Understanding the tax treatment of an IHC is crucial for businesses that are principally engaged in the activity of holding investments. Most of the time, businesses may not know what constitutes an IHC and its corresponding tax treatments. According to the Inland Revenue Board of Malaysia’s (IRBM) guideline, the tax treatment for an IHC varies depending on whether the IHC is listed on the Bursa Malaysia or not. In this article, we will cover the tax treatment for non-listed IHC, which is provided under section 60F of the ITA.     

What is an Investment Holding Company? 
An IHC is a company primarily engaged in holding investments. From the IRBM’s perspective, the determination of whether a company is an IHC depends on the following criteria:-

1. its main activity is the holding of investments; and
2. not less than 80% of the company’s gross income other than gross income from a business of holding of an investment (whether exempt or not) is derived from the holding of those investments.

In simple terms, the income from the ‘holding of investments’ is non-business income. IHC generates non-business income through various investments, such as dividends from their holding of shares, interest from fixed deposit placement, and rental income from real estate, etc.  

What is the tax treatment for non-listed IHC? 
Generally, an IHC is not entitled to various preferential tax treatments that are granted to Small and Medium-sized Enterprises (SMEs), such as capital allowance for small value assets (SVA), preferential tax rate of 17%, and so forth. In light of this, here are several tax implications associated with being a non-listed IHC: 

• A non-listed IHC will be subjected to a higher tax rate as compared to SMEs. The tax rate applicable to IHC is a flat rate of 24%.  
• The allowable deduction amount is restricted and is only allowed for direct expenses incurred in the production of investment income. Any excess of those expenses is to be disregarded.  
• The allowable amount for general expenses is restricted, where only a fraction of such expenses are allowable for a deduction.  
• Permitted expenses that are allowable for deduction include:

1. directors’ fee;
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. 

As per IRBM’s guideline, the amount deductible will be the lower of: 

1. A x B/4C; or  
2. 5% of gross income consisting of dividend, interest and rent (gross investment income) chargeable to tax 

Where A is total permitted expenses; B is gross investment income chargeable to tax; and C is the aggregate of gross investment income (whether such dividend or interest is exempt or not) and gains from the realisation of investments.

• Unabsorbed losses cannot be utilised against other sources of income and cannot be carried forward to subsequent Years of Assessment.
• Not entitled to claim capital allowance as it is not carrying on a trade or business.

Basically, there are different tax treatments for both listed IHC and unlisted IHC. Therefore, it is crucial that businesses fully understand the tax requirements of IHC to maximise their deductions while avoiding penalties for filing an incorrect return form.

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