A Malaysian Investment Holding Company (IHC) describes a form of company which has the purpose of holding investment assets. There are two major criteria that will determine if your company is a IHC, knowing this can save you a whole lot of tax money. Let's look at the two criteria with a real life scenario.
Question:
Hi, I’m John, a businessman and a real estate investor. I have a family of six who consists of my wife and four children. I have incorporated John & Family Estates Sdn Bhd (JFE) for estate planning purposes. Presently, the company holds onto a portfolio of investment assets which include:
- Investment asset 1: John & Jack Empire Sdn Bhd (J&J)
JFE owns 60% shareholdings of J&J, a company that operates two cafés and two restaurants in Penang under the J&J brand. In year assessment (YA) 2019, JFE has earned a total of RM 120,000 in dividend income and earned RM 30,000 in management fees. - Investment asset 2: 2-Storey Shoplot at Aman Park, Kuala Lumpur (Value: RM 2.5 million)
This property is fully leased to a global coffee chain without provision of maintenance and support services. (JFE earns 240,000 per annum from leasing this investment property). - Investment asset 3: 4-Storey Shoplot at Clover Street, Johor Bahru (Value: RM 1.5 million)
This property is leased to four separate tenants where their annual rent collection collectively amounts to RM 100,000 in YA 2019. I have hired a licensed property management firm to provide active maintenance and support services to upkeep the shop lot. - Investment asset 4: REIT Portfolio (Value: RM 100,000)
JFE has a portfolio consisting of REITs listed in Malaysia and Singapore. The portfolio has contributed RM 6,000 in income distribution for 2019. - Investment asset 5: Fixed Deposit (Value: RM 120,000)
JFE has received RM 4,000 in interest income from its FD accounts.
However, I still don’t understand, what are the criteria a company must meet to be categorized as an Investment Holding Company in Malaysia and my question is: ‘Is JFE an Investment Holding Company (IHC) in Malaysia?’
Do you rent out a property? Read: 5 Rules You Must Know If You Rent out a Property in Malaysia.
Answer:
For a start, there are two major criteria stated under PR 10/2015 of the Income Tax Act (ITA) 1967 to determine if JFE is an Investment Holding Company in Malaysia. If JFE is identified to be an Investment Holding Company, its income earned would be taxed differently from a normal Sdn Bhd for its expenses allowable for tax deductions are different. The two criteria to determine if you own an Investment Holding Company in Malaysia are:
1. Purpose
A company is classified as an IHC (Investment Holding Company in Malaysia) if it is holding onto investment assets and the income derived from these assets is the main activity. To name a few, these investment assets include real estate, shares of both public and private listed companies, unit trust, fixed deposit, and cash respectively. For JFE, the company has fulfilled the first criteria for an IHC (Investment Holding Company) classification for the reason of incorporation is solely to hold onto John’s investment assets. As such, we move onto the next criteria.
2. The 80% Gross Income Rule
Once it has passed the first criteria of an Investment Holding Company in Malaysia, a company would only be treated as an IHC (Investment Holding Company) if it earns at least 80% of its gross income from its investment assets. It includes rental income taxed under Section 4(d) and interest and dividend income which are taxed under Section 4(c). Therefore, in JFE’s case:
-
- a. John & Jack Empire Sdn Bhd (J&J)
In total, JFE earns RM 150,000 in gross income from J&J. From it, its RM 120,000 earned is treated as an investment income as it is a dividend. Its remaining RM 30,000 would not be viewed as an investment income as it is a form of business income. Thus, Investment Asset Income = RM 120,000 - b. 2-Storey Shoplot at Aman Park, Kuala Lumpur
JFE’s rental income of RM 240,000 is taxed under Section 4(d) as its real estate is leased without provision of maintenance and support services to its tenant. Thus, the full amount is treated as an investment income. Investment Asset Income = RM 240,000 - c. 4-Storey Shoplot at Clover Street, Johor Bahru
The rental income of RM 100,000 is taxed under Section 4(a) because it provides maintenance and support services to manage the building. So, the full amount is not an investment income but a business income. Investment Business Income = RM 0
Read also: How to Offset Your Losses From Investment Properties Against Business Income
Question:
“What does it mean by active & comprehensive offering of maintenance and support services to a property?
Based on PR 4/2011, the examples of maintenance services include the maintenance and management of structural elements, stairways, lifts & escalators, corridors, pipes, fire escapes, drains, water tanks, landscape areas, cables, car parks, walls & fences, lightings, … etc of a property.
The landlord may provide the services himself or through his hiring of a professional and licensed property management firm.
- REIT Portfolio
Income distributed from REITs is a form of investment income. Thus, its RM 6,000 received would be viewed as such. Investment Asset Income = RM 6,000 - Fixed Deposit
Interest derived from FD accounts is a form of investment income. JFE’s RM 4,000 would be treated as such. Investment Asset Income = RM 4,000
Need to declare your rental income? Read also: 8 Things to Be Aware off When Declaring Your Rental Income to LHDN
Now, let us determine if JFE is an Investment Holding Company with the 80% Gross Income Rule:
| Source of Income | Amount (RM) | Amount (RM) |
| Investment assets: J&J: Dividends
2-Storey: Rental Income
REIT: Income Distribution
FD accounts: Interest | 120,000
240,000
6,000
4,000 | 370,000 |
| Other Income: J&J: Management Fees
4-Storey: Rental Income | 30,000
100,00 | 130,000 |
| JFE’s Total Gross Income in Year Assessment (YA) 2019 | | 500,000 |
| JFE’s Percentage of Investment Income from Total Gross Income | | 74.0% |
| Is JFE an Investment Holding Company (IHC)? | | Nope |
JFE is not an Investment Holding Company as it fails to fulfil the second criteria, thus, would be taxed as a conventional Sdn Bhd in Malaysia.
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Here is another question:
“What if JFE collects RM 150,000 in dividends from J&J in full without separating the gross income into RM 120,000 in dividends and RM 30,000 in management fees? Would it change the company’s status in Malaysia?”
The answer is as follows:
| Source of Income | Amount (RM) | Amount (RM) |
| Investment income: J&J: Dividends
2-Storey: Rental Income
REIT: Income Distribution
FD accounts: Interest | 150,000
240,000
6,000
4,000 | 400,000 |
| Other income: J&J Management Fees | 0 | |
| 4-Storey: Rental Income | 100,000 | 100,000 |
| JFE’s Total Gross Income in Year Assessment (YA) 2019 | | 500,000 |
| JFE’s Percentage of Investment Income from Total Gross Income | | 80.0% |
| Is JFE an Investment Holding Company (IHC)? | | Yes |
As such, JFE is an investment holding company in Malaysia and will enjoy different tax treatments from a conventional Sdn Bhd.
But, My Situation is More Complicated …
Most likely, your situation would be uniquely different and hence, requiring the assistance of a qualified tax professional. If that is you, you may use Joolah.my a platform that quickly refers you to the very best tax, audit and accounting experts in Malaysia.
FAQs
An investment holding company in Malaysia's basic activities involved the holding of investments in other legal entities. If at least 80% of the company's gross income is derived from these types of investments, the company is described as an investment holding company.
How is investment holding company determined in Malaysia? ›
An IHC is deemed to be Bursa-listed if it's listed on the Bursa Malaysia for any period during a given tax year. The income of a listed IHC is treated as business income, and expenses are given full tax deduction. Unabsorbed losses and capital allowances cannot be taken forward.
How do you determine a holding company? ›
To sum it up, a holding company is a parent company that owns and controls other companies and in many cases does not produce any goods or services or conduct business operations of its own. Holding companies and operating companies are used by businesses of all sizes and in all industries.
What defines an investment holding? ›
Holdings are the contents of an investment portfolio held by an individual or an entity, such as a mutual fund or a pension fund. Portfolio holdings may encompass a wide range of investment products, including stocks, bonds, mutual funds, options, futures, and exchange-traded funds (ETFs).
What is a holding company in Malaysia? ›
A holding company is a specific kind of business entity registered in Malaysia with the primary responsibility of overseeing and managing the assets and investment strategies of another business, known as the parent company.
How do you know if a company is an investment company? ›
Visit FINRA BrokerCheck or call FINRA at (800) 289-9999. Or, visit the SEC's Investment Adviser Public Disclosure (IAPD) website. Also, contact your state securities regulator.
What are the requirements of an investment company? ›
To start an investment company, you'll need to register with the Securities and Exchange Commission. You also must obtain a securities license from the state where you plan to do business. You may also need a broker-dealer license, depending on the products you plan to offer.
How to set up a holding company in Malaysia? ›
You will need to observe the foreign ownership conditions and general guidelines for operating this type of business stipulated in the Companies Act and Tax Act in Malaysia. You must own more than half the voting rights in another company. You must own more than 50% of the share capital of the subsidiary company.
What is the difference between a holding company and an investment company? ›
The trust is a holding company and investment company are often used interchangeably. Both refer to a company used to direct investments in other companies and assets. Investing via a holding company can be a good way to improve asset protection, minimize taxes and provide additional privacy.
How do you identify a holding company and subsidiary company? ›
The parent company thus holding control of the other company, may or may not control the stocks of the latter. The parent company here is called the holding company if it holds the stocks and is not involved with the business affairs of the subsidiary company.
Tax revision from 17% to become 24% for Investment Holding Company (IHC)
How do I set up an investment holding company? ›
How Do You Create a Holding Company? To create a holding company, you simply need to file the articles of incorporation in the state or jurisdiction where you want to register the company. You will also need to identify the business agents managing the holding and operating companies.
What is revenue for investment holding company? ›
* Revenue of a company refers to the main income source of the company excluding separate source income, such as interest, dividend and rental, which does not arise from its principal activity. In the case of an investment company, the revenue is its investment income (e.g. interest, dividend and rental).
What is the benefit of holding company Malaysia? ›
Expansion: a holding company incorporated in Malaysia can be used to expand within the region; Taxation advantages: part of the expenses of the company, the “permitted expenses” can be subject to tax deductions under the investment holding company regime.
What is the relationship between holding company and subsidiary Malaysia? ›
Subsidiary companies in Malaysia are business entities owned by a foreign company. This business entity has parent organizations, or a holding company, holding more than 50% of the company's shares.
What is the difference between a holding company and an LLC? ›
A holding company can be an LLC. The only difference between a traditional LLC and a holding company is that the holding company does not conduct any business of its own. Holding companies don't create products or manufacture goods—they exist purely to hold ownership of the assets of their subsidiaries.
What are the 4 types of investment companies? ›
Types of Investment Companies
- Open-ended investment company. Open-ended investment companies are also known as mutual funds. ...
- Closed-ended Investment Company. These companies are also known as investment trusts. ...
- Unit Investment Trusts (UIT)
An investment company would also be expected to have all of the following typical characteristics:
- It has more than one investment.
- It has more than one investor.
- It has investors that are not related parties of the parent and the investment manager.
- It has ownership interests in the form of equity or partnership interests.
Three of the biggest investment management companies in the world are BlackRock Funds (iShares), Vanguard, and Charles Schwab. Each of these firms offers many products to retail clients, including hundreds of mutual funds, exchange-traded funds, and other vehicles covering different asset classes.
What are the exceptions to the Investment Company Act? ›
Other exclusions to the Investment Company Act include but are not limited to: (1) certain government, government agencies; (2) issuers that are primarily engaged in a business other than investing, reinvesting, holding or trading securities; (3) issuers who are engaged in, among other things, purchasing or otherwise ...
The Act defines an investment company as "an issuer that is engaged or proposes to engage in the business of investing, reinvesting, owning, holding, or trading in securities, and owns or proposes to acquire 'investment securities' having a value exceeding 40% of the value of its total assets (exclusive of government ...
What is the minimum requirement for investing? ›
A minimum investment is the smallest dollar or share quantity that an investor can purchase when investing in a specific security, fund, or opportunity. A hedge fund, for example, may require that their clients deposit at least $100,000 with the firm. Or, a mutual fund may require at least $3,000 to be invested.
What are the four 4 types of business ownership in Malaysia? ›
Seven types of business entities in Malaysia.
- Sole proprietorship.
- Partnership.
- Private limited company.
- Public limited company.
- Unlimited companies.
- Foreign company.
- Limited liability partnership.
An LLC can be set up as a holding company, but when it is it will have no operation or function other than owning the other company and their assets. The company where the operations and business occurs, including where the employees and liabilities are, is referred to as the operating company.
What are the requirements to form a company in Malaysia? ›
The requirements for Malaysia company registration are:
- Minimum 1 director, aged 18 years old and above.
- Minimum 1 shareholder, aged 18 years old and above.
- Minimum RM1 paid-up capital.
- Appointment of a local company secretary who is licensed by SSM or a member of any professional body.
- A local registered address.
Holding Company Basics
A holding or parent company may own a smaller stake, including less than 50%, as long as it gives the subsidiary's managers day-to-day control.
What is the difference between private equity and investment holding company? ›
Most investment groups, from small investment clubs to larger corporate interests, have much lower barriers to entry. Smaller investors who see the potential in a firm can pool their money and buy into the company, while private equity funds buy the entire company in an effort to sell it at a profit at a later date.
Why would a company want a holding company? ›
Companies will often set up a holding company to gain tax efficiencies, minimise risk or prepare for sale or succession. There are clear benefits to creating a holding company as it can be used to protect profits or to separate out assets such as a business premises from the main trading company.
What is the key difference between holding company and subsidiary company? ›
According to the company law in India, a company that is owned and controlled by another company will be termed as a subsidiary, and the former is considered as a holding company. Hence, "control" is defined in the company law to evaluate the eligibility of a company to be called a holding company.
What is the difference between a holding company and a subsidiary? ›
Holding Company vs Subsidiary Company
This is the basic difference between the two terms. In addition, the former is the one that owns more than 50% share of another company. In contrast, a subsidiary firm has more than 50% shares owned by another entity or corporation.
A Holding Company is a company that owns more than half of another company's stock and hence has the capacity to control its operations. A Subsidiary Company is one in which another firm owns more than 50% of the shares and has complete control over the company's operations.
Do I need to pay tax for investment in Malaysia? ›
In Malaysia, any sale made from your investments is not subject to the capital gains tax. Your capital assets are also not subject to this tax system. In general, capital gains in the country are not subject to income tax. What you would need to pay is the real property gains tax (RPGT).
Are holding companies taxed differently? ›
Tax Advantages
The main tax advantage of a holding company is that it does not have to file different tax returns for each subsidiary company. Generally, subsidiaries can pay dividends to the holding company without creating a tax liability.
Do holding companies pay capital gains tax? ›
A holding company can also help save capital gains tax. In many jurisdictions, the sale of subsidiaries by a holding company may be free of capital gains tax.
Does a holding company need a bank account? ›
Yes, holding companies need different bank accounts than their subsidiary companies. They are also required to maintain different accounting records.
How do holding companies pay owners? ›
A holding company can make money via its subsidiaries, income from assets, royalties, or leasing/loaning assets to 3rd parties or subsidiaries as desired. Regular dividends - A holding company can profit from its subsidiary companies from shares of stocks or bonds that pay dividends or interest.
Does a holding company need an EIN? ›
Holding companies need some form of taxpayer identification to legally do business as the owner of another company, and this is typically done with an Employer Identification Number (EIN).
How are taxes paid in a holding company? ›
Holding Company Taxes
If your holding company owns shares of another business, the dividends the holding company receives are typically tax-free. For those in the highest tax bracket, deferred taxes in these situations can amount to around 30 percent of taxable income.
Does a holding company have income? ›
It can generate income directly from subsidiaries, or through ownership of wider assets. The holding company will receive dividends from subsidiaries, and may also gain by providing centralized services to the wider corporate group. They also make a profit from selling assets and subsidiaries.
What is the difference between capital profit and revenue profit in holding company? ›
Revenue Profit:Nothing but earnings from biz operations. Capital Profits : These Profits do not accrue in day to day business operations. Non-recurring in nature. Profits from Sale of fixed assets like Land and buildings, Plant and Machinery or Sale of Intangible assets like Trademarks, Licences are Capital Profits.
Holding companies can offer a number of advantages, including the ability to operate your business and ensure that your family receives the income from your business. However, holding companies also have a number of disadvantages, including limited liability protection and high costs.
What is the best use of a holding company? ›
Holding companies can be used to reduce tax as well as provide important non-tax related benefits. While each situation may be different, as your company's annual revenues and income increase, a holding company could be something to consider. A holding company is a corporation that owns shares in another company.
Why is Malaysia good for international business? ›
Solid infrastructure
Malaysia has a developed infrastructure that is able to support businesses. The country boasts an excellent transportation network with seaports, airports, and a well-connected road system. This makes it easy for companies to ship products and offer services both nationally and internationally.
Is parent company liable for subsidiary debt in Malaysia? ›
A subsidiary has a separate legal entity from its parent company. Therefore, the subsidiary is liable for its debts and liabilities.
What are the disadvantages of a holding company? ›
3 Disadvantages of a holding Company
Fees: Subsidiaries will have to pay formation fees and ongoing compliance costs, which can add up. 2. Management: Management challenges may also exist. Holding companies do not have to own all of the subsidiary's stock, and if they do not, they must deal with minority owners.
What is an example of a holding company? ›
The holding company examples include the Google restructuring example and the creation of a parent company known as Alphabet Inc., which now involves a diverse business portfolio. Berkshire Hathaway, possessed by Warren Buffet, is another excellent holding company example that works in the investment space.
What is the best state to form a holding company? ›
A Wyoming holding company is an LLC or Corporation which has been formed in Wyoming and is meant to hold a variety of assets from others companies to bonds and real estate. The best state for an individual to establish a holding company is Wyoming, and the best state for a Fortune 500 company is Delaware.
How to set up a holding company Malaysia? ›
You will need to observe the foreign ownership conditions and general guidelines for operating this type of business stipulated in the Companies Act and Tax Act in Malaysia. You must own more than half the voting rights in another company. You must own more than 50% of the share capital of the subsidiary company.
What is the minimum investment for foreigners in Malaysia? ›
In general, a minimum value of RM1 million is applied to all kinds of property in almost every state of Malaysia.
How to set up a SDN Bhd in Malaysia? ›
Documents Required for Malaysia Company Registration (Sdn Bhd)
- Company name.
- Nature of the business and further details about the business model.
- Company address.
- Information about the director(s) and shareholder (s)
- Passport / MyCard for verification.
- Authorization letter for trademark purposes.
Upon approval of the application, successful applicants: 2. Must invest MYR 1 million (approximately USD 230,000) plus MYR 50,000 (approximately USD 12,000) per dependent spouse or child into a local fixed deposit account maintained throughout their stay under the program. 3.
