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Investment Holding Company (IHC)

What is IHC ? Basis of assessment Sources of income Permitted fraction of expenses etc

Introduction
Investment holding company is usually used as a listing vehicle on Bursa Malaysia as well as serving as a holding company for group of companies. The Government has legislated section 60F with effect from year of assessment 1993 to govern tax treatment. However wef YA 2006, a new definition for IHC

Definition-s 60F(2)
IHC is defined as a company whose activities consist mainly in the holding of investments and not less than 80% of its gross income other than gross income from a source consisting of a business of holding whether exempt or not of an investment is derived therefrom. A business in holding of an investment means a business of letting property and providing maintenance or support services to property S 4(d).

Quantitative income test for an IHC


Section 4 of ITA comprises 6 categories of income (a) to (f). The first 2 are ignored and that leaves c to f. For exam purpose , there will be 4 sources of investment income dividends, interests, discounts and rent

Important points
There are 2 types of income income from holding of investments and all other kinds of income 4 sources of investment income dividends, interest, discounts and rent For all sources, the income is the gross income (before the deduction of expenses)

2 tests
Is the companys main activity the holding of investments- a business of letting RP where a company provides maintenance of support services Is at least 80 % of the companys gross income (whether exempt or not) derived from the holding of investment

Example 1 Kuldip Sdn Bhd describes its principal activity as housing development. Accounts were made up to 30 June. Due to a temporary downturn in business, 80% of the companys gross income for that year came from bank deposits and only 20 % came from housing development. Is Kuldip an IHC ? Answer No even though not less than 80% of its gross income come from investment source, because it was not a company that was mainly involved in the holding of investments. It is a property developer.

Gross investment income Dividend s4c Interest s4c

Taxable x x x + x x x

Exempt x x x=A x x x=x B

Rental with maintenance or support services s4(d) Management income s4(f)


Gross income

where A/B >= 80 %, then the company will be an IHC if no support & maintenance service, then rental income is treated as an investment income under A. S60F

The test for IHC is at least 80% of the gross income comes from investment
RM000

Company Management fees Investment income (include exempt) A Gross income B

1 40

2 60

3 40

160 200

160 220 73

140 180 78

A/B (%) 80

Is it a IHC?

Yes

No

No

The management fees of a IHC will be treated as a s4(f) income , so no CA & CY loss.

Burden of proof
Taxpayer has the onus to show that the company is not a IHC Proper documents must be kept to show otherwise

Maintenance service / support service

Doing all things necessary of the maintenance and management of RP structural elements of building, fire escapes, stairway water tanks , sewers, pipes Exterior parts of RP fields, recreational areas, driveways, walls, ext F&F

Income of IHC
Income from holding of investment shall NOT be treated as a business income Income other than from the holding of investment shall be treated as income falling under s 4(f) such as management fee For income tax computation, rental income is treated as s 4(d)

Berjaya is incorporated to carry on business of letting of properties with maintenance or support services. For year ended 30.6.2011, gross income from various source are as follows: Interest
Dividend Malaysia - Singapore (received) Rental

30,000
45,000 25,000 20,000 120,000

Determine whether Berjaya is a IHC?

Taxable Interest Dividend Investment income (A) Rental with services 30,000 45,000 75,000 +

Exempt 25,000 25,000 100,000 20,000

B
A/B = 100,000/120,000 = 83 % so Berjaya is a IHC Rental income is assessed under s 4(d)

120,000

Sawit Sdn Bhd started business in year 2007 and its main activity is oil palm plantation. Apart from that, Sawit Sdn Bhd also invests in several companies and fixed deposit in several banks. In year 2008, the company receives interest amounting to RM10,000 from the fixed deposit. The company has not generated any income from the plantation activity. The company closes its account on 31 December every year. Even though the income of Sawit Sdn Bhd is 100% derived from the saving in fixed deposit, Sawit Sdn Bhd is not an IHC for the year of assessment 2008 since its main activity is not the holding of investments but oil palm plantation.

Basis of assessment
YA2001and subsequent years Investment income would be assessed on financial year basis.

Tax treatment for IHC


S 60F of ITA for a non listed IHC on Bursa Malaysia S 60FA for an IHC listed on Bursa Malaysia

Source of Income
Where the investment holding company has more than one investment sources, each source of income has to be computed individually, deduct any expenses that are 'wholly and exclusively' incurred in the production of that income in order to arrive at adjusted income Dividend , interest , rental income & s 4(f). Since no business source, CA or CY loss is not available to IHC.

Source of Income
In the event expenses exceeded income, the difference is a permanent loss as investment income is not allowed to have its current year losses to be set off against other income. The preferential treatment of carry forward its losses is only available to business source.

Dividend income
With effect from YA 2008, statutory income of dividend income received by an IHC would be deemed to be total income or part of total income of an IHC for that YA s 53 Finance Act (transitional basis). Therefore, if the source of income is only dividend, the permitted expense are not allowed as a deduction see example 12 of PR 3/2011. With effect from YA 2011, dividend is deemed to include income distributed by a unit trust

An IHC has the following income & expenses for year ended 31.12.2011
Income Dividend income Interest income Rental income Expenses Interest expense on: 100,000 20,000 220,000

- shares acquired
- deposit placed - properties acquired

60,000
120,000 60,000

Fund management fees on shares acquired


Maintenance of properties

20,000
40,000

__________________________________________________
Dividend income Less: Interest expense on: - shares acquired Fund management fees Statutory income Interest income Less: interest expense Statutory income Rental income Less: interest expense Maintenance Aggregate income of IHC 220,000 ( 60,000) ( 40,000) 120,000 120,000 100,000 60,000 20,000 20,000 120,000 80,000 20,000 Deemed total income

(
nil

Expenses general and permitted


There are two type of expenses deductible from the gross income in the case of an IHC in arriving at the adjusted income and the total income
General - Expenses falling under sec 33(2) deducted from gross income to arrive at the adjusted income Permitted - Expenses falling under sec 60F(2) deducted from aggregate income to arrive at the total income

Deductibility of the expenses


The general expenses must comply with the requirements of sec 33 and sec 39 of the ITA It must be wholly and exclusively incurred in the production of gross income. It is only allowed against the particular source of income.

Permitted fraction of expenses s 60F(2)


If the revenue expenses cannot be treated as wholly and exclusively incurred in the production of the particular source of income, then such expenses would only be allowed as deduction if that expenses fall into the ambit of permitted expenses as defined under S 60F(2)

Scope of permitted expenses

a. b. c. d.

Not deductible under s 33(1) but fall under s 60F(2)

Directors fees Wages, salaries and allowances Management fees Secretarial, audit and accounting fees, telephone charges, printing and stationery costs and postage and e. rent and other expenses incidental to the maintenance of an office

Exclusion of expenses
It is important that the expenses allowable under section sec 60F(2) should be expenditure not qualifying for deduction under sec 33(1).
Tax preparation fees relating to filing of tax returns are considered as falling within the meaning of sec 60F(2)

Example Anthony Wee is an expert in fund management. He has been appointed as Director for Sure Save Bhd to solely monitor the share investment of the company. Sure Save Bhd is an investment holding company by virtue of S 60F.

The director fees paid to Anthony would be deductible against dividend income and not form part of the permitted expenses.

Fraction of permitted expenses


When the IHC had incurred the permitted expenses, only a fraction of such PE is given a deduction against aggregate income in arriving at the total income of the company Lower of A* B/4C or 5 % of B

The fraction will be determined as follows: A* B/ 4C Where: A= the total of the permitted expenses incurred for that basis period reduced by any receipts of a similar kind; B= the gross income consisting of dividend, interest and rent chargeable to tax for the basis period;and C= the aggregate of the gross income consisting of dividend (exempt or not), interest ( chargeable) and rent and gains made from the realization of investments for that basis period A * B/4C <= 5% of gross income consisting of dividend, interest and rent for that basis period. No s 4(f) income in B such as management service fee

The definition of C would comprise the following:


C = B + exempt dividend + gains from realization of investment

If the company does not have exempt dividends and gains from realization of investment, C = B
The maximum deduction would thus be 25% of A, computed as follows: A * B/4C = 0.25 A The gain or loss from realization of each investment has to be computed separately. Any loss from realization of a particular investment cannot be part of the C .

Unabsorbed permitted expenses


Where there is insufficient aggregate income to fully set off the fraction of permitted expenses, the balance of the expenditure is not available to be c/f to be set off in subsequent years of assessment. It would be a permanent loss.

Computation of Chargeable Income: Aggregate income (AI) - interest rental or management fees xx

Less: Fraction of permitted expense


A * B or 5 % of B , whichever is lower 4C Less: Approved donation ( restricted to 10% x AI) Total income Deemed total income from dividend Total income (x) xxx (x) xxx xxx xxx

Listed IHC
With effect from YA 2006, listed IHC is given preferential treatment to have its income from holding of investments as business source. Resident listed IHC deriving dividend, interest or rental income shall treat these incomes as a single business source to be assessed as s4(a). However IRB treated each source separately and therefore expenses which meet s 33 are allowed to be set off against each source

Listed IHC s 60FA(2)


All expenses will be deducted against the gross income to arrive at adjusted income Expenses include the permitted expenses such as directors fees But no c/f of losses or offset against aggregate income. Likewise for CA. S 18 of Finance Act 2005 allows listed IHC to continue set off unabsorbed CA and business losses b/f from YA 2005 until fully utilised

IRB - LIHC
The treatment of investment income as business income means that the test of deductibility should not be construed too narrowly. There is no deduction for permitted expenses, so expenses of management and administration of investment activities will be allowed, subject to the normal rules of deductibility. Where such expenses apply to more than one source of income, they must be apportioned on the basis of gross income.

IRB - LIHC
An LIHC will also be eligible for capital allowances in respect of qualifying capital expenditure for assets used to produce income from the investment sources Investment income may come from several different sources, and each source is to be treated as a separate business source.

IRB - LIHC
The ITA gives no guidance on how to identify and distinguish such sources. One should therefore follow the categorization mentioned in section 4 i.e. dividends, interest, discounts, and rent as to the four separate sources. Where more than one source of income exists the allocation for common whether expense or capital allowances, should go by a pro-rata gross income basis.

Restrictions
However the deductibility is limited to the income of the current year. Excess expenditure over the gross income will NOT be carried forward to the following year of assessment unless it is a business source. Unabsorbed capital allowances too cannot be carried forward.

Example 13: Era Baru Bhd is an IHC listed on the Bursa Malaysia. The income and expenses for the year of assessment 2012 are as follows :

Source of income Gross income

Interest expense

Dividend Interest Rental Total gross income


Common expenses

400,000 200,000 Nil


600,000 RM250,000

350,000 160,000 70,000

Common capital allowances RM80,000

Interest expense is a direct expense and not a common expense. The apportionment of interest expense that can be allowed against each source of investment income is computed based on the cost of each investment.

The total income of Era Baru Bhd for the year of assessment 2012 is computed as follows: (RM000) (RM000) (RM000) I. Gross interest 200
Less: Interest expense Common expenses 200,000 X 250,000 600,000 restricted to 160 83.333 243.333 200.00 200 Nil 43.333 (disregarded) 26.667 (disregarded)

Common CA 200,000 X 80,000 600,000

The total income of Era Baru Bhd for the year of assessment 2012 is computed as follows: (RM000) (RM000) (RM000) II. Gross rental Nil

Less: Interest expense


III. Gross dividend Less: Interest expense Less Common expenses 400,000 X 250,000 600,000 restricted to Common CA 400,000 X 80,000 600,000 Total income

70 (disregarded)
400 350 166.667 516.667 400.000 400 Nil 116.667 (disregarded) 53.333 (disregarded)

Nil

Example 14: Investment Bhd is an IHC listed on the Bursa Malaysia. The income and expenses for the year of assessment 2012 are as follows : Source of income Gross Direct income expense Management fee 200,000 350,000 Dividend 1,000,000 600,000 Interest 300,000 150,000 Total gross income Common expenses 1,500,000 250,000

Common capital allowances

200,000

Solution
I. Management fee Less: Interest expense Less: Common expenses 200,000 X 250,000 1,500,000 restricted to Current year business loss Common CA 200,000 X 200,000 1,500,000 (RM000) (RM000) (RM000) 200 350 33.333 383.333 200.00 183.333

200

Nil

26.667 can be c/f

As management fee is treated as part of business activity

II. Gross interest Less: Interest expense Less: Common expenses 300,000 X 250,000 Adjusted income Less: Common CA 200,000 X 200,000 1,500,000

(RM000) (RM000) (RM000) 300 150

50

200 100 40 60

III. Gross dividend Less: Interest expense 600 Less: Common expenses 1,000,000 X 250,000 166.667 1,500,000 Adjusted income Less: Common CA 1,000,000 X 200,000 1,500,000 Aggregate Income Less: CY business loss s44(2) restricted to Loss c/f Total income

1000

766.667 233.333 133.333 100 160 183.333 160.000 23.333 160 Nil

Listed IHC

Nonlisted IHC
No 3 N/A

Availability of Yes business source Number of sources set off CY business loss
Business source Source by source No other than management fee

Company with business income Yes


1 business source s 4a Yes

Listed IHC
Unabsorbed CA c/f
No other than management fee

Nonlisted IHC
N/A

Company with s4(a)

Yes Yes

No other than Utilise management N/A unabsorbed CA fee & loss b/f after 2006 Deduction of fully fraction permitted expense

fully

Advantages of IHC
Any gain from realization of investment would be capital gain and not subject to income tax. Any loss would not be deductible. If the frequency of disposal of investment is too high or the holding period is short, DG can deem the company to be investment dealing company.The gain would then be assessed as business income

Investment dealing company


A comparison between IHC and investment dealing company is shown on page 108. Income are assessed under s 4a

Other tax issues for IHC


Interest income, dividend income and rental income are assessed on receipt basis Foreign interest income remitted is exempted from tax and therefore not included in the quantum of deduction for permitted expenses - Income Tax Exemption Order No 48. If withholding tax is not complied with for payment to a non-resident firm, then it is not a deductible expense

Tax treatment for IHC


Legal fees which is capital in nature such as agreement drawn for the setting up of IHC is not a deductible expense. No capital allowances is available to IHC as it is not carrying on a business