MANY local companies in Malaysia, including listed ones, remain family-controlled. These businesses are often founded and managed by first-generation patriarchs, with ownership and leadership subsequently retained within the family.
In Asia, families generally prefer to maintain long-term control over their businesses, even where professional managers are appointed to handle the day-to-day operations. This differs from the more common western model, where families gradually detach themselves from management responsibilities over time.
In recent years, succession planning has become increasingly important from a tax perspective. The introduction of new tax measures, such as capital gains tax, dividend tax on dividend income exceeding RM100,000, taxation of foreign-sourced income remitted into Malaysia, increased scrutiny of stamp duty matters, as well as the widening scope of the sales and service tax regime, has prompted advisers to place greater emphasis on tax considerations when structuring family wealth and business succession arrangements.
Common structures
In the early stages, many family businesses are structured through companies owned personally by the founders, often husband and wife. As the businesses expand, different operations and investments are gradually placed under separate companies. Over time, assets, liabilities and income streams accumulate across multiple entities within the group.
As the structure becomes more complex, families often seek to streamline their business and investment holdings into a more organised structure to facilitate succession planning and long-term wealth preservation. This may involve the establishment of a holding company, trust or foundation.
Such restructuring exercises may involve transfers of shares, assets, liabilities and income-generating businesses between entities or family members. These transfers may trigger various tax implications, including capital gains tax, real property gains tax, stamp duty, income tax and indirect tax considerations.
What are the tax issues?
Income Tax
Before undertaking any restructuring exercise, it is important for the group to review its existing tax position, including brought forward losses, unabsorbed capital allowances, reinvestment allowances, investment tax allowances and other available tax incentives. The restructuring of business operations and income flows should be aligned with the future utilisation of these tax attributes to avoid unintended loss of tax benefits.
Where income-generating assets or businesses are transferred within the group, consideration should be given to whether the transfer would give rise to taxable income or whether it may be regarded as a capital transaction, which would generally fall outside the scope of income tax unless it is subject to capital gains tax or Real Property Gains Tax.
Stamp duty
The transfer of assets and liabilities pursuant to restructuring agreements may trigger stamp duty implications. This can become costly where the transaction is treated as a conveyance of a business, which may attract stamp duty at rates of up to 4%.
Accordingly, the restructuring exercise should be carefully planned to maximise the availability of reliefs and exemptions. This is particularly relevant where assets and liabilities are transferred from operating companies into a holding company, trust, or foundation structure.
Location of holding company/trust/foundation
Consideration should also be given as to whether the succession structure should be established in jurisdictions offering more favourable tax regimes, such as Labuan, the single-family office scheme in Johor, Singapore or other suitable jurisdictions.
A key consideration is whether distributions to beneficiaries can be made in a tax-efficient manner, including with minimal or no tax leakage. Families will generally prefer jurisdictions that do not impose inheritance tax, estate duty or significant withholding taxes.
In addition to tax considerations, the chosen jurisdiction should ideally provide regulatory certainty, efficient administration and flexibility in the movement of funds.
Importantly, such family wealth structures should not exist merely on paper. Tax authorities expect these structures to demonstrate sufficient commercial substance, including the presence of offices, employees, management functions, and proper decision-making processes. This is particularly important to support the legitimacy and tax residency position of the holding company, trust, or foundation.
This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (www.thannees.com).