1.
Definition of an Investment Holding Company (IHC)
An Investment Holding Company (IHC) is a company whose primary objective is holding
investments to derive passive income. Under Section 60F of the Income Tax Act, 1967, an
IHC is defined as a company that:
1. Holds investments as its primary business, which may include
shares, properties, fixed deposits, or other forms of income-
generating assets.
2. Derives income primarily from investments, such as:
o Dividends: Income from shares held in other companies.
o Interest: Income from fixed deposits or loan arrangements.
o Rental income: From properties owned by the IHC.
o Gains on disposal of investments: Such as shares or
properties.
Key Characteristics of IHCs:
The company generally does not actively engage in operational
activities such as trading, manufacturing, or service provision.
The IHC structure is often used for asset protection, income
diversification, or tax planning.
Purpose of IHCs:
Facilitating centralized management of group investments.
Protecting shareholders by segregating investment assets from
operational risks.
Enabling efficient dividend flow and tax optimization within
corporate groups.
2. Definition of the Business of Holding Investments
The business of holding investments refers to activities where a company manages and
oversees its investment portfolio to generate income. While the term "business" typically
involves operational activities, in the context of an IHC, it pertains to the following:
1. Active Management of Investments: Regular decision-making on
portfolio rebalancing, investment diversification, and disposal
strategies.
2. Income Generation Activities: Maximizing returns from
dividends, interest, or rental income.
3. Capital Growth: Ensuring long-term appreciation of investment
assets.
Investment Holding vs. Operational Business:
The distinction between holding investments and conducting an active business is crucial for
tax purposes. Operational businesses can claim broader deductions and allowances, while
IHCs face more restrictive tax rules.
3. Determination of an IHC
To determine whether a company qualifies as an IHC under Section 60F(2) of the ITA, 1967:
Primary Purpose: The main activity of the company must be
holding investments.
Income Composition Test:
o If more than 80% of the gross income of the company is
derived from investment activities (e.g., dividends, interest,
rental income), it is classified as an IHC.
o The remaining income, if any, is incidental to its primary
investment activities.
Example:
A company earns RM800,000 in total gross income:
RM700,000 from dividends and rental income (investment
activities).
RM100,000 from consulting fees (operational business).
Since RM700,000 constitutes 87.5% of the total income, the company is classified as an IHC.
Practical Implications:
Being classified as an IHC subjects the company to specific tax rules, including restricted
expense deductions and limited carry-forward of losses.
4. Tax Treatment for IHC Not Listed on Bursa Malaysia
Non-listed IHCs face stringent tax rules under Section 60F of the ITA. The main features are
as follows:
Deductibility of Expenses:
Expenses incurred to derive investment income are deductible, but only a proportion of the
total expenses is allowable. The deduction is calculated as follows:
Allowable Expenses=(Gross Investment IncomeTotal Gross Income)×Total
Expenses\text{Allowable Expenses} = \left(\frac{\text{Gross Investment
Income}}{\text{Total Gross Income}}\right) \times \text{Total Expenses}
Example of Expense Restriction:
Gross Investment Income: RM500,000
Total Gross Income: RM600,000
Total Expenses: RM200,000
Allowable Expenses=(500,000600,000)×200,000=RM166,667\
text{Allowable Expenses} = \left(\frac{500,000}{600,000}\right) \times
200,000 = RM166,667
The remaining RM33,333 of expenses (RM200,000 - RM166,667) is not deductible.
Capital Allowances:
Capital allowances are generally not available unless the IHC also operates an active business
alongside its investment activities.
Loss Carry-Forward Restrictions:
Unabsorbed business losses and capital allowances can only be carried forward to offset
future business income from the same source.
Tax Rate:
The income of a non-listed IHC is taxed at the standard corporate tax rate of 24%.
5. Tax Treatment for IHC Listed on Bursa Malaysia
Listed IHCs are governed by Section 60FA of the ITA and enjoy more favorable tax
treatments compared to non-listed IHCs.
Expense Deductions:
All expenses incurred wholly and exclusively in producing income
are fully deductible.
No proportional restriction as applied to non-listed IHCs.
Capital Allowances:
Listed IHCs are eligible for capital allowances on qualifying assets used for income
generation.
Loss Carry-Forward:
Unutilized business losses and capital allowances can be carried forward without restrictions,
provided compliance with current rules (e.g., substantial shareholding test).
Tax Rate:
Income is taxed at the standard corporate rate of 24%.
Example:
A listed IHC derives RM1 million in gross income and incurs RM300,000 in expenses related
to the production of income.
The entire RM300,000 is deductible, resulting in net taxable income
of RM700,000.
Tax payable: RM700,000 × 24% = RM168,000.
6. Illustration of Tax Computation for Non-Listed IHC
Assumptions:
Gross investment income: RM500,000 (dividends and rental).
Total gross income: RM600,000 (including RM100,000 interest
income).
Total expenses: RM200,000 (includes management fees, staff costs,
and operational expenses).
Computation:
Step 1: Restrict deductible expenses using the formula:
Allowable Expenses=(Gross Investment IncomeTotal Gross Income)×Total
Expenses\text{Allowable Expenses} = \left(\frac{\text{Gross Investment
Income}}{\text{Total Gross Income}}\right) \times \text{Total Expenses}
Allowable Expenses=(500,000600,000)×200,000=RM166,667\
text{Allowable Expenses} = \left(\frac{500,000}{600,000}\right) \times
200,000 = RM166,667
Step 2: Compute adjusted income:
Adjusted Income=Gross Investment Income−Allowable Expenses\
text{Adjusted Income} = \text{Gross Investment Income} - \
text{Allowable Expenses}
Adjusted Income=500,000−166,667=RM333,333\text{Adjusted Income}
= 500,000 - 166,667 = RM333,333
Step 3: Compute tax payable:
Assuming a corporate tax rate of 24%,
Tax Payable=RM333,333×24%=RM80,000\text{Tax Payable} =
RM333,333 \times 24\% = RM80,000
Impact of Restriction:
If the company were a listed IHC, the full RM200,000 in expenses would be deductible,
reducing taxable income and resulting in lower tax liability.
Comparison Between Listed and Non-Listed IHCs
Aspect Non-Listed IHC Listed IHC
Expense Deduction Proportionally restricted Fully deductible
Capital Allowances Generally not applicable Applicable
Limited to same source of Broadly
Loss Carry-Forward
income applicable
Tax Rate 24% 24%
Flexibility in Tax
Limited More favourable
Treatment
Conclusion
The tax treatment of IHCs in Malaysia under the ITA, 1967, varies significantly based on
whether the company is listed on Bursa Malaysia. Non-listed IHCs face restrictive tax rules,
including proportional expense deductions and limitations on loss carry-forwards. In contrast,
listed IHCs benefit from more favourable tax treatment, including full expense deductibility
and access to capital allowances This computation highlights the restrictive tax treatment for
non-listed IHCs. Additional adjustments may apply depending on specific circumstances
such as exemptions, reliefs, or tax credits. Understanding these differences is crucial for
structuring investments and managing tax liabilities effectively. Ms. Jovi should carefully
evaluate the nature of the IHC's operations and income composition to ensure compliance
with tax laws while optimizing tax outcomes.