(TAX UPDATE) The "RM1 Share" Problem : How Historical Share Transfers Are Becoming a Capital Gains Tax Liability

(TAX UPDATE) The "RM1 Share" Problem : How Historical Share Transfers Are Becoming a Capital Gains Tax Liability

A perspective from Mr Koh Teck Peng, an Approved Auditor and Licensed Tax Agent in Malaysia and Member of IACV (International Association of Certified Valuators).

Introduction

For decades, Malaysian SME owners have transferred shares within the family, between co-founders, or into holding structures at par value. RM1 a share. Sometimes RM1.00 exactly, sometimes a token RM1,000 for the whole block.

It was simple, it was cheap, and for many years, it was largely unchallenged.

That world has changed.

With the introduction of Capital Gains Tax (CGT) on the disposal of unlisted shares, and the way the Inland Revenue Board has explained market value substitution in its Guidelines on Capital Gains Tax for Unlisted Shares (LHDN.AG.600-1/7/3), many historical share transfers may now become relevant when determining acquisition cost, market value support, and future CGT exposure for chargeable persons. The legislative framework asks one uncomfortable question of every future disposal that falls within Section 65E(8): was the consideration reflective of market value?

For a significant number of Malaysian SMEs, the honest answer is no. And the cost of that answer, where a chargeable person is involved, is now quantifiable.

A Brief Background on CGT in Malaysia

Until recently, Malaysia was one of the few jurisdictions in the region without a broad-based tax on capital gains. With the exception of real property gains under the Real Property Gains Tax Act 1976, gains arising from the disposal of investment assets, including shares in unlisted companies, were not subject to income tax in the hands of most taxpayers.

This long-standing position shaped how Malaysian businesses were structured, how shares were held, and how transfers were priced.

CGT was introduced through the Finance (No. 2) Act 2023 [Act 851] with effect from 1 January 2024, and is administered by the Inland Revenue Board through the Income Tax Act 1967 (ITA). For domestic capital assets covered by the unlisted shares regime, implementation took effect from 1 March 2024 following the exemptions granted under the Income Tax (Exemption) (No. 7) Order 2023 [P.U.(A) 410/2023] and the Income Tax (Exemption) (No. 2) Order 2024 [P.U.(A) 57/2024] for the period 1 January 2024 to 29 February 2024 [LHDN Guidelines, paragraph 1.2].

Gains or profits from the disposal of capital assets are included in the classes of income on which tax is chargeable under paragraph 4(aa) of the ITA [LHDN Guidelines, paragraph 6.1]. The label "CGT" is convenient shorthand. The legal mechanism is income tax.

In its current form, the regime applies as follows.

Who Is Taxed

The chargeable person under the CGT provisions is a company, limited liability partnership, trust body or co-operative society including a Labuan entity that is subject to tax under the ITA [LHDN Guidelines, paragraph 4]. Individuals are not within the list of chargeable persons set out in the LHDN Guidelines. This is a point that requires careful application in family-owned SME contexts, where the disposer may be either an individual or a corporate entity, with materially different consequences.

What Is Taxed

CGT applies to

(a) shares of unlisted companies incorporated in Malaysia;

(b) shares of a controlled company incorporated outside Malaysia which owns real property situated in Malaysia or shares of another controlled company, or both, under section 15C of the ITA; and

(c) foreign capital assets received in Malaysia by a resident [LHDN Guidelines, paragraph 1.3].

The scope of CGT on shares covers "shares with equity in nature such as ordinary shares, preference shares, redeemable preference shares, convertible bonds or long-term borrowings which is equity in nature" [LHDN Guidelines, paragraph 6.3].

At What Rate

Tax rates are specified in Part XXI, Schedule 1 of the ITA. For capital assets acquired before 1 January 2024, the taxpayer may elect between 10% on chargeable income or 2% on the gross disposal price [LHDN Guidelines, paragraph 15(a)]. For capital assets acquired on or after 1 January 2024, the rate is 10% on chargeable income from the disposal [LHDN Guidelines, paragraph 15(b)]. Where the taxpayer elects the 2% gross basis, the deductible expenditure provided under subsection 65E(2) of the ITA shall not apply [LHDN Guidelines, paragraph 9.7].

When Disposal Occurs

A disposal of a capital asset is deemed to take place on the date of the agreement, if there is a written agreement, or on the date of completion of the disposal if there is no written agreement [LHDN Guidelines, paragraph 7.1].

The date of completion is the earlier of the date the asset is transferred by the disposer, or the date on which the whole amount or value of the consideration has been received by the disposer [LHDN Guidelines, paragraph 7.2].

Reporting Obligations

Taxpayers must declare gains from disposal of capital assets by filing a CGT return form via e-Filing (e-CKM Form) within 60 days from the date of disposal [LHDN Guidelines, paragraph 16.1].

Loss Treatment

Adjusted losses may be deducted against adjusted income from subsequent disposals in the same year of assessment, and unabsorbed losses may be carried forward against adjusted income from disposal of capital assets for a period of 10 consecutive years of assessment. Any balance unabsorbed after that period is disregarded [LHDN Guidelines, paragraphs 10.1 to 10.3].

The headline rate of 10% is modest. The complexity, and the exposure, lies in two areas that the LHDN Guidelines address directly: the determination of disposal price, particularly in non-arm's-length transactions, and the determination of acquisition cost, particularly where historical records reflect figures that do not represent market value.

This is where the "RM1 share" problem begins.

The Legal Basis for Market Value Substitution

The CGT provisions contain specific market value rules. In an ordinary arm's-length transaction, the actual agreed consideration will generally be the starting point, provided it reflects market value.

The LHDN Guidelines set out the criteria for determining whether market value is reasonable and appropriate: the existence of both disposer and acquirer; the parties are not related persons; the disposal is made at arm's length; the disposal is not made as a result of undue influence; and the parties have sufficient knowledge [LHDN Guidelines, paragraph 8.2].

However, where subsection 65E(8) of the ITA applies, the value of the consideration for the acquisition or disposal of capital assets shall be deemed to be equal to the market value of the capital assets at the time of disposal. The deeming provision is triggered in the following circumstances [LHDN Guidelines, paragraph 8.5]:

(a) where the acquisition or disposal is not at arm's length, and in particular by way of gift;

(b) where the acquisition or disposal is wholly or partly for a consideration that cannot be valued;

(c) where the disposer acquires capital assets as a trustee for creditors in full or part satisfaction of any debt, or transfers capital assets as trustee for creditors in full or part satisfaction of any debt;

(d) where the acquisition or disposal is in a transaction for the transfer of a business for a lump sum consideration; or

(e) where the disposal of capital assets is in a transaction between connected persons.

For Malaysian SMEs, paragraph 65E(8)(e) is the most significant. The LHDN Guidelines explain the meaning of "connected person" comprehensively. A company is connected with another company if the same person has control of both, or if a person has control of one and persons connected with him have control over the other, or if two or more groups of the same persons have control of each company [LHDN Guidelines, paragraph 8.6(a)].

A company is also connected with another person if that person has control of the company, or if that person and a person connected to him jointly control the company [LHDN Guidelines, paragraph 8.6(b)].

The LHDN Guidelines illustrate the application of paragraph 65E(8)(e) directly. In Example 4, where Eris Cent Sdn. Bhd. transferred shares in Melati Putih Sdn. Bhd. to Dollar Sdn. Bhd., and both Eris and Dollar were controlled by Asoba Sdn. Bhd., the LHDN Guidelines state:

"Since Eris and Dollar are controlled by Asoba, the disposal of shares is a transaction between connected persons under paragraph 65E(8)(e) of the ITA. The value of the consideration for disposal shall be deemed to be equal to the market value of the shares at the time of the disposal" [LHDN Guidelines, Example 4, paragraph 8.3].

The Director General of Inland Revenue is empowered to determine the market value in three circumstances: where parties cannot agree on market value; where there is only one party to the disposal; or where the DGIR is of the opinion that the market value as agreed by the parties is incorrect, "such as disposal that involves related companies where the disposer is controlled by the acquirer or vice versa" [LHDN Guidelines, paragraph 8.4].

What this means in practice is straightforward. If a chargeable person transfers shares to a connected company at RM1, and the underlying business has a defensible market value of, say, RM10 million, paragraph 65E(8)(e) deems the consideration to be market value, and the IRB is empowered to disregard the RM1 figure in computing the gain.

Acceptable Valuation Methodology

The LHDN Guidelines explicitly acknowledge the use of a recognised valuation methodology :

"A reasonable and appropriate share valuation method may be adopted to determine the market value of the share. One of valuation methods that may be adopted is the Net Tangible Assets value (NTA), which based on the financial statements of the company" [LHDN Guidelines, paragraph 8.3].

In Example 4 of the Guidelines, LHDN expressly accepted an NTA-based valuation of RM3 per share for the connected-party transfer between Eris, Dollar and Melati [LHDN Guidelines, Example 4]. The Guidelines describe the NTA formula and confirm that, where applied appropriately, the resulting consideration is "reasonable and appropriate as provided under subsection 65E(8) of the ITA" [LHDN Guidelines, paragraph 8.3 and Example 4].

NTA is the methodology the LHDN Guidelines illustrate. It is not the only acceptable methodology, but it is the one expressly endorsed. For trading businesses where earnings significantly exceed book value, an earnings-based or income-approach valuation may produce a more economically representative figure, but the burden of justifying the chosen methodology rests with the taxpayer.

Where the "RM1 Share" Problem Bites

Four scenarios arise repeatedly in our practice.

Scenario A: The corporate disposer with a low acquisition cost

A family investment holding company (Sdn Bhd, an LLP, a trust body, or a co-operative society) acquired shares in an operating subsidiary in 2015 at par value, RM1,000 for the entire shareholding. The holding company now disposes of the shares to a third-party buyer for RM8 million.

Under the LHDN Guidelines, the adjusted income from the disposal is determined by taking the difference between the disposal consideration and the acquisition price, after adjustment for allowable expenditure wholly and exclusively incurred for the disposal and acquisition [LHDN Guidelines, paragraph 9.2].

The holding company faces a large CGT exposure because the historical acquisition price recorded in the statutory documents is extremely low, and no contemporaneous market-value basis was documented at the time of the 2015 transfer. The resulting computation is legally correct under paragraph 9.2 of the LHDN Guidelines, but it produces a tax outcome that the shareholders would not have anticipated when the 2015 transfer was originally made at par value.

(Where the disposer is an individual, the position differs because individuals are not within the chargeable person definition under paragraph 4 of the LHDN Guidelines. The transaction should still be assessed against other anti-avoidance provisions of the ITA.)

Scenario B: The restructuring that triggers an immediate CGT exposure

A corporate shareholder inserts a holding company by transferring its shares in the operating company at par value to a connected acquirer. The operating company is, on any reasonable valuation, worth RM15 million. Subsection 65E(8) deems the consideration to be market value because the transaction is between connected persons [LHDN Guidelines, paragraph 8.5(e)]. Unless the transaction qualifies for the intra-group restructuring exemption under the Income Tax (Restructuring of Companies Scheme) (Exemption) Order 2024 [P.U.(A) 289] and meets all the conditions of that Order, the IRB applies market value substitution.

The intra-group exemption gazetted on 8 October 2024, effective 1 March 2024 to 31 December 2028, exempts a company, LLP, trust body or co-operative society from income tax on gains from the disposal of unlisted shares in a Malaysian-incorporated company to an acquirer company tax-resident in Malaysia, where the disposal is made under a scheme for restructuring of companies in the same group to increase operational efficiency, subject to the detailed conditions and the application procedure prescribed under the Order.

Scenario C: The deemed disposal upon transfer to trading stock

The LHDN Guidelines provide that where a capital asset acquired or held by the disposer as an investment or non-current asset is later taken into trading stock or inventory, there is a deemed disposal of the capital asset on the date it is taken into trading stock, pursuant to paragraph 65F(6)(a) of the ITA [LHDN Guidelines, paragraph 11.1]. The disposal price is equal to the market value on that date [LHDN Guidelines, paragraph 11.2]. Where the market value exceeds the acquisition price, the difference is taxable [LHDN Guidelines, paragraph 11.3].

Where shares previously held as investment or non-current assets are genuinely taken into trading stock or inventory, paragraph 65F(6)(a) may deem a disposal to occur at market value. This should not be treated as a mere accounting presentation issue; the analysis turns on whether there has been a substantive change in the character of the holding. For groups undergoing restructuring or change in business focus, the reclassification, where genuine, is a tax event.

Scenario D: The asset exchange transaction

Where a capital asset is exchanged for another asset, the LHDN Guidelines provide that the market value of the asset received by the disposer shall be taken as the value of the consideration for the disposal [LHDN Guidelines, paragraph 8.7]. Example 5 of the Guidelines illustrates a share-for-property-and-vehicle exchange where the disposal consideration was determined at the market value of the assets received [LHDN Guidelines, Example 5]. Owners contemplating "swap" arrangements between connected parties, whether to consolidate operations or rebalance shareholdings, need to recognise that the swap itself constitutes a disposal at market value.

In each case, the common thread is the same. The RM1 figure on the statutory records is not a shield. It is now a starting point for an IRB conversation founded on a specific statutory provision and explained in the LHDN Guidelines.

What Defensible Pricing Looks Like

The instinct of many SME owners is to ask whether there is a "safe" figure that will not attract scrutiny. There is not. What exists instead is a defensible valuation methodology, supported by contemporaneous documentation, that can withstand challenge under subsection 65E(8).

A defensible valuation for a Malaysian SME share transfer should, at minimum, address the methodology accepted in the LHDN Guidelines and Example 4 [LHDN Guidelines, paragraph 8.3 and Example 4]. The Guidelines accept NTA as one acceptable method. Where NTA materially understates economic value, for example in profitable trading businesses with low book value, the taxpayer may consider applying an income-based or market-based valuation methodology in line with International Valuation Standards, while documenting why the alternative approach produces a more reasonable and appropriate market value than NTA alone.

Each of the following elements should be in place at the time of the transaction:

First, a normalisation exercise on the underlying financial statements where appropriate to the chosen methodology.

Second, the chosen valuation method applied transparently, with workings retained.

Third, a written valuation report or memorandum dated contemporaneously with the transaction, retained in the company's records.

Fourth, the supporting documentation accessible if the Director General of Inland Revenue subsequently exercises his power under paragraph 8.4 of the LHDN Guidelines to determine market value.

The cost of doing this is not trivial. The cost of not doing it, when measured against the CGT exposure on a multi-million-ringgit assessed market value, is almost always greater.

Subject to the facts and the requirements under the CGT provisions, valuation fees reasonably incurred for the purpose of ascertaining market value may be allowable expenditure in computing the gain.

The LHDN Guidelines list fees paid for the professional services of valuers, accountants, agents or legal advisers, and the costs reasonably incurred for the purposes of making any valuation or in ascertaining market value, among the incidental costs of disposal and acquisition [LHDN Guidelines, paragraphs 9.4.2 and 9.5.2]. Note, however, that incidental costs do not apply where the taxpayer elects the 2% gross basis [LHDN Guidelines, paragraph 9.7].

What SME Owners Should Do Now

The question is not whether IRB will look at historical share transfers. The question is when. Four practical steps are worth considering.

The first is a diagnostic review of the company's statutory records, identifying every share transfer over the past ten years where the consideration is at par or otherwise not reflective of underlying value. This includes transfers to connected companies, holding vehicles, and family investment structures.

The second is a current-state valuation of the business, providing a defensible benchmark against which historical and prospective transfers can be measured. This is particularly important for owners contemplating succession, restructuring, or external sale in the next three to five years.

The third is an inventory of intra-group arrangements that may qualify under P.U.(A) 289, given that the exemption is only available for disposals made between 1 March 2024 and 31 December 2028 and is subject to specific conditions.

The fourth is a forward-looking transfer protocol. Every future share movement involving a chargeable person should be priced on a defensible basis with contemporaneous valuation support consistent with the methodology accepted under the LHDN Guidelines. The era of casually moving shares at RM1, where a chargeable person sits anywhere in the chain, is over.

KTP's View

The "RM1 share" is not a tax avoidance scheme. For most Malaysian SME owners, it was never intended as anything more than administrative convenience, an artefact of how share registers have been maintained for two generations.

The difficulty is that the legislative framework has moved, and the administrative habit has not. CGT under paragraph 4(aa) of the ITA, the market value deeming rule under subsection 65E(8), the DGIR's express power to determine market value in the circumstances described under paragraph 8.4 of the LHDN Guidelines, and the IRB's increasingly data-driven approach to assessment have collectively turned a harmless convention into a quantifiable exposure for chargeable persons.

Chargeable persons who address this proactively, with a clean valuation baseline supported by methodology consistent with the LHDN Guidelines, will find that the CGT regime is manageable. Those who do not may discover, often years later, that a decision made in 2015 to "just put it at RM1" has produced a tax assessment they cannot easily defend and cannot easily afford.

The shares on your statutory records may say RM1. The Inland Revenue Board will ask you what they were actually worth. The right time to have an answer ready is before the question is asked.

Note on the LHDN Guidelines

The LHDN Guidelines on Capital Gains Tax for Unlisted Shares (LHDN.AG.600-1/7/3) are issued by the Director General of Inland Revenue under Section 134A of the ITA. They clarify LHDN's interpretation and administrative approach to the statutory provisions, but are not themselves legislation. The Director General may revoke, revise or amend the Guidelines from time to time.

Primary Source Cited

Guidelines on Capital Gains Tax for Unlisted Shares (LHDN.AG.600-1/7/3), Inland Revenue Board of Malaysia, dated 21 July 2025. Available at: https://www.hasil.gov.my/media/rgndkcuh/20250721-guidelines-on-capital-gains-tax-for-unlisted-shares.pdf

Supporting statutory orders referenced: Income Tax (Exemption) (No.7) Order 2023 [P.U.(A) 410/2023]; Income Tax (Exemption) (No.2) Order 2024 [P.U.(A) 57/2024]; Income Tax (Restructuring of Companies Scheme) (Exemption) Order 2024 [P.U.(A) 289]; Income Tax (Initial Public Offering) (Exemption) Order 2024 [P.U.(A) 290].

Disclaimer: The contents of this article are for general information only and do not constitute professional advice. Legislation, regulatory guidelines, and market practice may change after the date of publication. KTP & Company PLT accepts no liability for reliance placed on this material. Please consult a qualified professional before acting on any matter discussed.

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