 2: 2-Storey Shoplot at Aman Park, Kuala Lumpur (Value: RM 2.5 million)
    This property is fully leased to a global coffee chain without provision of maintenance and support services. (JFE earns 240,000 per annum from leasing this investment property).
  • Investment asset 3: 4-Storey Shoplot at Clover Street, Johor Bahru (Value: RM 1.5 million)
    This property is leased to four separate tenants where their annual rent collection collectively amounts to RM 100,000 in YA 2019. I have hired a licensed property management firm to provide active maintenance and support services to upkeep the shop lot.
  • Investment asset 4: REIT Portfolio (Value: RM 100,000)
    JFE has a portfolio consisting of REITs listed in Malaysia and Singapore. The portfolio has contributed RM 6,000 in income distribution for 2019.
  • Investment asset 5: Fixed Deposit (Value: RM 120,000)
    JFE has received RM 4,000 in interest income from its FD accounts.

However, I still don’t understand, what are the criteria a company must meet to be categorized as an Investment Holding Company in Malaysia and my question is: ‘Is JFE an Investment Holding Company (IHC) in Malaysia?’

Do you rent out a property? Read: 5 Rules You Must Know If You Rent out a Property in Malaysia.

Answer:

For a start, there are two major criteria stated under PR 10/2015 of the Income Tax Act (ITA) 1967 to determine if JFE is an Investment Holding Company in Malaysia. If JFE is identified to be an Investment Holding Company, its income earned would be taxed differently from a normal Sdn Bhd for its expenses allowable for tax deductions are different. The two criteria to determine if you own an Investment Holding Company in Malaysia are:

1. Purpose

A company is classified as an IHC (Investment Holding Company in Malaysia) if holding onto investment assets and the income derived from these assets and it’s the main activity. To name a few, these investment assets include real estate, shares of both public and private listed companies, unit trust, fixed deposit, and cash respectively. For JFE, the company has fulfilled the first criteria for an IHC (Investment Holding Company) classification for the reason of incorporation is solely to hold onto John’s investment assets. As such, we move onto the next criteria.

2. The 80% Gross Income Rule

Once it has passed the first criteria of an Investment Holding Company in Malaysia, a company would only be treated as an IHC (Investment Holding Company) if it earns at least 80% of its gross income from its investment assets. It includes rental income taxed under Section 4(d) and interest and dividend income which are taxed under Section 4(c). Therefore, in JFE’s case:

    • a. John & Jack Empire Sdn Bhd (J&J)
      In total, JFE earns RM 150,000 in gross income from J&J. From it, its RM 120,000 earned is treated as an investment income for it is a dividend. Its remaining RM 30,000 would not be viewed as an investment income as it is a form of business income. Thus,Investment Asset Income = RM 120,000
    • b. 2-Storey Shoplot at Aman Park, Kuala Lumpur
      JFE’s rental income of RM 240,000 is taxed under Section 4(d) as its real estate is leased without provision of maintenance and support services to its tenant. Thus, the full amount is treated as an investment income.Investment Asset Income = RM 240,000
    • c. 4-Storey Shoplot at Clover Street, Johor Bahru
      The rental income of RM 100,000 is taxed under Section 4(a) because it provides maintenance and support services to manage the building. So, the full amount is not an investment income but a business income.Investment Business Income = RM 0

Read also: How to Offset Your Losses From Investment Properties Against Business Income

Question:

“What does it mean by active & comprehensive offering of maintenance and support services to a property?

Based on PR 4/2011, the examples of maintenance services include the maintenance and management of structural elements, stairways, lifts & escalators, corridors, pipes, fire escapes, drains, water tanks, landscape areas, cables, car parks, walls & fences, lightings, … etc of a property.

The landlord may provide the services himself or through his hiring of a professional and licensed property management firm.

  • REIT Portfolio
    Income distributed from REITs is a form of investment income. Thus, its RM 6,000 received would be viewed as such.Investment Asset Income = RM 6,000
  • Fixed Deposit
    Interest derived from FD accounts is a form of investment income. JFE’s RM 4,000 would be treated as such.Investment Asset Income = RM 4,000

Need to declare your rental income? Read also: 8 Things to Be Aware off When Declaring Your Rental Income to LHDN

Now, let us determine if JFE is an Investment Holding Company with the 80% Gross Income Rule:

Source of Income Amount (RM) Amount (RM)
Investment assets:

J&J: Dividends
2-Storey: Rental Income
REIT: Income Distribution
FD accounts: Interest

120,000
240,000
6,000
4,000
370,000
Other Income:

J&J: Management Fees
4-Storey: Rental Income

30,000
100,00
130,000
JFE’s Total Gross Income in Year Assessment (YA) 2019 500,000
JFE’s Percentage of Investment Income from Total Gross Income 74.0%
Is JFE an Investment Holding Company (IHC)? Nope

JFE is not an Investment Holding Company as it fails to fulfil the second criteria, thus, would be taxed as a conventional Sdn Bhd in Malaysia.

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Here is another question:

“What if JFE collects RM 150,000 in dividends from J&J in full without separating the gross income into RM 120,000 in dividends and RM 30,000 in management fees? Would it change the company’s status in Malaysia?”

The answer is as follows:

Source of Income Amount (RM) Amount (RM)
Investment income:

J&J: Dividends
2-Storey: Rental Income
REIT: Income Distribution
FD accounts: Interest

150,000
240,000
6,000
4,000
400,000
Other income:

J&J Management Fees

0
4-Storey: Rental Income 100,000 100,000
JFE’s Total Gross Income in Year Assessment (YA) 2019 500,000
JFE’s Percentage of Investment Income from Total Gross Income 80.0%
Is JFE an Investment Holding Company (IHC)? Yes

As such, JFE is an investment holding company in Malaysia and will enjoy different tax treatments from a conventional Sdn Bhd.

But, My Situation is More Complicated …

Most likely, your situation would be uniquely different and hence, requiring the assistance of a qualified tax professional. If that is you, you may use Joolah.my a platform that quickly refers you to the very best tax, audit and accounting experts in Malaysia.