Cautionary Note on Stamp Duty for M&A documentation – the Federal Court’s decision in Havi Logistics (M) Sdn Bhd v. Pemungut Duti Setem

The Federal Court's landmark decision in the Havi Logistics case may reshape the tax and legal landscape of mergers and acquisitions transactions in Malaysia. This article delves into the intricacies of the case, the implications for stamp duties on asset sale and purchase agreements, and what this means for future transactions.

Background

On 6 February 2020, Havi Logistics (M) Sdn. Bhd. (“Havi” )entered into an Asset Purchase Agreement (the “Agreement”) with Martin-Brower Malaysia Co. Sdn. Bhd. (“MB Malaysia”), to purchase certain assets and liabilities of MB Malaysia.

These assets purchased included fixed assets (such as computer software, computer hardware, fittings, renovation, plant, machinery and equipment) and general assets (such as goods in trade, inventory and business contracts). The consideration payable for the assets under the Agreement was USD2,491,491.55 (the “Purchase Price”), equivalent to RM10,378,806.35 at the then prevailing exchange rate.

Assessment of Stamp Duty

The Stamp Office assessed the Agreement with ad valorem stamp duty of RM399,196. Havi made payment of the assessed stamp duty, but under protest with a notice of objection.

Appeal to the Collector of Stamp Duties

Havi lodged an appeal to the Collector of Stamp Duties (“Collector”)against the stamp duty assessment on the grounds that the Agreement should be assessed based on Item 4 of the First Schedule of the Stamp Act 1949 (“Stamp Act”), where the applicable stamp duty would only be RM10. Item 4 of the First Schedule of the Stamp Act imposes RM10 stamp duty on “Agreement or Memorandum of Agreement made under hand only, and not specifically charged with any duty…”

On appeal, the Collector maintained the earlier decision to assess stamp duty on the Agreement based on Section 21(1) of the Stamp Act, which states that “any contract or agreement… for the sale of any equitable estate or interest in any property whatsoever… shall be charged with the same ad valorem duty… as if it were an actual conveyance on sale of the estate, interest or property contracted or agreed to be sold”.

Note that there are exceptions – Section 21(1) of the Stamp Act does not apply for the sale of:

(a)   Lands, tenements, hereditaments, or heritages;

(b)   Property situated out of Malaysia;

(c)    Goods, wares or merchandise;

(d)   Stock or marketable securities; and

(e)   Ships or vessels or part interest, share or property of ships or vessels.

Item 32 of the First Schedule of the Stamp Act imposes stamp duty on, inter alia, “Conveyances” and “Transfers”. The ad valorem stamp duty rate under Item 32 is on a graduated scale, up to 4% of the consideration or market value of the property being conveyed or transferred.

Appeal to the High Court: Havi Logistics (M) Sdn Bhd v. Pemungut Duti Setem [2022] CLJU 2617

Havi appealed to the High Court against the decision of the Collector. The High Court allowed Havi’s appeal, and held that the applicable stamp duty on the Agreement should only be RM10.

The High Court determined that the sole question to be answered was whether the Agreement was to be assessed under Item 4 or Item 32of the First Schedule of the Stamp Act. In answering the question, the learned High Court judge held that, inter alia:

(a)   The Agreement was a written contract for the sale and purchase of business, but does not involve the transfer of properties or interest, legally or equitably, between MB Malaysia and Havi.

(b)   Therefore, the Agreement cannot be said to be an instrument which falls within the purview of Section 21 and Item 32, First Schedule of the Stamp Act. On plain reading of Item 4, First Schedule of the Stamp Act, the Agreement fulfilled all the requirements set out thereunder. Therefore, the applicable stamp duty would be RM10, under Item 4 of the First Schedule of the Stamp Act.

(c)    Ad valorem stamp duty can only be imposed when a property is legally or equitably transferred by an instrument.

It can be said that the decision of the High Court reflects the common understanding on stamp duty liability of asset purchase agreements amongst many businesspersons and practitioners in Malaysia. Specifically, an asset purchase agreement is only to buy and sell assets, with the actual conveyance of the legal and equitable interests in such assets occurring only on the closing of the asset purchase agreement. There would usually be conditions precedent to the closing of the sale and purchase transaction under an asset purchase agreement. The actual transfer of the legal and equitable interests in such assets will be by way of a subsequent transfer instrument (e.g., a share transfer form, a memorandum of transfer, etc) or by way of physical delivery of the transferred assets.

Appeal to the Court of Appeal: Pemungut Duti Setem v.Havi Logistics (M) Sdn Bhd [2024] 1 CLJ 79

The Collector appealed to the Court of Appeal. The main ground of appeal was that the stamp duty on the Agreement should have been assessed under Section 21(1) of the Stamp Act read together with Item 32(a) of the First Schedule of the Stamp Act.

The Court of Appeal reversed the decision of the High Court, and held that the Agreement was a “conveyance on sale” within the meaning of the Stamp Act, and thus ad valorem stamp duty would be applicable.

The Court of Appeal referred to Clause 2.3(c)(i) of the Agreement which stated that on closing, the title and risk to the acquired assets would pass automatically to Havi through a deemed delivery. The assets were deemed delivered at the location where the assets were located. No further action was required by the parties to effect delivery of the assets. Therefore, the Agreement itself was an instrument by which title passed, which means that the Agreement is a “conveyance on sale”.

Appeal to the Federal Court

On appeal to the Federal Court, the Federal Court was posed with, inter alia, the following questions:

1. Whether the Agreement was a “conveyance on sale” within the meaning of Section 2 of the Stamp Act, thus being chargeable with ad valorem stamp duty?
2. Whether the deemed delivery provision in Clause2.3(c)(i) of the Agreement made the Agreement an “instrument” (i.e., a conveyance on sale)?

The Federal Court held that in ascertaining whether the Agreement was a conveyance on sale, it must first be determined whether the intention of the parties to the agreement is ultimately to pass title to the assets via the instrument.

The Federal Court answered this issue in the affirmative –the Agreement was for the sale and purchase of a business because it was stated that MB Malaysia was to “sell, transfer, convey, assign, and deliver” to Havi all of MB Malaysia’s right, title and interests in the assets set out under the Agreement.

Crucially, the Federal Court, albeit coming to the same end conclusion as the Court of Appeal, disagreed with the Court of Appeal that the Agreement was a conveyance on sale because of the presence of Clause 2.1(c)(i) of the Agreement on “deemed delivery on Closing”.

The Federal Court held that the presence of the deemed delivery clause is immaterial to the finding that the Agreement is a conveyance on sale. The Federal Court referred to the definition of “conveyance on sale” in Section 2 of the Stamp Act, which reads:

 “conveyance on sale” includes every instrument and every decree or order of any Court, whereby any property, or any estate or interest in any property, upon the sale thereof is transferred to or vested in a purchaser or any other person on his behalf or by his direction.

The Federal Court took one step further to state that “conveyance on sale” makes it clear that an instrument by which property or any interest therein is transferred on the sale of such property or interest, would be regarded as a conveyance on sale, without having the need of a deeming transfer clause. Consequently, the Federal Court held that the stamp duty liability on a conveyance on sale is pursuant to Section 21(1) of the Stamp Act, which reads:

“21(1) Any contract or agreement made in Malaysia… for the sale of any equitable estate or interest in any property whatsoever… shall be charged with the same ad valorem duty, to be paid by the purchaser, as if it were an actual conveyance on sale of the estate, interest or property contracted or agreed to be sold.”

Hence, an instrument, even if it was not a conveyance on sale as defined in Section 2 of the Stamp Act, would be chargeable with ad valorem duty under Section 21(1) of the Stamp Act as if it were an actual conveyance on sale, if the criteria in Section 21(1) of the Stamp Act are fulfilled.  

The Federal Court goes on to further state that there is no requirement under Section 21(1) of the Stamp Act that an instrument must operate to convey or transfer property for it to be a conveyance on sale. The fact that the closing of the sale transaction is at a future date is also immaterial. The Federal Court also concluded that fixed assets and general assets, like in the case of Havi, cannot fall within the exemption under Section 21(1) of the Stamp Act – as Section 21(1) of the Stamp Act only exempts stock in trade.

Conclusion – Ad valorem Stamp Duty on Asset Purchase Agreements in Malaysia

With Federal Court’s ruling in the Havi Logistics case, a sale and purchase agreement for business and assets would be chargeable with ad valorem stamp duty the moment it is executed.

The ad valorem stamp duty liability arises even though the closing of the transaction has yet to occur. It remains to be seen whether the Collector will refund the stamp duty on a duly stamped sale and purchase agreement, if the asset sale and purchase transaction is, for any reason (such as non-fulfillment of conditions precedent), not closed.

The Havi Logistics case has set a clear precedent and is consequently in line with the Collector’s increasingly strict stance on tax compliance, particularly concerning stamp duty. With the IRB ramping up audits and assessments, businesses can no longer afford to take a reactive approach. Instead, proactive measures, detailed record-keeping, and thorough due diligence must become standard practice.

The shift towards strict interpretation of the law and the anticipated implementation of a self-assessment regime for stamp duty signal anew era of tax enforcement in Malaysia. Businesses must now operate with the understanding that even minor oversights could lead to significant financial repercussions.

Tax consultants and lawyers advising on business and asset transfers should be mindful of the stamp duty liability when structuring business and asset purchase agreements.

In this evolving landscape, it is imperative for businesses to:

a)      Re-evaluate their documentation processes to ensure compliance;

b)     Seek professional legal advice when dealing with complex transactions; and

c)      Stay informed about regulatory changes and court decisions that could influence future IRB actions.

As Malaysia moves towards a more stringent tax enforcement framework, companies that adapt early will be better positioned to avoid disputes and penalties while those who remain complacent risk being caught off guard by increasingly aggressive audits and stricter assessments.

If you have any questions or require any additional information, please contact  Loo Tatt King or Kellie Allison Yap or the partner you usually deal with in Zaid Ibrahim & Co.

This alert is for general information only and is not a substitute for legal advice.