Investment Holding Company
An Investment Holding Company (IHC) means a company whose activity consists mainly of holding investments and not less than 80% of its gross income, excluding gross income from a business of holding of an investment (whether exempt or not) is from holding such investments.
A "business of holding of an investment" is a business of letting of real property where the company provides maintenance services or support services on the property during any year of assessment.
"Letting of real property" refers to the right to use or occupy real property according to the terms of an agreement or contract, including the lease of part of own or leased real estate.
Maintenance services or support services means services that include:
(a) carry out all matters necessary for the maintenance and management of real estate (e.g. cleaning or repair services), such as building structural elements, stairs, fire exits, entrances and exits, lobbies, corridors, lifts/escalators, compounds, drains, water tanks, sewers, pipes, wires, cables or other fixtures and fittings; and
(b) do all things necessary to maintain and manage the exterior of the property, such as sports fields, recreational areas, driveways, parking lots, open spaces, landscaped areas, walls and fences, exterior lighting or other exterior fixtures and fittings .
Recognition of Investment Holding Company
In general, determining whether a company is an IHC depends on two (2) criteria:
(a) its main activity is holding investments; and
(b) not less than 80% of the company's gross income is derived from holding such investment (whether exempt or not), other than gross income from business of holding of an investment.
Another criterion for determining whether a company is an IHC is that any amount of gross income from a business of holding of an investment investment is not computed as gross income from holding investments. Therefore, only interest, dividends and rental income are computed as gross income from investments holding.
If a company is a non-IHC in a year of assessment but gross income from rental (business of holding of investment) decreases in the subsequent year or years of assessment due to temporary cessation of tenancy because of the following circumstances:
(a) repair or renovation of the building;
(b) absence of tenants for a period of 2 years after termination of tenancy;
(c) legal injunction or other official sanction; or
(d) other circumstances beyond the control of the company;
the company is still deemed as a non-IHC for the subsequent year or years of assessment even though income from the holding of investment is not less than 80% of the gross income of the company.
If the period of absence of tenants is more than 24 months and income from the holding of investments is more than 80% of gross income for a year of assessment outside the 24-month period , the company is treated an an IHC for the year of assessment outside the period.
Any company which has been determined to be an IHC in the basis period for a year of assessment will be deemed to be an IHC in the subsequent years of assessment. However, this treatment is not applicable if the company is able to prove that it is no longer an IHC in the relevant year of assessment.
Tax Treatment
The tax treatment for an IHC depends on whether the IHC is or is not listed on the Bursa Malaysia. The special tax treatment for an IHC is provided under:
(a) section 60F of the ITA for an IHC not listed on the Bursa Malaysia; and
(b) section 60FA of the ITA for an IHC listed on the Bursa Malaysia.
Tax Treatment for Investment Holding Company Not Listed on the Bursa Malaysia – Section 60F of the ITA
Any income derived from the holding of investments [interest, dividend, rental (non-business) and rental (business of holding of an investment)] is treated as a non-business source. Whereas income other than income from the holding of investments is treated as a source of income under paragraph 4(f) of the ITA.
Permitted Expenses
In ascertaining the total income of an IHC for a year of assessment, an amount of permitted expenses determined in accordance with the prescribed formula is allowable as a deduction from the aggregate income of the IHC.
Permitted expenses incurred by an IHC consist of–
(a) directors’ fees;
(b) wages, salaries and allowances;
(c) management fees;
(d) secretarial, audit and accounting fees, telephone charges, printing and stationery costs and postage; and
(e) rent and other expenses incidental to the maintenance of an office,
which are not deductible under subsection 33(1) of the ITA.
The prescribed formula to determine the amount of permitted expenses which is allowable as a deduction is as follows:
A X B / 4C
where:
A is the total of the permitted expenses incurred for a basis period reduced by any receipts of a similar kind;
B is the gross income consisting of dividend, interest and rent chargeable to tax for a basis period;
C is the aggregate of the gross income consisting of dividend and interest (whether such dividend or interest is exempt or not) and rent, and gains from realisation of investments for a basis period.
The amount allowable as a deduction should not exceed 5% of the gross income consisting of dividend, interest and rent for that basis period.
Note: “Dividend” includes income distributed by a unit trust.
Single-tier Dividend Income
Single-tier dividend income is exempted from tax and any expenses related to the derivation of the dividend are to be disregarded.
If there is no aggregate income or the aggregate income is not sufficient to absorb the permitted expenses for a year of assessment, any excess of the permitted expenses cannot be carried forward to subsequent years of assessment.
Capital Allowance / Industrial Building Allowance
As a general rule, capital allowance and industrial building allowance are given on qualifying capital expenditure incurred by a person in relation to assets used for the purposes of his business. Whether or not rental income from the letting of real property is regarded as a business source of a person for a year of assessment would depend on the circumstances in the basis period for that year of assessment. This in turn would determine whether or not the person is eligible for capital allowances and industrial building allowance for his rental income.
Where rental income (from business of holding of investment) derived by a company from its building is treated as a business source and capital allowances and/or industrial building allowance have been claimed and subsequently the rental income is no longer treated as a business source because the company has become an IHC in a year of assessment, the company is not eligible for capital allowances in respect of its plant and machinery in that year of assessment, unless the IHC is listed on the Bursa Malaysia.
However, pursuant to paragraph 60 of Schedule 3 of the ITA, the company is still eligible to claim industrial building allowance on its building provided the tenant uses the building as an industrial building.
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