Investment Holding Company Tax Malaysia: Are Permitted Expenses Deductible?

What is an Investment Holding Company?

Under the Malaysian tax rules, an Investment Holding Company is generally a company whose activities consist mainly of holding investments and where not less than 80% of its gross income, other than income from a business of holding investments, is derived from those investments.

For a non-listed IHC, the special tax treatment is provided under section 60F of the Income Tax Act 1967. IRBM's current guidance is contained in Public Ruling No. 2/2024 – Investment Holding Company.

Examples of investment income may include:

• interest income;

• rental income;

• dividend income; and

• certain distributions from investments.

What are “Permitted Expenses”?

A non-listed IHC is subject to special rules for expenses.

Under section 60F, certain expenses may qualify as “permitted expenses”, even where they would not otherwise qualify for deduction under the general rule in subsection 33(1) of the Income Tax Act 1967.

IRBM's Public Ruling No. 2/2024 identifies the following categories of permitted expenses:

1. Directors' fees;

2. Wages, salaries and allowances;

3. Management fees;

4. Secretarial, audit and accounting fees, telephone charges, printing and stationery costs and postage; and

5. Rent and other expenses incidental to the maintenance of an office.

These are expenses which are not otherwise deductible under subsection 33(1).

This is particularly relevant for IHCs because many of their ordinary annual costs — such as audit, accounting and company secretarial fees — may fall within the permitted expense categories.

Does “Permitted Expense” Mean It Is Automatically Deductible?

No.

This is the important point that IHCs and their advisers should be aware of.

For a non-listed IHC, the amount of permitted expenses that can actually be deducted is determined using the formula prescribed under section 60F:

A × B / 4C

where:

• A = total permitted expenses incurred during the basis period, reduced by receipts of a similar nature;

• B = gross income consisting of taxable dividend, interest and rent; and

• C = aggregate gross income consisting of dividend and interest (whether exempt or not), rent and gains from the realisation of investments.

The deduction is also subject to a 5% cap based on the relevant gross investment income.

Therefore, an IHC does not simply deduct all of its accounting expenses from its investment income.

What Happens If the IHC Is Dormant?

This is where the position becomes particularly interesting.

A company may be considered dormant from a Companies Act or administrative perspective because it has ceased its active operations and only incurs minimum compliance expenses.

However, being dormant does not automatically mean that its expenses become tax deductible.

For example, a dormant IHC may continue to incur:

• audit fees;

• accounting fees;

• company secretarial fees;

• tax compliance fees; and

• other statutory compliance costs.

Some of these expenses may fall within the definition of permitted expenses.

However, if the IHC has no aggregate investment income for the year, there may be no permitted expense deduction available for that year.

IRBM's Public Ruling No. 2/2024 specifically states that where there is no aggregate income, or where the aggregate income is insufficient to absorb the permitted expenses, the excess permitted expenses cannot be carried forward to subsequent years of assessment.

What If the IHC Has Some Investment Income?

The position changes if the IHC has taxable investment income.

For example, assume the company has:

• RM50,000 interest income;

• RM20,000 taxable rental income; and

• RM10,000 permitted expenses.

The company may be entitled to a deduction for a portion of the permitted expenses, subject to the prescribed section 60F formula and the applicable 5% restriction.

The full RM10,000 is not necessarily deductible.

This is why the tax computation should be prepared based on the section 60F mechanism rather than simply taking the profit or loss reported in the financial statements.

What About Single-Tier Dividends?

Another important consideration is that single-tier dividend income is exempt from tax.

IRBM's Public Ruling No. 2/2024 confirms that expenses relating to the derivation of single-tier dividend income are disregarded. This means that an IHC should not assume that receiving dividend income automatically creates a pool of taxable investment income against which all its permitted expenses can be deducted.

For example, an IHC receiving only Malaysian single-tier dividends may have significant dividend receipts but little or no taxable investment income for purposes of the permitted expense calculation.

This can produce a very different tax result from what might initially be expected.

Common Misunderstanding: “The Company Is Dormant, So There Is No Tax Issue”

A dormant company may have no tax payable, but that does not mean there are no tax compliance considerations.

An IHC should still consider:

• whether it continues to meet the definition of an IHC;

• whether it has any investment income;

• whether any income is taxable or exempt;

• whether expenses fall within the permitted expense categories;

• whether section 60F applies;

• whether there is any permitted expense deduction available under the formula; and

• whether any unabsorbed amount can be carried forward.

In particular, unutilised permitted expenses under section 60F cannot simply be accumulated indefinitely for use when the company eventually starts generating investment income.

Practical Takeaway for IHCs

For shareholders who maintain an IHC primarily to hold shares, properties or other investments, the tax treatment of annual compliance costs can be easily misunderstood.

The key principle is:

Being a permitted expense does not mean that the expense is automatically deductible.

The expense must first fall within the permitted expense categories and the amount deductible must then be determined under the section 60F formula.

If the IHC has no relevant investment income, the company may have no immediate tax deduction, and the unused amount generally cannot be carried forward.

Therefore, even where an IHC is dormant or has minimal activity, it is important to review its tax position annually rather than assuming that its accounting expenses will automatically be deductible.

Need help with your Investment Holding Company?

If your company is an investment holding company, particularly one holding shares, properties or other investments, our tax team can assist with reviewing the company's IHC status, permitted expenses and section 60F tax computation.

Loi Tax Consultancy Services Sdn. Bhd.
Tax Advisory | Corporate Tax Compliance | Tax Planning

This article is intended for general information purposes only and should not be regarded as tax advice. The tax treatment depends on the specific facts and circumstances of each company and the legislation and IRBM guidance applicable for the relevant Year of Assessment.

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