Using a Holding Company to Hold Property in Malaysia

A holding company can be used to purchase property. Using a holding company to purchase property in Malaysia offers foreigners several advantages, including easy and flexible disposal or transfer, asset protection, wealth management, estate planning, potential tax benefits, loan financing, income tax on rental income, and real property gains tax. Nevertheless, investors should take into account other key considerations such as compliance with laws and regulations, the structure of the holding company, and costs associated with it.

Easy and Flexible Disposal or Transfer

If the investor decides to exit or dispose of the investment, transferring the company's shares can be done as an alternative to transferring the underlying property or fractional ownership interests in the property. The transfer of shares results in significant savings on stamp duty for the next buyer (especially if it is a related party).

The transfer of shares of a company is also significantly faster than a transfer of property. A dedicated property investment company with a professionally maintained set of accounts and taxes can be an attractive proposition to another property investor.

Asset Protection, Wealth Management and Estate Planning

Asset protection is a component of financial planning intended to protect one's assets from creditor claims. Individuals and business entities use asset protection techniques to limit creditors' access to certain valuable assets while operating within the bounds of debtor-creditor law.

The truly wealthy understand that maintaining their fortune for generations is as important as actually earning it. There is a Chinese proverb saying "wealth does not pass (survive) three generations." A company with at least one minimum shareholder can survive in perpetuity, making it a useful tool for asset protection, wealth management and estate planning.

This is especially relevant if the property investor is elderly, or intends to pass the property to beneficiaries. The transfer of ownership interest in the actual property is generally expensive and time consuming. Instead, the transfer of shares in a company to beneficiaries can be quickly and affordably effected after the Grant of Probate is obtained. This allows the beneficiaries faster access to, and preserves more value in, the estate.

The holding company structure separates ownership of the property from the personal assets of the foreigner. This means that if the property faces legal issues or financial difficulties, the foreigner's personal wealth is not directly at risk.

Loan Financing

Incorporating a company with higher paid up share capital may put the company on better footing to secure bank financing for subsequent purchases of property. A good financial track record of timely loan repayments, supported by a portfolio of properties generating strong rental income flows, will enable a company, over time, to secure financing or refinancing more easily and maximise its ability to leverage in its investments.

Income Tax on Rental Income

The company tax rate may be lower than a foreigner's personal income tax rate, depending on the individual's tax residency status. The maximum personal income tax rate in Malaysia for a non-resident is a flat rate of 30%, while the corporate tax rate in Malaysia starts at 17% for the first RM 600,000 per year, and 24% in excess of that.

The potential savings of up to 13% on tax payable on rental income derived from the properties could far outweigh the nominal annual costs of maintaining a company. If structured properly to constitute business income, a company could also potentially enjoy more tax deductibles against the rental income compared to personal income tax.

Real Property Gains Tax (RPGT)

The real property gains tax rates applicable to a company which disposes of property decrease from a scale of 30%, 20% and 15% over the course of five years. On the other hand, the RPGT rate for foreign individuals is a flat 30% if the property is disposed of within the first five years. This differential in RPGT rates could make a big difference in the net return on investment of your property.

Economic Substance Requirements

• Minimum number of full time employees in Labuan: one (1)
• Minimum amount of annual operating expenditure in Labuan: RM 20,000

Please refer to our whitepaper on Tax Framework in Labuan IBFC: New Development for further details.

Summary: Using a holding company to hold property in Malaysia offers foreigners significant advantages in terms of flexibility, asset protection, tax efficiency and estate planning. Professional advice is recommended to ensure the structure is optimally set up for your specific situation. You may also find our whitepaper on Asset Protection, Wealth Management and Estate Planning useful, and our Corporate Services page describes how we set up and administer holding companies.

The information contained in this document is provided for information purposes only. It does not constitute legal advice and should not be relied upon as such. Readers may need to obtain professional advice on legal or tax issues before relying on it. QX Trust Co. Ltd tries to ensure that the content is accurate, adequate, or complete, but does not represent or warrant, express or implied, its accuracy, correctness, completeness or use of any of the information. QX Trust Co. Ltd expressly disclaims any liability to any person for loss or damage incurred as a result of reliance placed upon the information contained in this document.

For tailored advice on this topic, contact our team.