Company Tax Planning

a) Holding Company
 Charging of management fees – at arm’s length
 S. 140A Anti avoidance provision for related companies
– IRB can improve MV on the supply of goods and services between
related companies
 Advantages of charging management fees at market rate
– Companies may no longer be an IHC, then management fees are
business income then expenses fully deductible
– IHC – section 60F applies – restriction of deductions for expenses to
maximum 25%

b) Payment of dividends
 Interest expense on loans used to buy shares would be disregarded as
dividends are exempt
 Sch 6 Para 12 – non deductibility of expenses against exempt dividends

c) Exempt income account

 If there’s an exempt income account, to pay dividends out of exempt account

d) Reinvestment allowance
 Qualifying project – automation, expansion, modernization
 Financing options under RA
 Transfer the investment in subs co 2 from subs co 1 to the holding company
so that shareholders can enjoy tax free dividends from RA incentive enjoyed
by the subs co 2

H Co
100% H Co
Sub Co 1
100% 100%
100%
Sub Co 2 Sub Co 1 Sub Co 2
e) For profitable company and loss making company (look for matching companies
manufacturing similar products)
 Do not transfer operation from profit making company to loss making
company as loss making company has no unabsorbed losses

f) For loss making companies (there are 3)

 Section 44A Group Relief Losses; important criteria RM 2.5m OSC

g) Trading company is in exporting

 Enhanced Export Incentive – penetrating new markets (Lecture 7 – Tax
Incentive)

h) Disposal of property from shareholder to company

 The sales consideration will be deemed to be the market value (i.e. the
consideration will be substituted with the market value) – See RPGT Notes
 So should just dispose at the market value
 The acquiring company will acquire the land at a higher value
 How to avoid tax for the shareholder? To dispose after 5 years (Rate is 0%)

i) Situation: A subsidiary company has paid up share capital of RM 2.0m and needs
funds. Should the holding company give a loan (interest free or at market rate) or
take up additional shares in the subsidiary?

Option – Equity

1. Dividends
 Result: Holding Company – higher dividends
Subs company – dividend payment not deductible
2. Is subsidiary company an SME?
 Incentives for SMEs
– Lower tax rates: On first RM 500,000 @ 18%, balance @ 24%
– No restriction on the allowances claimed on small value assets (others:
RM 13,000 maximum claim on SMA)
3. Subsidiary company is not an SME even though paid up capital is less than RM
2.5m for an SME
 SME conditions
– Paid up capital of RM 2.5 m or less
– Not more than 50% of the paid up OSC is owned by a related company
where the related has more than RM 2.5m paid up OSC
 So subsidiary is taxed at the normal 24% and claim for Small Value Assets
restriction to RM 13,000

Option – Interest free loan with no terms for repayment

1. Interest free loans with no terms for repayment is not a loan. It is a grant.
2. How is the grant used?
If grant is used to pay off trade debts and staff costs (deductible expense), then the
grant received is taxable.
3. Only grants from government are exempt
4. Loan from the holding company is considered a grant which is taxable.

Option – Loan with interest charged at market rate (interest becomes payable a
few years later)

See notes on taxability of interest income

Disposal of Land – RPGT

1. Allowable loss
2. Built a structure which was washed away (permitted expenses, insurance
compensation). See Tutorial 4 Q6 (construction and destruction of a showroom
building); RPGT computation
3. Legal cost in DEFENDING title
4. Disposal in 6th year (tax rate: 0% / 5%)
5. Definition of disposal: sale, conveyance, transfer
6. Exchanging land for another land is also a disposal
 Disposal date
 Where disposal requires approval of State Government, date of disposal is the
date of approval from the Government
 Even though the agreement to exchange will be signed later, the date of
disposal will be the date approval is received from the Government
7. Exchange land for another land is also a disposal
Disposal price
 Sch 2 Para 13: where an asset is disposed in exchange for another asset
 The MV of the asset received shall be the consideration for the disposal
 Does not matter if the asset is a chargeable asset or not (e.g. foreign land)
 So the disposal is the MV of the other asset (the foreign land)

k) Tax incentives

1. Allowance for Increased Exports

Conditions:
 Resident Company engaged in manufacturing a consumer product
 Consistently achieves at least 30% of value added
 Has export sales, and expects to increase its export sales every year
 Does not enjoy any other tax incentive in the YA.

AIE Computation: To consider only export sales (exclude local sales)

RM
Export Sales – Year 1 2,000,000
Increase in Export Sales – Year 2 (20%) 400,000
AIE (10% × RM 400,000) 40,000
 ALLOWANCE FOR INCREASED EXPORTS

 Resident manufacturing and agricultural companies only

 Incentives depends on value added of the product:
Value added Criteria
Manufactured products %AIE
Non SME SME (YA 16 to 18)
≥ 30% ≥ 20% 10%
≥ 50% ≥ 40% 15%
No value added required for agricultural
10%
produce

 The amount of allowance is restricted to 70% of statutory income for each

YA
 The unutilise allowance can be c/f to be used in future YAs

2. Reinvestment Allowance – Conditions

 Resident Company
 In operations for more than 36 months
 Does not enjoy any other tax incentives in the YA
 Capital expenditure incurred for qualifying project (e.g. modernization,
automation, expansion)

3. Pioneer Status

l) Leasing and HP Business – Tutorial 9 Q4(c)

m) Tax Evasion and Avoidance

1. Tax Evasion: not deducting rental income, claiming for deduction of non-
existence of expense (coming up with fake invoices)

2. Tax Avoidance: paying staff RM 12,000 as salary (deductible) instead of as

leaver passage (not deductible)
 3. Tax Evasion Penalties:
– Company may be liable for prosecution for wilful evasion (s. 114) or for
making incorrect returns (s.113)
– Director may be liable for prosecution for helping a company to evade
tax by preparing false accounts or records (s.114)

n) Project implementation to add a structure (into an existing company or into a

newly formed company)
1. Deductibility of feasibility studies and other establishment expense
 Existing company – if the project is to extend the current business
activity…
 New company – if the project results in a new business
2. Supply and pricing of stocks
 Existing company – if activity is placed within the same company, then
no sales transaction. So no pricing of stocks needed.
 New company – transfer of stocks between the related companies must
be priced. To avoid transfer pricing issues, price must be at MV; s. 140A
3. Loan interest expense – deductibility. How is the loan used?
 If loan is used for the assets in the business in the existing company
 If loan is used to finance equity in the new company
 If loan is used to on lend to the new company