How to set up holding company in Malaysia?
Investment Holding Companies (IHCs) in Malaysia offer a strategic avenue for investors to manage and control diverse portfolios. This article delves into the intricacies of establishing and operating an IHC, providing insights into the regulatory framework, permissible activities, and the tax landscape. We explore the advantages of setting up a holding company in the Malaysian business landscape, analyzing its appeal for foreign investors and the various considerations involved in its incorporation. Additionally, we examine the specific rules and requirements governing IHCs, shedding light on the tax implications for both listed and non-listed entities. As we navigate through the article, we uncover the potential drawbacks associated with IHCs, offering a balanced perspective for those contemplating this business structure. With these complexities in mind, follow RS 36 Solutions to delve into the intricacies of Malaysia’s Accounting landscape to help you navigate this financial terrain effectively.
Overview of Establishing a Holding Company in Malaysia
A holding company in Malaysia serves as a strategic entity for overseeing and directing the investment strategies and assets of other companies. This particular business structure doesn’t engage in providing services or manufacturing goods independently. Instead, its revenue is derived from efficiently managing the assets and investments of other companies.
Functioning as the representative of the parent company for subsidiary businesses, a holding company in Malaysia possesses voting rights not only within the parent company but also extends its influence to other companies. The primary purpose behind establishing a holding company in Malaysia lies in its incorporation with the aim of acquiring diverse assets, including intellectual property and real estate.
Understanding an Investment Holding Company (IHC)
Advantages of Establishing a Holding Company in Malaysia:
Establishing a holding company in Malaysia presents numerous advantages for global investors, capitalizing on the country’s strategic location and favorable business environment. Key benefits include:
Strategic Location: Malaysia’s central position in South East Asia makes it an enticing business hub for international investors.
Access to a Growing Economy: As one of the primary manufacturing economies in the region, Malaysia offers access to a burgeoning market with a focus on products like petroleum, rubber, and palm oil.
Expansion Opportunities: Utilize the holding company structure to facilitate business expansion throughout the Asian region.
Taxation Advantages: Benefit from tax deductions on “permitted expenses” under the investment holding company regime, contributing to overall taxation efficiency.
Directorial Authority: The holding company holds the right to appoint directors in subsidiary companies, maintaining control and strategic oversight.
100% Foreign Ownership: Enjoy the flexibility of complete foreign ownership in certain business sectors.
Lower Corporate Taxes: Malaysia’s competitive corporate tax rates enhance the financial attractiveness of establishing a holding company.
Double Taxation Avoidance Treaties: Leverage international agreements to prevent double taxation, fostering a more favorable tax environment.
No Withholding Taxes: Profits, royalties, dividends, and capital can be repatriated without facing withholding taxes when paid outside of Malaysia, promoting ease of capital movement.
Considerations for Incorporating a Holding Company in Malaysia
When contemplating the registration of a holding company in Malaysia, it’s crucial to heed the following startup tips:
Niche Focus: Clearly define the specific business niche your holding company aims to target.
Establish a Robust Corporate Entity: Create a stable corporate entity that can thrive in the Malaysian business environment.
Strategic Planning: Develop a comprehensive plan and strategy for your business endeavors in Malaysia.
Business Development: Implement a business model that clearly outlines and aligns with your planned strategy.
Network Building: Build a strong network to effectively source and capitalize on business opportunities.
Financial Planning: Secure sufficient finances to support the various investments associated with a holding company.
Reputation and Trust: Maintain a stellar reputation, foster goodwill, and build trust with parent companies and stakeholders.
Stay Informed: Keep abreast of annual reports, legal profiles, and financial statements to ensure ongoing compliance and transparency.
Pre-Requirements for Establishing a Malaysia Holding Company
Before embarking on the incorporation of a holding company in Malaysia, it is imperative to acquaint yourself with the stipulations outlined in the Company Act of Malaysia.
Several prerequisites must be met to qualify as a holding company in Malaysia, as dictated by the Companies Act 1965:
Foreign Ownership and Operational Guidelines: Adhere to the foreign ownership conditions and operational guidelines specified in the Companies Act and Tax Act of Malaysia.
Voting Rights: Possess more than half of the voting rights in another company, establishing it as a subsidiary.
Share Capital Ownership: Own more than 50% of the share capital in the subsidiary company.
Control Over Board: Maintain controlling rights over the board of directors of the subsidiary.
For a Malaysian holding company to be deemed an attractive investment, it must align with certain criteria:
Capital Gains Tax Exemption: Enjoy exemption from capital gains tax on profits.
Dividend Repatriation: Facilitate the repatriation of income derived from dividends by the subsidiary to the parent company.
Withholding Tax Exemption: Ensure that dividends paid by the subsidiary to the holding company are exempt from withholding tax.
Additionally, holding companies in Malaysia must comply with local regulations concerning annual reporting and taxation.
Simple Steps for Establishing a Holding Company in Malaysia
When forming a holding company in Malaysia, investors can follow these straightforward steps:
Define Company Structure: Begin by determining the form your company will take. Decide on the structure early, considering the type of business you aim to represent.
Business Analysis: Thoroughly analyze the business you intend to represent. Choose a market niche that aligns with your business plan.
Application Submission: Proceed by submitting an application for your company to the relevant Malaysian authorities.
Bank Account Setup: Open a legitimate bank account for your holding company, ensuring it is registered under the company name.
Financial Funding: Adequately fund the newly established holding company to support its operations.
Record Keeping: Maintain regular records and accounts of the financial status of the holding company. Ensure meticulous record-keeping to monitor and support the company’s financial condition.
Establishing Membership in a Holding Company in Malaysia
When establishing membership in a holding company in Malaysia, it’s essential to be aware of certain restrictions. Notably, corporations cannot be accepted as members of the company. Additionally, the transfer of shares from a holding company to its subsidiaries is prohibited in Malaysia, as outlined by Section 17 of the Companies Act.
Exceptions to this legislation include situations where the subsidiary comprises a personal representative or a trustee. Foreign investors seeking involvement in an investment holding company, particularly in the real estate sector, can find valuable guidance from our team of specialists in company registration in Malaysia.
If you’ve decided to open a company, our accountants in Malaysia can provide comprehensive support, offering services such as payroll management, bookkeeping, tax registration assistance, debt monitoring, audits, tax minimization strategies, and more. Our expertise extends to human resources administration, ensuring a thorough financial analysis and timely tax reports to keep your company’s financial position well-informed.
Establishing an Investment Holding Company in Malaysia
The fundamental activities of an investment holding company in Malaysia revolve around holding investments in other legal entities. If a minimum of 80% of the company’s gross income is generated from such investments, it qualifies as an investment holding company.
As per Public Ruling No. 10/2015, issued by the Inland Revenue Board of Malaysia, an investment holding company (IHC) is permitted to engage in specific business activities. These activities encompass ventures into the real estate sector, including the rental of real estate properties, along with providing support and maintenance services related to the property in question.
Activities Permitted for a Holding Company in Malaysia
When you establish a holding company in Malaysia, you gain the authorization to undertake the following activities:
Engage in investments in securities, stocks, and shares.
Retain investments in the form of deposits and loans.
Possess investments in the form of immovable assets and properties.
Provide management services, such as accounting or client support.
Rules for Qualifying as a Malaysia Investment Holding Company
Purpose of the Company
The company is allowed to offer additional services, provided they are not identified as its primary activity.
Any product listed in the sellable inventory will disqualify the company from being categorized as an investment holding company.
Minimum 80% Gross Income from Investments
The company must secure a minimum of 80% of its gross income (exempt or not exempt) from the holding of investments, including dividends, interest, and rental income.
Business rental encompasses the rental of property, inclusive of associated services.
Separate Legal Entity Status
The company is recognized as a distinct legal entity from its owner.
Shareholders are not personally liable for the company’s debts beyond their contributed share capital.
Independent Borrowing Capacity and Tax Obligations
An Investment Holding Company possesses the autonomy to borrow loans and fulfill tax obligations independently.
It maintains the capacity to sue and be sued as a separate legal entity.
Tax Requirements for Investment Holding Companies in Malaysia
The tax obligations for an investment holding company in Malaysia hinge on its listing status on Bursa Malaysia. The regulatory framework differs based on this distinction:
Listed Companies: If the company is listed on the Malaysian stock exchange, it falls under the regulation of the Income Tax Act Section 60 FA.
Non-Listed Companies: Companies not listed on the stock exchange are subject to regulation under the Income Tax Act Section 60F.
Drawbacks of Establishing an Investment Holding Company (IHC)
Margin of Financing for Residential and Commercial Property
IHCs are more lucrative for investing in commercial properties, with a minimum 40% down payment required for residential units.
Banks typically prefer corporate guarantors with higher merit over individual guarantors associated with an IHC.
Administration Costs
- Owning an IHC comes with maintenance costs, including annual expenses like auditor and secretarial fees ranging between RM4,000 to RM6,000.
Time-Consuming
- Managing an IHC involves the hassle of filing annual company accounts and other administrative tasks.
Less Tax Savings
- IHCs cannot carry forward losses for the year and are unable to claim capital allowances.
Despite these drawbacks, the Companies Act 2016, replacing the Companies Act 1965, introduced certain benefits upon its implementation on 31st January 2017:
A Sdn Bhd no longer requires a Memorandum and Article of Association (M&A) and now only needs a Constitution if applicable.
The minimum number of two directors is no longer mandatory.
Restrictions on object clauses are eliminated.
The need for a Company Seal is abolished, resulting in significantly reduced administration costs.
Conclusion:
In conclusion, while Investment Holding Companies in Malaysia present lucrative opportunities for investors, they come with their set of challenges and considerations. The regulatory nuances, tax requirements, and the preference for certain types of investments underscore the need for careful planning and strategic decision-making. Despite the drawbacks, the Companies Act 2016 has introduced notable amendments, streamlining administrative processes and reducing associated costs. As with any business venture, weighing the pros and cons is essential, and understanding the intricacies of establishing and managing an IHC ensures a more informed and successful investment journey in the dynamic Malaysian market.
Frequently Asked Questions (FAQs)
What is the purpose of establishing an Investment Holding Company in Malaysia?
An Investment Holding Company is formed to manage and control investments in various legal entities.
Can a holding company in Malaysia engage in activities beyond holding investments?
Yes, a holding company may offer additional services as long as they are not listed as its main activity.
What percentage of gross income must be derived from investments for a company to be considered an Investment Holding Company?
At least 80% of the company’s gross income must come from holding investments, including dividends, interest, and rental income.
Are there restrictions on the types of properties an Investment Holding Company can invest in?
No, IHCs can invest in both residential and commercial properties, but residential property investment requires a minimum 40% down payment.
What is the regulatory framework for tax requirements of an Investment Holding Company in Malaysia?
Listed companies are regulated under the Income Tax Act Section 60 FA, while non-listed companies fall under the Income Tax Act Section 60F.
What are the drawbacks of setting up an Investment Holding Company in Malaysia?
Drawbacks include higher down payments for residential property, administration costs, time-consuming processes, and limited tax savings.
Can an Investment Holding Company carry forward losses for the year?
No, an IHC cannot carry forward losses for the year.
How has the Companies Act 2016 impacted the administration of Investment Holding Companies?
The Companies Act 2016 has reduced administrative costs by eliminating the need for a Memorandum and Article of Association and relaxing directorship requirements.
What annual expenses should an Investment Holding Company in Malaysia expect?
Annual expenses may range between RM4,000 to RM6,000, covering auditor fees and secretarial fees.
Can corporations be exempt from making estimated tax payments?
Corporations are generally required to make estimated tax payments if they anticipate owing $500 or more in taxes for the year.
