IT IS very common for groups of companies to undertake restructuring for various reasons: reduction of operating costs, avoiding duplication of resources, reducing financing costs, reducing bureaucratic compliance and improving tax efficiency.
Merging businesses within the group will reduce the need to prepare an extra set of tax returns, eliminating the need to manage transfer prices (direct and indirect taxes) and prepare transfer pricing documentation and possibly elimination of the need to account for sales and service tax for intercompany transactions. Merging businesses will allow the use of current year business losses generated from one business against the profits of another business.
Common types of restructuring
The two common types of internal restructuring will be through share transfers or asset transfers. Asset transfers can be of two types – selling the business “lock, stock and barrel” to another entity within the group, or the business will be broken down and sold on a piecemeal basis (i.e. assets and liabilities will be sold separately).
Pointers to watch out for
► Share transfers
In the case of shares being transferred within the group, stamp duty will be payable at the rate of 0.3% of the consideration or market value of the shares (if the company is listed), whichever is higher. If the shares are not listed, 0.3% stamp duty will be payable on the higher of the consideration or net tangible asset of the company.
The transfer of shares could also trigger Capital Gains Tax (CGT) where unlisted shares are transferred within the group. The government earlier announced that CGT exemptions will be given on the transfer of shares involving internal group restructuring. However, to date, no gazette order or rules have been introduced to effect the exemptions. Since the introduction of CGT in 2024, there is no need to check whether such shares are Real Property Company shares since such gains will no longer be subject to Real Property Gains Tax (RPGT).
► Business transfers
If the business is transferred as a whole and that will include all assets and liabilities, staff and business connections, the tax issues you need to consider will cover stamp duty, income tax and potentially RPGT. Since the business is viewed as a “property” for stamp duty purposes, the stamp duty applicable will be at the ad valorem rate of 1% to 4% based on the higher of the consideration or market value of the business. The market value can be based on multiples of the price earnings ratio, discounted cash flow, and any other acceptable valuation methodologies.
If the business is transferred as a whole, the consideration will be regarded as capital in nature, and the company should not be subject to income tax. However, if there are any real properties involved in the transfer of the business, then RPGT will be triggered.
► Piecemeal transfers
If there is a business restructuring involving the transfer of assets and liabilities separately on a piecemeal basis, it is extremely important for stamp duty purposes that the fragmentation is not intended to avoid paying stamp duty at a higher ad valorem rate. Normally, if there is a piecemeal sale between two third parties, the buyer will not buy all the assets and liabilities but instead he will pick and choose assets and liabilities that he is prepared to take over. The same characteristics should also be present in transfers on a piecemeal basis between related companies to avoid being labelled as a transfer of a business as a whole.
In this scenario, you need to look at the tax implication of each asset and liability that is being transferred. There are different tax treatments for the transfer of stocks, debtors, creditors, fixed assets and real properties, intangibles, bank loans, provisions transferred, employees, concessions, long-term contracts, etc.
Finally, you should be aware that there are provisions in the Stamp Act 1949 and RPGT Act 1976 that provide exemptions for such transfers.
This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (www.thannees.com).
