An investment holding company (IHC) in Malaysia is a company specifically established to hold investments. Sure, but… that sounds rather circular, doesn’t it?
While a company like a minimart is obviously created to earn profits from buying and selling things like groceries, an IHC is designed simply as a structure to hold assets. In this case: property.
An IHC exists as a separate legal entity to those individuals involved, which means the company is a legal body representing the investment assets it holds.
That also means an IHC acts as a legal entity when it comes to elements such as liability of debts, loan applications, and taxation.
There’s a lot of talk around this type of financial structure when it comes to property investment, and investment holding in general.
It’s a complex area that dives deep into the world of taxation and financial regulation. Still, we want to explore the overview of what IHS is to inform our property-centric audience!
What’s The Official Definition Of An Investment Holding Company?
Here’s the exact wording applied by a ruling from the Inland Revenue Board of Malaysia (LHDN) on the definition of an investment holding company:
An investment holding company (IHC) means a company whose activities consist mainly in the holding of investments and not less than 80% of its gross income other than gross income from a source consisting of a business of holding of an investment (whether exempt or not) is derived from the holding of those investments.
LHDN is sort of like the people that are important when it comes to the potential financial implications of something like an IHC.
Gross income in this case relates to the income earned from holding these particular properties.
That means the total dividend earned from the properties, plus any interest earned on that amount, as well as the total rental income from any non-business source.
Let’s look at an example used by the Inland Revenue Board:
There are two types of investment holding companies in Malaysia for tax purposes – those not listed on the Bursa Malaysia, and those that are.
An IHC is deemed to be Bursa-listed if it’s listed on the Bursa Malaysia for any period during a given tax year.
The income of a listed IHC is treated as business income, and expenses are given full tax deduction. Unabsorbed losses and capital allowances cannot be taken forward.
An unlisted IHC may claim deductions for a certain proportion of administrative expenses such as staff wages and management fees.
Such deductions are limited to 5% of the total gross income, and unabsorbed expenses may not be carried forward.
Now, before we go forward in understanding the pros and cons of an investment holding company, let’s quickly understand the ruling that the LHDN has established to give us more context.
What Is An Investment Holding Company Ruling?
In general, a public ruling sets to explain the tax treatment structures that an investment holding company residing in Malaysia have to abide by.
The public ruling serves as a guide for both civilians and the officers representing the Inland Revenue Board of Malaysia.
It works out the understanding that the Inland Revenue’s Director-General acquires information regarding the tax laws, policies, and procedures applicable to its operations.
To ensure that the public ruling is coherent and valid, the Director-General will refer to Section 138A of the Income Tax Act 1967 (ITA), and its various rules and regulations.
As it stands, the present public ruling can be withdrawn in parts or in its entirety, either through a notice of withdrawal, or by the publication of a new ruling that replaces it.
a list of past public rulings published by LHDN!
We can agree that the need for a public ruling emphasises the intricacies of a taxable investment holding company. But complex as it may be, there are notable advantages to establishing one.
What Are The Benefits Of An Investment Holding Company?
It’ll come as no surprise to discover that the main benefits of an investment holding company are financial. But it’s certainly not as simple as saying ‘money saving’.
Here’s what you stand to gain with an IHC:
1) Access to finance
An IHC is legally enabled to apply for finances and loans as soon as it has been established, compared to the requirement of three years of financial statements for a normal operating company.
That’s a big difference in a market that moves as quickly as property. Don’t forget that the individual rules of financing may be limited by the banks own operational procedures!
Financial benefits may also apply to individuals, especially those who might be deemed to be a high capital risk due to current financial liabilities.
By transferring existing assets to a properly established IHC, the individual could then find themselves in a more favourable position when it comes to assessment for future financing.
It’s worth noting that maximum loan limits vary between IHCs and individuals, and commercial versus residential properties.
An IHC for example can only receive a loan of up to 60% of the value of a residential property, compared to up to 90% for individuals buying their first or second property.
That’s a big difference if you don’t have a lot of money in your pocket. The limits are roughly balanced for commercial properties, with around 80-85% maximum loan amount.
2) Risk management
Now, this is a major benefit in circumstances such as joint ownership.
In a standard joint ownership property purchase, Person A and Person B would own a property (and potentially home loan) under their joint names.
If Person A was to die, Person B would have to go through the rigorous legal proceedings to ensure ownership of the property. An IHC sidesteps those problems.
With an IHC, the death of Person A would only directly impact the shareholding of the company, rather than its property ownership.
Person B would still have control without the delays and challenges resulting from extensive bureaucratic processes relating to inheritance and property ownership.
3) Proportional share of finances
If Person A pays for 80% of a property, and Person B pays for 20%, Person A would be the major shareholder under an appropriately established IHC.
That means their larger share in the company would give them a controlling share in decision making.
Under a traditional joint ownership agreement, these two parties would have an equal say in what happens to their property assets.
In a scenario where, for example, Person A needs to sell to release their finances, they might find it difficult to do so with a traditional joint ownership agreement.
As the major shareholder in the IHC, they’d be the boss of this particular situation, and have the final say. Money talks in an IHC!
4) Taxation benefits
The permitted expenses allowed by LHDN can be offset against rental income from business sources, which would otherwise count against the gross income levels permissible of an IHC.
Also consider that the capital rate of taxes for companies under RM2.5 million capital, applicable to IHCs under this threshold, is currently at 17%.
That compares to the 21% tax band for individual earnings between RM50,000 and RM70,000, and 24%-30% for individual earnings on the tax bands over that figure.
That’s a potential tax saving depending on the particular income and earnings levels of the IHC and individuals involved. This is, however, by no means guaranteed.
What Are The Drawbacks Of Having An Investment Holding Company?
Investment holding companies are complex financial mechanisms, and a properly audited and established structure is vital to ensure no financial impropriety.
You don’t want to invest 80% of the cash to find out your business partners can do with it what they want thanks to poor terms and conditions of contract.
A properly audited IHC requires authorisation from banks, and thus should offer oversight to avoid this problem. Let’s take a look at some of the
1) Loan limits
Definitely one area to look out for, particularly in the area of residential properties.
IHC financing on loans is capped at 60% of the total value of a residential property, compared to up to 90% for individuals buying a first or second property, and 70% for individuals buying their third property onwards.
2) Operational expenses
IHCs have running costs, just like any other business. You need to recognise these costs will factor into the overall value of your property investment return when considering this route.
Establishing an IRC for a property worth RM200,000 means the relative costs of those expenses compared to any potential financial savings are likely to be proportionally far higher, than for a property portfolio worth RM2 million.
Perhaps the most overriding concern, as you can’t just decide one day to set up an IHC and suddenly start enjoying financial benefits. If only saving money was that easy!
Analysing and assessing your financial circumstances, the benefits of an IHC, and the risks too, is an extremely complex financial process.
You should be careful to seek experienced financial advice before considering this decision. It’s not just financial cost that you’d have to consider, but also time.
Establishing and operating an IHC isn’t something you do on your lunch break. You’ll have to commit time as well as resources to this endeavour.
Ultimately, an investment holding company might provide a positive financial structure for managing your property portfolio.
But it might also be a complex and unnecessary way of organising your property investment. It’s best you speak to the professionals to work out which category you might fall into.
Whether you’re going full IHC or individual property investment, you can find everything from outstanding commercial properties to the latest new launch developments on PropertyGuru.