Real Estate Going Global Malaysia

Transcription

1 Real Estate Going Global Malaysia Tax and legal aspects of real estate investments around the globe 2013 Real Estate Going Global Malaysia 1

2 Contents Contents Contents... 2 Real Estate Tax Summary Malaysia... 3 Contacts All information used in this content, unless otherwise stated, is up to date as of 16 April Real Estate Going Global Malaysia 2

3 Real Estate Tax Summary Malaysia General The coordination and regulation of the acquisitions of assets, including real property, by foreign interests, is undertaken by the Foreign Investment Committee (FIC) in the Prime Minister s department through the issuance of guidelines. Compliance with the guidelines is expected. Non-residents may invest in Malaysian property by direct ownership, or through Malaysian incorporated companies or property trusts. During the Invest Malaysia Conference on 30 June 2009, the Malaysian government announced further liberalisation measures to facilitate greater property transactions and investments made by foreign interests. Based on the relaxed FIC guidelines, effective from 1 January 2011, a foreign interest is not allowed to acquire: properties valued less than MYR 500,000 per unit residential units under the category of low and medium low cost as determined by the State Authority properties built on Malay reserve land properties allocated to Bumiputera interest in any property development project as determined by the State Authority. The government had announced that the FIC approval will only be required for the following situations: Direct acquisitions of property valued at MYR 20m and above, resulting in the dilution of Bumiputera interests in the property. Direct acquisitions of property valued at MYR 20m and above, resulting in the dilution of government agency in the property. Indirect acquisitions of property by other than Bumiputera interest through the acquisition of shares, resulting in a change of control of a company owned by Bumiputera interest and/or government agency. This is on the basis that the property held by the company is 50% of its total assets and the property is valued at more than MYR 20m. The following property transactions will no longer require FIC approval, but fall under the purview of the relevant ministries or government departments: Foreigners are allowed to purchase residential units valued at more than MYR 500,000 but falls under the purview of the State Authorities. No conditions will be imposed on the usage of the properties or number of units owned. Real Estate Going Global Malaysia 3

4 Foreign interests are only allowed to acquire agricultural land valued at more than MYR 500,000 or at least five acres in area for the following purposes and must be registered under a locally incorporated company and subject to prescribed conditions: - to undertake agricultural activities on a commercial scale using modern or high technology; or - to undertake agro-tourism projects; or - to undertake agricultural or agro-based industrial activities for the production of goods for export. Foreign interests are allowed to purchase industrial land or commercial units valued at more than MYR 500,000 and must be registered under a locally incorporated company and subject to prescribed conditions. Transfer of property to a foreigner based on family ties is only allowed among immediate family members. Acquisitions of properties by licensed manufacturing companies are exempted from requiring the approval of FIC. Acquisitions of land for property development projects, such as housing or commercial property projects, must be made by a Malaysian-incorporated company, among other prescribed conditions. In general, where an acquisition of assets by foreign interests is made through a locally incorporated company, the permitted foreign equity in the local company is up to a maximum of 70%. Real estate investment trust (REIT)/Property trust fund (PTF) The SC issued new guidelines on REITs on 21 August 2008 (which was subsequently updated on 13 July 2011) to accelerate growth and establish a vibrant and competitive real estate investment trust industry in Malaysia. The new guidelines supersede the earlier Guidelines on Real Estate Investment Trusts issued on 3 January 2005, Guidelines on Property Trust Funds issued on 13 November 2002, and all guidance notes and circulars issued following those guidelines. In addition, the Inland Revenue Board of Malaysia (MIRB) has issued three new Public Rulings in relation to REIT/PFTs in October and November 2012 to replace the Guidelines on Real Estate Investment Trusts or Property Trust Funds (REITs/PTF) dated 29 June They are: Public Ruling No.7/2012 Taxation of Unit Holders of Real Estate Investment Trusts/Property Trust Funds Public Ruling No.8/2012 Real Estate Investment Trusts/Property Trust Funds An Overview Public Ruling No.9/2012 Taxation of Real Estate Investment Trusts/Property Trust Funds Real Estate Going Global Malaysia 4

5 Malaysian REIT/PTFs are trusts governed by general trust law. A trust is not a separate legal entity or person. It is a set of obligations accepted by a person (the trustee) in relation to the property (the trust property), in which such obligations are exercised for the benefit of another person (the beneficiary). The obligations of the trustee and the rights of the beneficiaries are typically set out in writing in the trust deed. In addition, the trustee has a legal duty to act in the best interests of beneficiaries, to act honestly and to exercise the same prudence and diligence as an ordinary person would exercise in carrying on their own business. Malaysian REIT/PTFs are similar to that of a unit trust; that is, all income and capital entitlements of the trust are fixed in accordance with the trust deed, and those entitlements are unitized. Income and capital entitlements of a beneficiary (or unitholder) are determined by reference to the number of units they hold, and the rights attached to those units per the trust deed. Similar to a shareholder's liability in a company, a unitholder's liability is also limited, although the law is not explicit on this. The trustee of a Malaysian REIT holds the real estate or properties in a REIT portfolio in trust for the REIT investors. Malaysian REITs are managed by management companies that have to be approved by the SC. Under the guidelines, only a management company approved by the SC can act as a management company to a REIT/PTF. The management company must: be an entity incorporated in Malaysia (except where the management company is licensed by the SC), be a subsidiary of: - a company involved in the financial services industry in Malaysia - a property development company - a property investment holding company - any other institution which the SC may permit. have a minimum of 30% local equity have minimum shareholders funds of MYR 1m at all times. The initial minimum size of a REIT/PTF should be at least MYR 100m. A REIT/PTF is required, as part of its listing scheme, to undertake an offering to the general public. Any expenses incurred relating to an offer for sale of units shall be borne by the offeror. A REIT/PTF may only invest in real estate, single-purpose companies, real estaterelated assets, non-real estate-related assets, cash, deposits and money market instruments. At least 50% of the fund s total asset value must be invested in real estate and/or single-purpose companies at all times. The fund s investment in non-real estate-related assets and/or cash, deposits and money market instruments must not exceed 25% of the fund s total asset value. Real Estate Going Global Malaysia 5

6 Exchange control rules Subject to the FIC guidelines, a non-resident (other than stockbroking companies and banks) is free to obtain any amount of Ringgit borrowings from licensed onshore banks or resident non-bank companies to finance activities in the real estate sector in Malaysia, or finance/refinance the purchase of residential and commercial properties in the Malaysia, except for the purchase of land only. Effective 1 June 2011, the following relaxations have also been accorded to resident companies wishing to obtain financing: Foreign currency borrowings A resident company is free to borrow any amount in foreign currency from: - its non-resident non-bank related company 1 - resident related 1 companies - licensed onshore banks 2 and licensed International Islamic Banks. However, where the non-resident non-bank-related company is set up solely to obtain foreign currency loans from a non-resident financial institution, the amount of borrowing from the non-resident non-bank-related company continues to be subject to the prevailing aggregate limit of MYR 100m equivalent from non-residents. A resident company is free to refinance outstanding approved foreign currency borrowing, including principal and accrued interest. The thresholds for foreign currency borrowing of MYR 100m in aggregate by a resident company on a corporate group basis is no longer applicable to financing obtained in the above manner. The threshold however still applies to financing outside the above situations and approval will be required from Bank Negara Malaysia (Malaysia s Central Bank). Ringgit borrowings A resident company is allowed to borrow in ringgit, including the issuance of ringgitdenominated debt securities: of any amount from its non-resident non-bank-related 1 company to finance activities in the real sector 3 in Malaysia 1 Related company includes the ultimate holding, parent/head office, subsidiary/branch, associate or sister (common shareholder) company. 2 Licensed onshore banks refer to licensed commercial banks, licensed Islamic banks and licensed investment banks. 3 Real sector is the sector where there is production of goods and services, which includes all industries except for financial services. Real Estate Going Global Malaysia 6

7 up to MYR 1m in aggregate from other non-resident non-bank companies or individuals for use in Malaysia. However, borrowings in ringgit from the non-resident-related company, which is solely set up to obtain foreign currency loans from a non-resident financial institution, continues to be subject to the prevailing MYR 1m limit on ringgit borrowings by residents from non-residents. Previously, borrowing in ringgit of any amount from non-residents required prior permission of the Controller of Foreign Exchange (the Controller). Rental income General In general, income accruing in or derived from Malaysia (net of tax deductible expenses and capital allowances) is taxed at the current prevailing corporate tax rate of 25% unless specific excemptions apply. Rental income derived from properties situated in Malaysia is subject to income tax, and may be taxed as business income or investment income, depending on the circumstances in each case. The MIRB issued a revised public ruling on 10 March 2011 setting out the criteria for rental income to be treated as business income. Letting of real property is deemed as a business source if maintenace services or support services are comprehensively and actively provided in relation to the real property. Maintenance services or support services comprehensively provided refers to services including: doing generally all things necessary (e.g., cleaning services or repairs) for the maintenance and management of the real property such as the structural elements of the building, stairways, fire escapes, entrances and exits, lobbies, corridors, lifts/escalators, compounds, drains, water tanks, sewers, pipes, wires, cables or other fixtures and fittings; and doing generally all things necessary for the maintenance and management of the exterior parts of the real property such as playing fields, recreational areas, driveways, car parks, open spaces, landscape areas, walls and fences, exterior lighting or other external fixtures and fittings; or If a person only provides security services or other facilities, that person is not providing maintenance services or support services comprehensively. Such services may be provided by the person himself who owns or lets out the real property or by another person or firm hired by him. Hence, rental income is treated as business income. Expenses which are allowed a deduction is the direct expenses that is wholly and exclusively incurred in the production of income such as assessment and quit rent, Real Estate Going Global Malaysia 7

8 interest on loan (taken to finance purchase of real property rented out), fire insurance premium, expense on rent collection and rent renewal, and repairs. Capital allowances can also be claimed on qualifying expenditure incurred on certain types of buildings as well as plant and machinery used in the business. Costs that are capital in nature, such as stamp duty and legal costs incurred on the acquisition of property, are not tax-deductible, but would be regarded as forming part of the acquisition price of the property for real property gains tax purposes. Notwithstanding the above, there s a special treatment provided for letting of a building to an approved Multimedia Super Corridor (MSC) 4 status company, which are regarded as carrying on a business and the income received therefrom is considered as a business income. Without the comprehensive and active provision of maintenance services or support services, the letting of real property is deemed as a non-business source where rental income is treated as investment income and the rules provide for different types of deductions. REIT/PTF With effect from year of assessment 2005, rental income from the letting of real property received by REIT/PTF is to be treated as business income. The undistributed income of the REIT/PTF will be subject to normal corporate income tax, currently at 25%. Due to new tax transparency legislation, distributed income by REIT/PTF will not be taxed at REIT/PTF level, provided that the REIT/PTF distributes 90% of its income. Instead, the unitholders will be taxed on such distributions received. Tax-deductible expenses are those revenue expenses wholly and exclusively incurred in the production of income and normally includes the REIT/PTF manager s remuneration. However, a trustee fee does not qualify for tax deduction, since it is not wholly and exclusively incurred in the production of gross income. Effective year of assessment 2006, fees for consultancy, legal and valuation services incurred in the establishment of REIT/PTF will also be allowed as a tax deduction. Where the property has not commenced to produce rental income, no deductions will be allowed. Pursuant to the Public Ruling No.9/2012 Taxation of Real Estate Investment Trusts/Property Trust Funds, if a building has not been rented out, a rental source is not considered as having been commenced. Hence any related expenses incurred prior to the commencement of that source of income are not deductible against other existing rental income, which is not consistent with the tax legislation. As to-date the MIRB has not issued any formal position on this issue. 4 MSC or MSC Malaysia encompasses an integrated environment that encourages innovation, helps local and international companies to reach new technological frontiers, promotes partnership with global IT players and provides opportunities for mutual enrichment and success. Real Estate Going Global Malaysia 8

9 Depreciation and capital allowance for industrial buildings Depreciation of land and buildings does not qualify for tax deduction against rental income, and capital allowances are not available for residential and commercial buildings. Where a building can be classified as an industrial building, e.g. factory, warehouse, certain hotel buildings, etc., and it is used for business or leased to a tenant who uses the premise as an industrial building, a capital allowance known as an industrial building allowance (IBA) can be claimed against the business or rental income of the owner of the building. The initial allowance is 10%, and the annual allowance is 3% of the building cost. Apart from this, buildings constructed under an agreement with the government on a build-lease-transfer basis, approved by the Minister of Finance, qualify for annual allowance of 6%. In addition, the following types of buildings qualify for allowances of 10% per annum: Buildings used as living accommodation for employees by a person engaged in a manufacturing business, hotel or tourism business and approved service project Buildings used as a school or an educational institution approved by the minister of education, or any relevant authority, or for the purposes of industrial, technical or vocational training approved by the minister Buildings used as a warehouse for storage of goods for export, or for storage of imported goods to be processed and distributed or re-exported Buildings used for the provision of child-care facilities Building (self-constructed or purchased) used as old folks care centre approved by the Social Welfare Department. Pursuant to the Public Ruling No.9/2012 Taxation of Real Estate Investment Trusts/Property Trust Funds, the IBA for building used in a hotel business can be claimed if the REIT/PTF is the owner and operates the hotel business, which is not consistent with the tax legislation. As to-date the MIRB has not issued any formal position on this issue. Capital allowances may be claimed on qualifying capital expenditures incurred on plant and equipment used in a business of letting property. The initial allowance is 20%, and the annual allowance varies depending on the type of plant and equipment used. The rates of annual allowance are as follows: Office equipment 10% Furniture and fittings 10% General plant and machinery 14% Heavy machinery and motor vehicles 20% Environmental protection equipment 20% Real Estate Going Global Malaysia 9

10 Computer and information technology assets 5 80% Motor Vehicle (private passenger car type) 6 20% Accelerated capital allowances are eligible for certain plant and equipment or promoted industries. Expenditure on assets with life span of not more than 2 years is allowed on a replacement basis. In general, capital allowances on qualifying plant expenditure can only be claimable against business income and not investment income. As such, only rental income treated as business income will be entitled to the relief of capital allowances. In relation to a REIT/PTF, where there is insufficient adjusted income to absorb the capital allowances for that year of assessment, the unused capital allowances shall be disregarded and will be permanently lost. Costs of obtaining finance Costs of obtaining finance (other than interest), including legal costs and stamp duty on new loan transactions, are generally not deductible. However, specific tax deduction is given for financing costs incurred in relation to the issuance of certain Islamic securities/bonds up to year of assessment This incentive has been extended for another five years, until year of assessment Capital gains on sale of real property Any gains on disposal of real properties (chargeable asset), or shares in real property companies (chargeable asset) would be subject to the following RPGT rates with effect from 1 January 2013: Holding period RPGT rate Disposal within 2 years of acquisition 15% Disposal after 2 years and within 5 years of acquisition 10% Disposal after 5 years of acquisition Exempt A real property company is a controlled company that owns or acquires real property or shares in real property companies with a market value of not less than 75% of its total 5 The accelerated capital allowance for computer and information technology assets are not available to a company which has been granted incentives under the Promotion of Investments Act 1986 (PIA), i.e., Pioneer Status and Investment Tax Allowance; or reinvestment allowance. These rules are effective for Year of Assessment (YA) 2009 to YA Motor vehicles excluding motor vehicles licensed for commercial transportation of goods or passengers are subject to a restriction on the maximum qualifying expenditure: - New vehicles purchased on or after 28 October 2000 where on-the-road price is MYR 150,000 or less subject to a maximum qualifying expenditure of MYR 100,000; and - Vehicles other than the above is subject to a maximum qualifying expenditure of MYR 50,000 Real Estate Going Global Malaysia 10

11 tangible assets. A controlled company is a company that does not have more than 50 members and is controlled by not more than five persons. Where the disposal of property is by a property owner to a REIT/PTF approved by the SC, exemptions from RPGT and stamp duty have been provided for. This exemption applies only to acquisitions of properties by an approved REIT/PTF. Where the approved REIT/PTF subsequently sells properties, the RPGT and stamp duty exemption would not apply. Dividends When a company resident in Malaysia pays a dividend, tax is deducted, or is deemed to be deducted, from the gross dividend at the current rate of 25%. With effect from the year 2004, a two-tier tax rate applied to Malaysian resident companies which, among other requirements, have a paid-up capital of MYR 2.5m and less. They are taxed at the rate of 20% on the first MYR 500,000 of chargeable income, while any income in excess of MYR 500,000 will be taxed at the normal rate of 25%. However, with effect from year of assessment 2010, the reduced rate of 20% shall not apply if more than: 50% of the paid-up capital in respect of ordinary shares of the company is directly or indirectly owned by a related company 7 50% of the paid-up capital in respect of ordinary shares of the related company 7 is directly or indirectly owned by the first mentioned company 50% of the paid-up capital in respect of ordinary shares of the first mentioned company and the related company 5 is directly or indirectly owned by another company. Dividends distributed by such companies are deemed to be franked at the rate of 25%. A new single-tier system was introduced effective year of assessment 2008 to replace the previous tax imputation system whereby tax is levied on the profits of the company as a final tax. Dividends subsequently received by the shareholders are exempted from tax. A transitional period has also been introduced, whereby companies under the tax imputation system which has unutilised Section 108 balances as of 31 December 2007, are given a six-year period (from 1 January 2008 to 31 December 2013) to use the Section 108 credits for payment of franked dividends. The savings and transitional provisions also prohibit the claiming of tax credits by shareholders during the transitional period in the following circumstances: 7 Section 107C(4C) ITA defined Related company means a company that has a paid-up capital in respect of ordinary shares of more than 2.5 million at the beginning of the basis period for a year of assessment. Real Estate Going Global Malaysia 11

12 The receipt of dividends from shares that are not held continuously for 90 days or more from the date of purchase of shares (exclude shares in public listed companies); or The receipt of non-cash dividend; or The receipt of dividends that relate to non-ordinary shares 8 Taxation of REIT/PTF The income of a REIT/PTF, consisting of rental, interest (other than interest which is exempt from income tax) and other investment income derived from or accruing in Malaysia (after deducting tax allowable expenses), will be taxable at the normal corporate tax rate (currently at 25%). The tax transparency system however, exempts the REIT/PTF from such taxes in a year of assessment if the REIT/PTF distributes at least 90% of its total taxable income in the same year of assessment. If less than 90% of its total taxable income is distributed in a year of assessment, then the tax transparency system would not apply and total taxable income of the REIT/PTF would continue to be taxed, currently at the prevailing rate of 25%. Income which has been taxed at the REIT/PTF level will have tax credits attached when subsequently distributed to unitholders. Dividends received by the REIT/PTF, if any, may have tax credits attached, representing tax deduction at source at the prevailing tax rate of 25%. Such tax credits will be available for set off either wholly or partly against the tax liability of the REIT/PTF. Any excess of the tax credits over the tax liability will be refundable to the REIT/PTF. Exempt Income Since the REIT/PTF are considered to be unit trusts, certain income is exempt from tax, including interest or discount from the following investments: securities or bonds issued or guaranteed by the Government; debentures or Islamic securities, other than convertible loan stocks, approved by the Securities Commission; Bon Simpanan Malaysia issued by Bank Negara Malaysia; interest income from Islamic securities originating in Malaysia, other than convertible loan stock issued in a foreign currency and approved by the Securities Commission and Labuan Financial Services Authority; and 8. Section 40(3) ITA: Ordinary shareholding means holding of shares other than shares that carry only a right to any dividend that is of a fixed amount or at a fixed rate per cent of nominal value of the shares, or a fixed rate per cent of the profits of the company. Real Estate Going Global Malaysia 12

13 bonds and securities issued by Pengurusan Danaharta Nasional Berhad. Interest paid or credited by any bank or financial institution licensed under the Banking and Financial Institutions Act 1989 or the Islamic Banking Act 1983 is tax exempt. Income received by the REIT/PTF from overseas investment is also tax exempt. The income exempted at the REIT/PTF level is also exempt from tax upon distribution to unitholders. Foreign sourced income earned by the REIT/PTF is generally not taxable in Malaysia. Foreign source income is only taxed in Malaysia where the recipient is a financial institution or seen to be dealing in investments. Foreign sourced income earned by the REIT/PTF will retain its character when distributed to its unitholders so that no withholding tax will apply. Taxation of REIT/PTF unitholders The taxation of unitholders will depend on whether the unitholders are Malaysian residents or non-residents. Tax treatment of unitholders The tax treatment is dependent on whether the REIT/PTF has distributed 90% or more of its total taxable income. The REIT/PTF distributes 90% or more of taxable income Where 90% or more of the REIT/PTF s total taxable income is distributed by the REIT/PTF, distributions to unitholders will be subject to tax based on a withholding tax mechanism at the following rates: Unitholders Withholding tax rate Individuals and all other non-corporate investors such 10% 10 as institutional investors 9 (resident and non-resident) Non-resident corporate investors 11 25% Resident corporate investors 0% 12 The withholding tax is a final tax and resident individuals and non-corporate investors will not be required to declare the income received from the REIT/PTF in their Malaysian tax returns. No withholding tax is applicable on distributions to resident corporate investors. Resident corporate investors are required to report the distributions from the REIT/PTFs in their normal corporate tax return and bring the taxable REIT/PTF distributions at the normal corporate tax rate, currently at 25%. 9 Institutional investor means a pension fund, collective investment scheme or such other person approved by the Minister of Finance. 10 This reduced rate of withholding tax is effective from 1 January 2012 to 31 December Company means an incorporated body. 12 Corporate unitholders who are tax resident in Malaysia would have to file tax returns and declare such REIT/PTF income which is taxed at 25%. Real Estate Going Global Malaysia 13

14 The REIT/PTF distributes less than 90% of taxable income Where less than 90% of the total taxable income is distributed, the REIT/PTF is not entitled to the exemption. The REIT/PTF would have paid taxes on the taxable income for the year. The distributions made by the REIT/PTF of such taxed income will have tax credits attached. The tax treatment for unitholders would be as follows: Resident individuals Resident individuals will be subject to tax at their own marginal rates on the distributions and be entitled to tax credits representing tax already paid by the REIT/PTF. Resident corporate investors Resident corporate investors are required to report the distributions from REIT/PTFs in their normal corporate tax return and bring such income to tax at the normal corporate tax rate, currently 25%. Where tax has been levied at the REIT/PTF level, the resident corporate investors are entitled to tax credits. Foreign unitholders No further taxes or withholding tax would be applicable to foreign unitholders. Foreign unitholders may be subject to tax in their respective jurisdictions depending on the provisions of their country s tax legislation and the entitlement to any tax credits would be dependent on their home country s tax legislation. Distributions representing specific exempt income or gains on disposal of investments at the REIT/PTF level will not be subject to further income tax when distributed to all unitholders. Disposals by unitholders Malaysia does not impose tax on capital gains. Therefore, gains on the disposal of the units by unitholders which are considered to be capital in nature will not be subject to income tax. If a unitholder has held the Units for long-term investment purposes, any gains arising from the disposal of the Units should be considered capital gains and hence, not subject to Malaysian income tax. However, if the Units have been held as trading assets of a trade or business carried on in Malaysia, the gains arising from the sale of Units will be seen to be part of business income and subject to normal income tax. Dealers in securities and financial institutions in Malaysia (e.g. insurance companies and banks) will normally be subject to income tax since such gains will be seen to be part of their business income. Foreign dealers and financial institutions with no business presence or permanent establishment in Malaysia will not be subject to Malaysian income tax on such gains. Such gains may still be subject to tax in each foreign investors respective jurisdictions. In the event of a winding up of REIT/PTF, the taxation of gains received in the form of cash or residual distribution will depend on whether the gains are seen to be capital gains or normal business income. Real Estate Going Global Malaysia 14

15 Unitholders electing to receive their income distribution by way of investment in the form of new units will be regarded as having purchased the new units out of their income distribution. Unit splits issued by REIT/PTF are not taxable in the hands of unitholders. Loss carryforward Income tax Losses can only be carried forward for offset against future business income if the losses had been incurred in the course of carrying on a business. As a result, if the leasing of properties qualifies as a business activity for income tax purposes, losses incurred would be available for carryforward. However, effective year of assessment 2006, accumulated tax losses and unabsorbed capital allowances of a dormant company shall be disregarded in the event there is a change of more than 50% in the company s direct/immediate shareholdings. Any losses incurred by a REIT/PTF or an investment holding company from the letting of properties cannot be deducted against income from other sources of income in a basis period. In addition, the losses cannot be carried forward to offset against future business income. Related party transactions and thin capitalisation rules The tax authorities have issued the Transfer Pricing Guidelines since 2003 wherein all transactions between related parties are required to be conducted on an arm s length basis. Under this principle, the conditions made or imposed between two related parties in their commercial or financial transactions must not differ from those that would be made between independent parties engaging in similar transactions under similar circumstances. Section 140A of the Act came into effect from 1 January The salient point of Section 140A is that transactions with associated persons for acquisition or supply of property or services must be at an arm s length price. If the Director General has reason to believe that the transaction price is too low or too excessive, the Director General is empowered to make adjustments on transactions of goods, services or financial assistance carried out between related companies based on the arm s length principle as well as prescribe thin capitalisation rules which seek to restrict tax deduction on excessive interest, finance charges, other consideration paid or payable or losses suffered on financial assistance granted by associated person. However, the implementation of the thin capitalisation provision has been deferred until 31 December It is expected that the safe harbour debt-equity ratio for thin capitalisation rules is 3:1. Hence, due care should be exercised in related party debt situations to ensure that the debts do not exceed the safe harbour ratio to avoid any unnecessary disallowance of the interest expenses. In addition to this, the Income Tax (Transfer Pricing) Rules 2012 (in relation to Section 140A of the Act) and Income Tax (Advance Pricing Arrangement) Rules 2012 (in relation to Section 138C of the Act) were introduced on 11 May 2012, with Real Estate Going Global Malaysia 15

16 retrospective effect from 1 January One of the key features in the new Transfer Pricing Rules is the requirement for taxpayers to prepare contemporaneous Transfer Pricing Documentation, i.e. either at the point of developing the inter-company transaction or prior to the submission of the company's tax return. The Detailed Transfer Pricing Rules 2012 and Advanced Pricing Arrangement Guidelines 2012 have been issued on 20 July In view of the above, any payment made to a related entity will need to take into consideration the abovementioned requirements and compliance with the arm s length standard. Other relevant taxes Stamp Duty Stamp duty is imposed on a wide range of documents. The rates vary with the type of document and amount involved. The stamp duty payable for transfer instruments for real property is 1% to 3% of the market value of the property. The stamp duty payable for transfer instruments for shares is 0.3% of the consideration. Effective 13 September 2003, instruments of transfer of real property by any person to a REIT/PTF approved by the SC will be exempted from stamp duty. The sale of property by the REIT/PTF is not exempt, and the purchaser has to pay the stamp duty. Assessment and Quit rent A property tax called assessment rates is levied on the gross annual value of property, and is payable to the city or town council. Quit rent is a form of land tax, and a nominal amount is payable to the state land office. Real Estate Going Global Malaysia 16

17 Contacts Malaysia Contacts Advisory Datuk Mohd Anwar Yahya Tel: +60 (3) Assurance Mohammad Faiz Azmi Tel: +60 (3) Manjit Singh Tel: +60 (3) Tax & Legal Jennifer Chang Tel: +60 (3) Real Estate Going Global Malaysia 17

18 This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in the publication, and, to the extent permitted by law. PwC does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it PwC. All rights reserved. Not for further distribution without the permission of PwC. PwC refers to the network of member firms of PricewaterhouseCoopers International Limited (PwCIL), or, as the context requires, individual member firms of the PwC network. Each member firm is a separate legal entity and does not act as agent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of its member firms nor can it control the exercise of their professional judgment or bind them in any way. No member firm is responsible or liable for the acts or omissions of any other member firm nor can it control the exercise of another member firm s professional judgment or bind another member firm or PwCIL in any way.