Investment Holding Company(IHC)What is IHC ?Basis of assessmentSources of incomePermitted fraction of expenses etc

IntroductionInvestment holding company is usually used as a listing vehicle on Bursa Malaysia as well as serving as a holding company for group of companies. The Government has legislated section 60F with effect from year of assessment 1993 to govern tax treatment. However wef YA 2006, a new definition for IHC

Definition-s 60F(2)IHC is defined as a company whose activities consist mainly in the holding of investments and not less than 80% of its gross income other than gross income from a source consisting of a business of holding whether exempt or not of an investment is derived therefrom.A business in holding of an investment means a business of letting property and providing maintenance or support services to property S 4(d).

Quantitative income test for an IHCSection 4 of ITA comprises 6 categories of income (a) to (f). The first 2 are ignored and that leaves c to f.For exam purpose , there will be 4 sources of investment income dividends, interests, discounts and rent

Important pointsThere are 2 types of income income from holding of investments and all other kinds of income4 sources of investment income dividends, interest, discounts and rentFor all sources, the income is the gross income (before the deduction of expenses)

2 testsIs the companys main activity the holding of investments- a business of letting RP where a company provides maintenance of support services Is at least 80 % of the companys gross income (whether exempt or not) derived from the holding of investment

Example 1Kuldip Sdn Bhd describes its principal activity as housing development. Accounts were made up to 30 June. Due to a temporary downturn in business, 80% of the companys gross income for that year came from bank deposits and only 20 % came from housing development.Is Kuldip an IHC ?AnswerNo even though not less than 80% of its gross income come from investment source, because it was not a company that was mainly involved in the holding of investments. It is a property developer.

Gross investment incomeTaxableExemptDividend s4cxxInterest s4cxxx +x = ARental with maintenance or support services s4(d)xxManagement income s4(f)xxx+x = xGross income B

where A/B >= 80 %, then the company will be an IHCif no support & maintenance service, then rental income is treated as an investment income under A. S60F

The test for IHC is at least 80% of the gross income comes from investmentRM000Company123Management fees406040Investment income (include exempt) A160160140Gross income B200220180 A/B (%)807378Is it a IHC?YesNoNoThe management fees of a IHC will be treated as a s4(f) income , so no CA & CY loss.

Burden of proofTaxpayer has the onus to show that the company is not a IHCProper documents must be kept to show otherwise

Maintenance service / support serviceDoing all things necessary of the maintenance and management of RP structural elements of building, fire escapes, stairway water tanks , sewers, pipesExterior parts of RP fields, recreational areas, driveways, walls, ext F&F

Income of IHCIncome from holding of investment shall NOT be treated as a business incomeIncome other than from the holding of investment shall be treated as income falling under s 4(f) such as management feeFor income tax computation, rental income is treated as s 4(d)

Berjaya is incorporated to carry on business of letting of properties with maintenance or support services. For year ended 30.6.2011, gross income from various source are as follows:Interest30,000Dividend Malaysia45,000 - Singapore (received)25,000Rental20,000120,000Determine whether Berjaya is a IHC?

TaxableExemptInterest30,000-Dividend45,00025,000Investment income (A)75,000 +25,000100,000Rental with services 20,000B120,000A/B = 100,000/120,000 = 83 % so Berjaya is a IHCRental income is assessed under s 4(d)

Sawit Sdn Bhd started business in year 2007 and its main activity is oil palm plantation. Apart from that, Sawit Sdn Bhd also invests in several companies and fixed deposit in several banks. In year 2008, the company receives interest amounting to RM10,000 from the fixed deposit. The company has not generated any income from the plantation activity. The company closes its account on 31 December every year. Even though the income of Sawit Sdn Bhd is 100% derived from the saving in fixed deposit, Sawit Sdn Bhd is not an IHC for the year of assessment 2008 since its main activity is not the holding of investments but oil palm plantation.

Basis of assessmentYA2001and subsequent yearsInvestment income would be assessed on financial year basis.

Tax treatment for IHCS 60F of ITA for a non listed IHC on Bursa MalaysiaS 60FA for an IHC listed on Bursa Malaysia

Source of IncomeWhere the investment holding company has more than one investment sources, each source of income has to be computed individually, deduct any expenses that are 'wholly and exclusively' incurred in the production of that income in order to arrive at adjusted income Dividend , interest , rental income & s 4(f). Since no business source, CA or CY loss is not available to IHC.

Source of IncomeIn the event expenses exceeded income, the difference is a permanent loss as investment income is not allowed to have its current year losses to be set off against other income. The preferential treatment of carry forward its losses is only available to business source.

Dividend income With effect from YA 2008, statutory income of dividend income received by an IHC would be deemed to be total income or part of total income of an IHC for that YA s 53 Finance Act (transitional basis). Therefore, if the source of income is only dividend, the permitted expense are not allowed as a deduction see example 12 of PR 3/2011.With effect from YA 2011, dividend is deemed to include income distributed by a unit trust

An IHC has the following income & expenses for year ended 31.12.2011IncomeDividend income100,000Interest income 20,000Rental income220,000ExpensesInterest expense on:- shares acquired 60,000- deposit placed120,000- properties acquired 60,000Fund management fees on shares acquired 20,000Maintenance of properties 40,000

__________________________________________________Dividend income100,000Less: Interest expense on:- shares acquired 60,000 Fund management fees 20,000 80,000Statutory income 20,000Interest income 20,000Less: interest expense120,000 Statutory incomenilRental income220,000Less: interest expense( 60,000)Maintenance ( 40,000)120,000Aggregate income of IHC120,000Deemed totalincome(

Expenses general and permittedThere are two type of expenses deductible from the gross income in the case of an IHC in arriving at the adjusted income and the total income General - Expenses falling under sec 33(2) deducted from gross income to arrive at the adjusted incomePermitted - Expenses falling under sec 60F(2) deducted from aggregate income to arrive at the total income

Deductibility of the expensesThe general expenses must comply with the requirements of sec 33 and sec 39 of the ITA It must be wholly and exclusively incurred in the production of gross income.It is only allowed against the particular source of income.

Permitted fraction of expenses s 60F(2)If the revenue expenses cannot be treated as wholly and exclusively incurred in the production of the particular source of income, then such expenses would only be allowed as deduction if that expenses fall into the ambit of permitted expenses as defined under S 60F(2)

Scope of permitted expensesNot deductible under s 33(1) but fall under s 60F(2)Directors feesWages, salaries and allowancesManagement feesSecretarial, audit and accounting fees, telephone charges, printing and stationery costs and postage andrent and other expenses incidental to the maintenance of an office

Exclusion of expensesIt is important that the expenses allowable under section sec 60F(2) should be expenditure not qualifying for deduction under sec 33(1).

Tax preparation fees relating to filing of tax returns are considered as falling within the meaning of sec 60F(2)

ExampleAnthony Wee is an expert in fund management. He has been appointed as Director for Sure Save Bhd to solely monitor the share investment of the company. Sure Save Bhd is an investment holding company by virtue of S 60F.

The director fees paid to Anthony would be deductible against dividend income and not form part of the permitted expenses.

Fraction of permitted expensesWhen the IHC had incurred the permitted expenses, only a fraction of such PE is given a deduction against aggregate income in arriving at the total income of the companyLower of A* B/4C or 5 % of B

The fraction will be determined as follows: A* B/ 4CWhere: A=the total of the permitted expenses incurred forthat basis period reduced by any receipts of asimilar kind;B=the gross income consisting of dividend, interestand rent chargeable to tax for the basis period;andC=the aggregate of the gross income consisting ofdividend (exempt or not), interest ( chargeable) and rent andgains made from the realization of investments forthat basis periodA * B/4C

The definition of C would comprise the following:C = B + exempt dividend + gains from realization of investmentIf the company does not have exempt dividends and gains from realization of investment, C = BThe maximum deduction would thus be 25% of A, computed as follows:A * B/4C = 0.25 AThe gain or loss from realization of each investment has to be computed separately. Any loss from realization of a particular investment cannot be part of the C .

Unabsorbed permitted expensesWhere there is insufficient aggregate income to fully set off the fraction of permitted expenses, the balance of the expenditure is not available to be c/f to be set off in subsequent years of assessment. It would be a permanent loss.

Computation of Chargeable Income:Aggregate income (AI) - interest rental or management feesxxLess: Fraction of permitted expenseA * B or 5 % of B , whichever is lower(x) 4CxxxLess: Approved donation ( restricted to 10% x AI)(x)Total incomexxxDeemed total income from dividendxxxTotal incomexxx

Listed IHCWith effect from YA 2006, listed IHC is given preferential treatment to have its income from holding of investments as business source. Resident listed IHC deriving dividend, interest or rental income shall treat these incomes as a single business source to be assessed as s4(a). However IRB treated each source separately and therefore expenses which meet s 33 are allowed to be set off against each source

Listed IHC s 60FA(2)All expenses will be deducted against the gross income to arrive at adjusted incomeExpenses include the permitted expenses such as directors fees But no c/f of losses or offset against aggregate income. Likewise for CA. S 18 of Finance Act 2005 allows listed IHC to continue set off unabsorbed CA and business losses b/f from YA 2005 until fully utilised

IRB - LIHCThe treatment of investment income as business income means that the test of deductibility should not be construed too narrowly. There is no deduction for permitted expenses, so expenses of management and administration of investment activities will be allowed, subject to the normal rules of deductibility. Where such expenses apply to more than one source of income, they must be apportioned on the basis of gross income.

IRB - LIHCAn LIHC will also be eligible for capital allowances in respect of qualifying capital expenditure for assets used to produce income from the investment sources Investment income may come from several different sources, and each source is to be treated as a separate business source.

IRB - LIHCThe ITA gives no guidance on how to identify and distinguish such sources. One should therefore follow the categorization mentioned in section 4 i.e. dividends, interest, discounts, and rent as to the four separate sources. Where more than one source of income exists the allocation for common whether expense or capital allowances, should go by a pro-rata gross income basis.

Restrictions However the deductibility is limited to the income of the current year.Excess expenditure over the gross income will NOT be carried forward to the following year of assessment unless it is a business source.Unabsorbed capital allowances too cannot be carried forward.

Example 13: Era Baru Bhd is an IHC listed on the Bursa Malaysia. The income and expenses for the year of assessment 2012 are as follows : Source of income Gross income Interest expense Dividend 400,000 350,000 Interest 200,000 160,000 Rental Nil 70,000 Total gross income 600,000 Common expenses RM250,000 Common capital allowances RM80,000 Interest expense is a direct expense and not a common expense. The apportionment of interest expense that can be allowed against each source of investment income is computed based on the cost of each investment.

The total income of Era Baru Bhd for the year of assessment 2012 is computed as follows: (RM000) (RM000) (RM000) I. Gross interest 200

Less: Interest expense 160 Common expenses 200,000 X 250,000 83.333 600,000243.333 restricted to 200.00200Nil 43.333 (disregarded) Common CA200,000 X 80,000 26.667 (disregarded) 600,000

The total income of Era Baru Bhd for the year of assessment 2012 is computed as follows: (RM000) (RM000) (RM000) II. Gross rental Nil

Less: Interest expense 70 (disregarded)

III. Gross dividend400Less: Interest expense 350Less Common expenses 400,000 X 250,000 166.667600,000516.667 restricted to 400.000400Nil 116.667 (disregarded) Common CA400,000 X 80,000 53.333 (disregarded) 600,000Total incomeNil

Example 14: Investment Bhd is an IHC listed on the Bursa Malaysia. The income and expenses for the year of assessment 2012 are as follows : Source of income Gross Directincome expense Management fee200,000350,000 Dividend 1,000,000 600,000 Interest 300,000 150,000

Total gross income 1,500,000 Common expenses 250,000 Common capital allowances 200,000

Solution(RM000) (RM000) (RM000) I. Management fee200Less: Interest expense 350 Less: Common expenses 200,000 X 250,000 33.333 1,500,000383.333 restricted to 200.00200Nil Current year business loss183.333Common CA200,000 X 200,000 26.667 can be c/f1,500,000

As management fee is treated as part of business activity

(RM000) (RM000) (RM000) II. Gross interest300Less: Interest expense 150 Less: Common expenses 300,000 X 250,000 50200Adjusted income100Less: Common CA200,000 X 200,000 40601,500,000

III. Gross dividend1000Less: Interest expense 600Less: Common expenses 1,000,000 X 250,000 166.667766.667 1,500,000Adjusted income233.333 Less: Common CA1,000,000 X 200,000 133.3331001,500,000Aggregate Income160Less: CY business loss s44(2)183.333restricted to 160.000160Loss c/f 23.333Total incomeNil

Listed IHCNon-listedIHCCompany with business incomeAvailability of business sourceYesNoYesNumber of sourcesBusiness sourceSource by source 31 business source s 4a set off CY business lossNo other than management feeN/AYes

Listed IHCNon-listedIHCCompany with s4(a)Unabsorbed CA c/fNo other than management feeN/AYesUtilise unabsorbed CA & loss b/f after 2006No other than management feeN/AYes Deduction of permitted expensefullyfractionfully

Advantages of IHCAny gain from realization of investment would be capital gain and not subject to income tax. Any loss would not be deductible.If the frequency of disposal of investment is too high or the holding period is short, DG can deem the company to be investment dealing company.The gain would then be assessed as business income

Investment dealing companyA comparison between IHC and investment dealing company is shown on page 108. Income are assessed under s 4a

Other tax issues for IHCInterest income, dividend income and rental income are assessed on receipt basis Foreign interest income remitted is exempted from tax and therefore not included in the quantum of deduction for permitted expenses - Income Tax Exemption Order No 48.If withholding tax is not complied with for payment to a non-resident firm, then it is not a deductible expense

Tax treatment for IHCLegal fees which is capital in nature such as agreement drawn for the setting up of IHC is not a deductible expense.No capital allowances is available to IHC as it is not carrying on a business

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