Issues Relating To Organizational Forms And Taxation. MALAYSIA Skrine

Transcription

1 Issues Relating To Organizational Forms And Taxation MALAYSIA Skrine CONTACT INFORMATION Harold Tan Kok Leng Skrine Unit , 8th Floor Wisma UOA Damansara 50 Jalan Dungun Damansara Heights Kuala Lumpur Malaysia Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (eg., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. In Malaysia, any business enterprise may take one of the following forms - (i) a sole proprietorship; (ii) a partnership; (iii) a locally incorporated company; or (iv) branch of a foreign company. A locally incorporated company is most commonly used by foreign investors as it is commonly a requirement under the local laws to conduct business in Malaysia. All sole proprietorships and partnerships must be registered with the Companies Commission of Malaysia ( CCM ) under the Registration of Businesses Act The Companies Act 1965 ("CA") governs all companies in Malaysia, and the most common company structure in Malaysia is a company limited by shares.

2 A foreign corporation may operate a branch in Malaysia by registering the branch with the CCM before commencing business or establishing a place of business within Malaysia in accordance with the CA. In addition, there are also other business forms which are available in Malaysia such as Operational Headquarters, Regional Distribution Centres, International Procurement Centres and Regional/Representative Office. 2. Are there attributes of the form that you consider unique to your jurisdiction? No. 3. Describe the management and governance structure for each organizational form. The structure of a company would typically include (a) Board of Directors which manages the business and affairs of a company (minimum of two resident directors whose principal or place of residence in Malaysia is required); (b) company secretary (whom shall be a natural person of full age who has his principal or only place of residence in Malaysia); and (c) auditor. 4. Is there a residency requirement for management or owners? In particular, are there restrictions or prohibitions on foreign investors to perform, or have interests in, specific activities? Every company must have at least two resident directors who have their principal or only place of residence within Malaysia. One of the main restrictions on foreign investors in carrying out business in Malaysia is the foreign equity restriction imposed by the Government in specific activities. The Foreign Investment Committee continues to formulate policy guidelines imposing Bumiputera (the indigenous race of Malaysia) equity restrictions in certain sectors such as that of national interest, ports and airports, property, defence, public transportation and telecommunications. For other sectors such as, in the tourism industry, foreign participation is not allowed in outbound operators in the tourism business. In the insurance and takaful industry, foreign equity participation is allowed up to 70%. 5. Describe the extent to which management and owners are exposed to liability. Directors - A director s duties arise under common law fiduciary duty, statutory duties under the CA and the requirements as specified in the Bursa Securities Listing Requirement (for public listed companies). The remedy at common law for a breach of fiduciary duty is an action for damages for loss sustained by the corporation. Breach of statutory duty is an offence under the CA where the director if found guilty, could be ordered to pay damages to the company or repay any profit he had made. In addition, he may also liable to a fine or a term of imprisonment (section 132(3) of CA).

3 In the event of any breach of the Bursa Securities Listing Requirements by the directors, Bursa Malaysia has the power to take enforcement actions and impose penalties on directors who are in default. Actions include issuance of a caution letter, imposition of a fine not exceeding RM1 million, imposition of a moratorium on or prohibition of dealings in the listed company s and/or other listed securities by the relevant director or any other action which Bursa Malaysia may deem appropriate. Shareholders - The liability of the members of a company limited by shares is limited by the Memorandum of Association to the amount (if any) unpaid on their respective shares. The maximum amount of the member s liability to the company is the unpaid portion of then nominal value of his shares, and once this is paid the shareholder need not contribute further to the company, even on an insolvent winding up. The liability of the members of a company limited by guarantee is limited by the Memorandum of Association of the company to such amount as the members may respectively undertake to contribute to the assets of the company in the event of its being wound up. When members at the date of the liquidation are unable to fulfill their obligations, the liquidator may have access to those who were members during the year prior to the commencement of liquidation in respect of liabilities whilst they were members (section 18(1) of CA). An unlimited company is formed on the principle of having no limit placed on the liability of its members. Members are liable to contribute to the assets on a winding up if the company has insufficient assets to satisfy its debt and liabilities. Former members who ceased to be members within the previous year may be liable in respect of debt incurred before they ceased to be members. 6. Ownership interest: (i) how is it represented? (ii) is it transferable?; and (iii) is there a minimum number of owners? i. The subscribers to the memorandum shall be deemed to have agreed to become members of the company and on the incorporation of the company shall be entered as members in its registers of members; and every other person who agrees to become a member of a company and whose name is entered in is register of members shall be a member of the company (section 16(6) of CA). Apart from subscribing to memorandum, other persons who wish to become a member of a company may do so by subscribing for shares of the company. The evidentiary title to a share is provided by the share certificates. A share certificate which specifies the shares held by a member of the company will be prima facie the evidence of the title of the member to those shares. Ownership of shares and membership in a company are established by registering and entering the name of the new member into the register of members (section 158 of CA). ii. The right to transfer shares is incidental to the ownership of those shares. Unless the Articles of Association or a statute prohibits or imposes restrictions, the right of a shareholder to make and have registered a bona fide transfer is unrestricted. In many public companies, there is usually no restriction on the right to transfer shares but

4 private companies are required by CA to provide in their Articles of Association some form of restriction on the right to transfer shares (section 15(1)(a) of CA). An example of a provision that restricts the right to transfer shares is a provision vesting a right in the directors to refuse to register a transfer. Section 103(1) of CA provides that notwithstanding anything in the Articles of Association a company may not register a transfer of shares unless a proper instrument of transfer in the prescribed form has been delivered to the company. The prescribed form of an instrument of transfer is Form 32A (Transfer Form). The Transfer Form must be completed and signed by, or on behalf of, both the transferor and the transferee. Although the term proper instrument of transfer is not defined, case law has established that a proper instrument of transfer is one which must be duly stamped, unless exempted from stamp duty. The transfer is effected when the instrument is registered and the name of the transferee is entered in the register of members in respect of the shares. iii. Section 14(1) of the CA provides that the minimum number of members of a company is two. It requires two or more persons to subscribe their names to the memorandum for the purpose of incorporating a company. With the exception of a private company, whose number of members is limited to 50, there is no limit imposed by the CA as to the maximum number of members a company may have. 7. Is there a minimum capitalization? Section 14(1) of the CA provides for two or more persons to subscribe their names to the memorandum for the purpose of incorporation of company. In certain sectors, the Government and regulatory authorities have imposed capital conditions on companies intending to conduct certain types of businesses. For example, to establish a hypermarket, the minimum capital investment imposed by the Ministry of Domestic Trade Consumerism and Co-operatives in terms of shareholders funds (paid-up capital plus reserve) is RM50 million, to be reviewed every 3 years. The paid-up capital for each additional outlet is RM10 million. 8. Is there a security that can be issued to the public? Under the CA, there are various situations where a company may create a charge for the public such as to secure any issue of debentures, on uncalled share capital of a company, shares of a subsidiary of the company which are owned by the company, on land wherever situate or any interest therein or on book debts of the company. These charges shall be registered with the CCM within 30 days after its creation (section 108 of CA). With regard to the issuance or offer of securities to the public, such transactions are governed by the Capital Markets and Services Act 2007 ("CMSA"). Section 2 of the CMSA defines securities as (a) debentures, stocks or bonds issued or proposed to be issued by any government; (b) shares in or debentures of, a body corporate or an unincorporated body; or (c) unit trusts or prescribed investments.

5 A private company is prohibited from inviting the public to subscribe for any shares in or debentures of the company (section 15(1)(c) of CA). Only a public company is allowed to invite public to subscribe for any shares or debentures. 9. Can the form incur debt, or grant security for debt? Yes. Section 19(1)(c) of the CA provides that the powers of a company shall include, unless expressly excluded or modified by the memorandum or articles, the powers set fourth in the Third Schedule of the Act. Paragraph 13 of the Third Schedule empowers a company to borrow or raise or secure the payment of money in such manner as the company may think fit and to secure the same or the repayment or performance of any debt, liability, contract, guarantee or other engagement incurred or to be entered into by the company in any way and in particular by the issue of debentures perpetual or otherwise, charged upon all or any of the company's property (both present and future), including its uncalled capital; and to purchase, redeem, or pay off any such securities. 10. What is the duration of the form? Can it be renewed? A company, once created by the law, is an independent legal entity with perpetual succession and can only be dissolved by a process of the law, or by way of a winding up. There are two primary methods of winding up under the CA as follows: a) Winding up by the courts: The list of persons who may present petition for the winding up of a company is provided under section 217(1) of CA. Grounds for winding up (section 218 of CA) include where a special resolution is passed, default in filing statutory report, failure to commence business, reduction of members below two or inability to pay debts. b) Voluntary winding up which involves two types of voluntary winding up: Member s voluntary winding up - a winding up of a company where a declaration of solvency has been made and lodged in pursuance to section 257 of CA. It must be preceded by a declaration of solvency. The conduct of liquidation is dominated by the members. Creditor s voluntary winding up - a winding up under Division 3 of Part X of CA other than a members voluntary winding up (section 4(1)). It is a winding up where no declaration of solvency has been made and lodged. The CA gives the control of a creditor s voluntary winding up largely in the hands of the creditors. It is possible to renew the life span of certain forms of entities. Some establishments are renewable for example a representative/regional office of a foreign company. The approval for the establishment of representative/regional office is valid for a period of 2 years and is renewable by an application being made to the Ministry of Industrial Development Authority. 11. Describe the process, customary time period and approximate cost of establishing the form.

6 To incorporate a company in Malaysia, one must apply to the CCM using Form 13A together with a payment in order to determine if the proposed name of the intended company is available. The application will be approved if a name is available and the proposed name will be reserved for the applicant for three months. Certain documents are required to be submitted to the CCM within the three months period to secure the use of the proposed name such as (i) Memorandum and Articles of Association; (ii) Declaration of Compliance (Form 6); (iii) Statutory Declaration by a person before appointment as a director, or by a promoter before incorporation of a company (Form 48A); (iv) additional documents such as original Form 13A, a copy of the letter from CCM approving the name of the company and a copy of identity card of each director and company secretary. The Memorandum of Association documents the company's name, the objectives, the amount of its authorised capital (if any) proposed for registration and its division into shares of a fixed amount. The Articles of Association describe the regulations governing the internal management of the affairs of the company and the conduct of its business. The registration fees payable for incorporation of a company is determined based on the authorized share capital of the company. AUTHORISED SHARE CAPITAL (RM) FEES (RM) 0-100,000 1, , ,000 3, ,001 1 Million 5,000 1,000,001 5 Million 8,000 5,000, Million 10,000 10,000, Million 20,000 25,000, Million 40,000 50,000, Million 50, ,000,001 and above 70,000 The procedure (including the documents to be lodged with the CCM) for registering a foreign company with CCM differs slightly but does not detract from the registration requirement with the CCM. Every foreign company shall, within a month of establishing a place of business or commencing business within Malaysia, lodge with the CCM the registration notice of the situation of its registered office in Malaysia using the prescribed form. The above registration fees payable to CCM also apply to registration of a foreign company. 12. Are there requirements for the government (central or local) to be part of a project or investment vehicle or receive part of the profits arising therefrom (apart from taxes)? None that we are aware of. 13. For what taxes is the form liable? A company is treated as a taxable entity separate from its shareholders and is chargeable to income tax in respect of any trade or business carried on in Malaysia. A company is resident if its business is controlled and managed in Malaysia.

7 Save for such companies in the banking, shipping, insurance and air traffic sectors who are taxed on their global income, a resident company is chargeable to tax on its income derived from, or accruing in Malaysia. Such income derived from outside Malaysia (i.e. foreign sourced income) but remitted to Malaysia, are exempted from tax with effect from the year of assessment (Y/A) A non-resident company is only chargeable to tax in respect of its income derived from, or accruing in Malaysia, but not on its foreign sourced income, irrespective of whether such foreign sourced income is remitted to Malaysia. The income tax rate applicable to a company in Malaysia for Y/A 2009 is 25%. 14. What is the tax treatment of payments to foreign owners? A non-resident who has an investment in a Malaysian company, by way of share or stock holdings, can receive a payment from such a company by way of: a) a dividend; or b) a reduction of the paid-up capital of the company; or c) a distribution in the course of the liquidation of the company. In the case of (b) and (c), no Malaysian tax is payable as the receipts are of a capital nature. In the case of dividends, although these receipts are of an income nature, they too are not taxable in the hands of the non-resident recipients. This is so because under the single tier tax system which was implemented from Y/A 2008, the tax on profits of companies is a final tax and the dividends distributed to the shareholders are tax-exempted in their hands. 15. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? The tax treatment on dividend payouts and distribution of funds on the capital reduction or liquidation of a company applies equally to a resident and non-resident of Malaysia. Withholding tax is not applicable to dividends. However, the income of a non-resident consisting of interest derived from Malaysia is subject to a withholding tax at the rate of 15%, unless: a) it is varied by the Director General; or b) a relevant double tax treaty applies which supersedes the rate provided in the Income Tax Act, In the case of royalty payments to a non-resident, such payments are subject to a withholding tax chargeable at the rate of 10%.