Following the previous post on Real Property Gains Tax (RPGT), this post aims to shed a spotlight on another field of transaction which will also attract RPGT- sale of shares in a Real Property Company (RPC).
Generally, Malaysia does not charge any capital gains tax (neither does Malaysia have a CGT regime) on sale of shares. The exception being profit accruing from the sale of Real Property Company’s shares pursuant to RPGT Act 1967.
The general background of why RPGT is imposed on the sale of RPC shares is because such shares are considered to be a sale of any sort of interest of real property itself. It exists to cover the tax loophole that was exploited to avoid paying RPGT on sale of real property.
Characteristics of an RPC
Following Para 34A(6) Schedule 2, an RPC is defined as a controlled company who owns real property or shares and the defined value is equal or more than 75% of its total tangible assets (TTA).
i) Controlled company
A controlled company is a company that has less than 50 members but is mainly controlled by not less than 5 members.
ii) Real property or real property shares
Real property is “any land situated in Malaysia” and any interest, option or other rights in or over such land” whilst real property shares are well… shares in a real property company.
iii) Total tangible assets (TTA)
TTA means the total value of tangible assets the company has which includes but not limited to fixed assets ie plant and machinery, buildings and land, current assets ie cash, inventory and cash receivables as well as investment. What isn’t included are intangible assets i.e. intellectual property like patents and copyrights.
Once an RPC share, always an RPC share
A company ceases to be an RPC when it either fails to fulfil either of the criteria which is either when it has more than 50 members or is controlled more than 5 people or that the defined value of real property/ RPC shares falls below 75% of the company’s TTA.
However, the understanding of “once an RPC share, always an RPC share” is that if a person acquires RPC shares, or it holds shares in the company which subsequently becomes an RPC, the shares in which the person holds will be RPC shares even if the company ceases to be an RPC. Therefore, the disposal of such shares will be subjected to RPGT.
Scenario 1: A purchases shares in Company XYZ on 1 January 2012 which is not an RPC. Subsequently on 30 June 2012, Company XYZ becomes and RPC as consequent of purchasing a valuable piece of land. When A decides to dispose of his shares in Company XYZ on 10 January 2019, the profit made on the sale of the shares will be subjected to RPGT of 5%.
Rationale: When A purchased shares in Company XYZ, they were not RPC shares. However, when Company XYZ becomes an RPC, A is deemed to now be holding RPC shares and therefore the sale of such shares are RPC.
The purchaser of shares on 10 January 2019 is considered to have purchased RPC shares.
Scenario 2: A purchases shares in Company XYZ on 1 January 2012 which is not an RPC. Subsequently on 30 June 2012, Company XYZ becomes and RPC as consequent of purchasing a valuable piece of land. On 30 July 2018, Company XYZ disposes of the said piece of land and hence is no longer an RPC. When A decides to dispose of his shares in Company XYZ on 10 January 2019, the profit made on the sale of the shares will be subjected to RPGT of 5%.
Rationale: Despite the cessation of the company being an RPC on 30 July 2018, the shares held by A are deemed RPC shares from 30 June 2012 onwards and will be as such during disposal.
However, since Company XYZ ceases to be an RPC from 30 July 2018, the shares purchased from on 10 January 2019 are not RPC shares because the company is no longer an RPC. Hence there can be a situation where on seller’s side, he is selling RPC shares but on the buyer’s side, they are not RPC shares.
Therefore, it is important for the intended seller to analyse and consider whether the shares held are RPC shares and subject to RPGT. Failing to remit the required taxes and the buyer and seller will be subject to penalties and fines.
Timing for determination of an RPC
Quite apparent from the situations above, a company can “accidentally” become an RPC by virtue of purchasing real property. Companies would often avoid being an RPC for the reason that the members may find it difficult to sell the shares in the company thereafter because of the RPGT.
Whether or not a company becomes an RPC depends on whether on the day when the company purchases the interest of the real property, whether the defined value of the real property exceeds 75% of the company’s TTA. Where there is a contract, the disposal is on the day that the contract is signed; where there is no contract, the disposal is on the day of completion of disposal (Para 15 Schedule 2 RPGT Act 1967).
Para 34A(6)(b) Schedule 2 RPGT Act 1967 reads “a controlled company to which subsubparagraph (a) is not applicable, but which, at any date after 21 October 1988, acquires real property or shares or both whereby the defined value of real property or shares or both owned at that date is not less than seventy-five per cent of the value of its total tangible assets”
So a company becomes an RPC on the day acquires real property and the defined value of the property is not less than 75% of the company’s TTA. Therefore, the financial position of the company on that day is of paramount importance for the company to determine whether the shares in the company turns into RPC shares.
Computation of RPGT
The calculation of RPGT from the sale of RPC shares differs slightly from the calculation of real property slightly because more often than not, there is no market value attached to them since it is quite unlikely that public listed companies are a controlled company, hence nevermind being an RPC.
In the event of Scenario 1 and 2, whereby A’s shares become RPC shares years after the acquisition of the shares, the deemed acquisition price of the RPC shares is as follows:
Therefore, the computation of RPGT payable is as follows:
Step 1: Chargeable Gain = Disposal Price – Purchase Price – Miscellaneous Charges/ Incidental cost
Step 2: Net Chargeable Gain = Chargeable Gain – Exemption waiver (RM10k or 10% of the chargeable gain, whichever is higher)
Step 3: RPGT payable = Net Chargeable Gain x RPGT Rate
Determination of whether a company is an RPC is especially important during a corporate exercise or merger & acquisition operation owing to the logic that “once an RPC share, always an RPC share”. Note that both the seller and buyer have to file RPGT returns within 60 days from date of transaction and failing to do so will risk incurring penalties.