In the final part of our Foreign Ownership series, we consider the setting up of companies in Malaysia for the purpose of purchasing and holding Malaysian property.
While such an exercise involves some customized planning to suit one’s situation and ongoing costs in maintaining the company, there are several compelling benefits which may outweigh the costs, when using a Malaysian company to hold the property as an investment. Here are some of them:
- EASY & FLEXIBLE DISPOSAL / TRANSFER
If the investor decides to exit or dispose of the investment, transferring the company’s shares can be done as an alternative to transferring the underlying property or fractional ownership interests in the property. The transfer of shares results in significant savings on stamp duty for the next buyer (especially if it is a related party). The transfer of shares of a company is also significantly faster than a transfer of property. A dedicated property investment company with a professionally maintained set of accounts and taxes can be an attractive proposition to another property investor.
- ESTATE PLANNING
A company with at least 1 minimum shareholder can survive in perpetuity which can be a useful tool for estate planning. This is especially so if the property investor is elderly, or intends to pass the property to beneficiaries. The transfer of ownership interest in the actual property is generally expensive and time consuming. Instead, the transfer of shares in a company to beneficiaries can be quickly and affordably effected after the Grant of Probate is obtained. This allows the beneficiaries faster access to, and preserves more value in the estate. There are, however, some tax considerations involved in such transfers.
- LOAN FINANCING
Incorporating a company with higher paid up share capital may put the company on better footing to secure bank financing for subsequent purchases of property. A good financial track record of timely loan repayments, supported by a portfolio of properties generating strong rental income flows will enable a company, over time, to secure financing or refinancing more easily and maximize its ability to leverage in its investments.
- INCOME TAX ON RENTAL INCOME
Company tax rate may be lower than a foreigner’s personal income tax rate, depending on the individual’s tax residency status. The maximum personal income tax rate in Malaysia for a non-resident is a flat rate of 30% while the corporate tax rate in Malaysia starts at 17% for the first RM 600,000 per year, and 24% in excess of that. The potential savings of up to 13% on tax payable on rental income derived from the properties could far outweigh the nominal annual costs of maintaining a company. If structured properly to constitute business income, a company could also potentially enjoy more tax deductibles against the rental income compared to if it is under personal income tax.
- REAL PROPERTY GAINS TAX (“RPGT”)
The real property gains tax rates applicable to a company which disposes property decreases from a scale of 30%, 20% and 10% over the course of 5 years. On the other hand, the RPGT rates for foreign individuals is a flat 30% if the property is disposed within the first 5 years. This differential in RPGT rates could make a big difference in the net return on investment of your property.
However, there are also some downside considerations or potential limitations when using a private company to purchase Malaysian property:
- LOWER LOAN TO VALUE RATIO
Loan financing for companies offered by local banks may have some limitations of higher interest rate and lower borrowing limits. For example, the maximum borrowing limit for a company granted by banks is up to 70%.
- REAL PROPERTY GAINS TAX (“RPGT”)
The individual exemption for real property gains tax of either RM 10,000 or 10% of net chargeable gain does not extend to a company. A company is also not granted the ‘once in a lifetime exemption’ for residential property, which is only available to Malaysian citizens and not to foreigners.
As a foreigner, if you choose to establish a company to purchase and hold a property as an investment, you will also need to engage a company secretary to submit the application and registration of your company with the Companies Commission of Malaysia, to prepare the relevant resolutions and forms required for the property purchase etc.
In conclusion, there are several pros and cons to consider when choosing to invest in Malaysian property via a company. Always seek expert advice from the relevant professionals including tax consultants, company secretaries’, lawyers, and bankers, to learn how best to structure your property investments in the most efficient way possible.
This article was written by Shawn Ho (Partner) & Suzanne Fam (Senior Associate) from the corporate practice group of Donovan & Ho. Shawn leads the corporate practice group of Donovan & Ho, and has been recognised as a Notable Practitioner, whilst the firm has been recognised as a Notable Firm for Corporate and M&A by Asialaw Profiles 2020. We are also ranked as a Recommended Firm by IFLR1000 2020.
Our corporate practice group advises on corporate acquisitions, restructuring exercises, joint venture arrangements, shareholder agreements, employee share options and franchise businesses, Malaysia start-up founders and can assist with venture capital funds in Seed, Series A & B funding rounds. We also advise on property transactions and real-estate related tax planning. Feel free to contact us if you have any queries.