Capital Gains Tax (CGT) In Malaysia – Frequently Asked Questions (FAQs)

The capital gains tax (CGT) is a recently implemented taxation system that specifically applies to profits generated from the sale of certain investments. In addition to serving as a new source of revenue for the government, CGT will also impact investment decisions for investors. If you are currently holding an investment, it's important to consider the potential tax implications before selling it for a profit. In this article, we will cover some of the frequently asked questions about CGT, offering clear and concise answers to enhance your understanding of its implications.

1. What kind of disposal will be subject to CGT?
   
   The following types of disposals are typically subject to CGT:
   1. The disposal of unlisted shares of companies incorporated in Malaysia;
   2. The disposal of shares in foreign companies that own real property in Malaysia or shares of another controlled company or both, where the defined value of the real property or shares of the relevant company is not less than 75% of the value of its total tangible asset; or
   3. The disposal of capital assets situated outside Malaysia, which are then remitted into Malaysia. It includes all types of capital assets, including shares on foreign stock exchanges, bonds, real property, etc.
2. What is the meaning of “disposal”?
   
   The term "disposal" refers to sell, convey, transfer, assign, settle or alienate whether by agreement or by force of law and includes a reduction of share capital and purchase by a company of its own shares.
3. Who will be affected by CGT?
   
   As per the CGT regulations, companies, limited liability partnerships, trust bodies, and cooperative societies are subject to CGT on the chargeable income derived from the disposal. However, individual taxpayers will not be subject to CGT. Disposals made by individuals are exempt from CGT but will be subject to Real Property Gains Tax (RPGT) on profits derived from the disposal of real property or shares in a Real Property Company.
4. What is the rate of tax?
   
   In the case of the disposal of capital assets situated in Malaysia that are being acquired before 1 January 2024, taxpayers may choose to pay CGT at either 10% on the chargeable income or 2% of gross disposal price. Conversely, for assets acquired from 1 January 2024 onwards, a fixed rate of 10% on the chargeable income from the disposal of shares applies.
   
   On the other hand, taxpayers holding investments in foreign countries are subject to the prevailing income tax rate on chargeable income received in Malaysia from outside the country.
5. How to determine the date of disposal? According to the CGT guideline, the date of completion of the disposal means:
   1. The date the ownership of the asset is transferred by the disposer; or
   2. The date on which the whole of the amount or value of the consideration for the transfer has been received by the disposer.
   whichever is earlier.
6. Are there any CGT exemptions?
   
   Yes. There are several exemptions allowed under CGT, including the disposal of shares in connection with:
   1. Initial Public Offering approved by Bursa Malaysia;
   2. Internal restructuring (within the same group); and
   3. Venture capital companies.
   In addition, the Minister also exempts taxpayers from the payment of income tax in respect of gains or profits as follows:
   • 1 January 2024 – 29 February 2024: Disposal of shares of a company incorporated in Malaysia not listed on the stock exchange;
   • 1 January 2024 – 29 February 2024: Disposal of shares of a controlled company incorporated outside Malaysia which owns real property situated in Malaysia or shares of another controlled company or both; and/or
   • 1 January 2024 – 31 December 2026: Disposal of capital asset arising from outside Malaysia which is received in Malaysia.
7. What are the tax implications for the disposal of Real Property Company (RPC) shares that were previously subject to RPGT?
   
   Effective 1 January 2024, the sale of unlisted shares in real property companies by companies, LLPs, trust bodies, or cooperative societies is subject to CGT and is no longer taxed under RPGT.
   
   However, the sale of shares in real property companies by individuals is still subject to the imposition of RPGT.
8. When should the CGT return be filed and paid?
   
   Taxpayers who have made domestic capital gains are required to file a CGT return to the Inland Revenue Board of Malaysia (IRBM) for each disposal transaction within 60 days from the date of disposal and make the corresponding tax payment within the same period.
   
   For capital gains from foreign sources, taxpayers are required to declare these gains in their annual tax return upon remittance of gains into Malaysia.
9. What if I incur losses from the disposal of capital assets? Can these losses be carried forward or used to offset against other capital gains?
   
   The losses incurred from the disposal of capital assets can only be offset against the gains of subsequent disposals carried out in the same year or the subsequent year. Any unutilised losses can only be carried forward for a period of ten consecutive years of assessment and must be deducted against the same source of income.
10. Would you be able to define what kind of shares are subject to CGT? Is the CGT applicable to the disposal of preference shares?
    
    According to the CGT guideline, CGT will be imposed primarily on shares with equity elements. It includes ordinary shares, preference shares, redeemable preference shares, convertible bonds, or long-term loans with equity elements. The characteristics of shares with equity elements are as follows:
    1. Entitle to receive non-fixed dividends;
    2. The shareholders' interest in the remaining assets after other claims are settled in a liquidation;
    3. No maturity date; and
    4. The right to vote.
11. Do foreign source capital gains qualify for an exemption?
    
    Foreign source income derived from the disposal of a capital investment is not subject to tax under the Income Tax Act (ITA). However, with the introduction of CGT, the disposal of capital assets is now subject to CGT upon remittance into Malaysia.
    
    Exemption (except for gain from disposal of intellectual property) on foreign source capital gains will be granted if the economic substance conditions are met. To qualify for the economic substance-based exemption, the chargeable persons must:
    1. employ an adequate number of employees in Malaysia; and
    2. incur an adequate amount of operating expenditures in Malaysia.

Given that CGT is becoming one of the prominent topics in Malaysia, it is crucial to have a comprehensive understanding of the tax regulations to ensure that you fulfil your tax obligations.