Tax and Customs

Introduction

Sections 15 and 15A of the Stamp Act 1949 (SA 1949) are well-known to corporate lawyers and tax practitioners. The stamp duty reliefs provided under these provisions were originally part of the SA 1949's framework when it was enacted in 1949 and have been updated through subsequent amendments to meet Malaysia’s evolving policy goals. Guidelines for the enforcement of these exemptions were formally issued by the Inland Revenue Board (HASiL) in 2019 with further amendments in2022. However, approvals for exemption under these provisions may remain elusive to many.

Section15 of the SA 1949 exempts stamp duty for instruments used in corporate reconstructions or amalgamations, as specified in items 32(a) and 32(b) of the First Sch, under certain conditions. Similarly, S. 15A of the SA 1949 provides stamp duty exemption for instruments used in transfers of property between associated companies, which also covers the same instruments specified in items 32(a) and32(b). The key difference between these 2 exemptions is outlined in S. 15A of the SA 1949, which requires that the transfer between associated companies must be for the purpose of achieving greater efficiency in operation.

Ad valorem stamp duty, as prescribed in item 32 of the First Sch of the SA 1949, applies to essential legal documents, including Sale and Purchase Agreements (SPAs) and Memorandums of Transfer (MOTs). For instruments involving sales or transfers of assets during corporate restructuring or amalgamation schemes, taxpayers may apply for stamp duty relief under S.15(1) of the SA 1949if the scheme meets the prescribed conditions. On the other hand, for instruments that pertain to property transfers between associated companies, taxpayers may seek stamp duty relief under S.15A of the SA 1949 provided the arrangement complies with the stipulated conditions.  

Exemptions under S.15 and S.15A are rarely granted, and seldom reach the Court. A landmark case for the applicability of stamp duty exemption under S.15 of the SA 1949 is Cititower Sdn Bhd v Pemungut Duti Setem [2017] 8 CLJ 710. Citi tower and AMSB entered into a Sale and Business Agreement (SBA) in which Citi tower sought to acquire AMSB’s business, encompassing both its assets and liabilities, including a plot of land. To transfer the land, a Form 14A was executed, prompting Citi tower to apply for relief under S.15 of the SA 1949.

The Collector denied the application and issued an ad valorem stamp duty assessment under item 32 of the First Sch. Citi tower appealed to the High Court, which ruled in its favour. Contrary to the Collector’s argument that only the SBA qualified for exemption, the Court held that the MOT was also exempt from the ad valorem rate on multiple grounds.

The Court, addressing the Collector’s argument, noted that under S. 4(3) of the SA1949, the MOT qualifies as a subsidiary document and is therefore exempt from ad valorem duty, with only a nominal RM10 charge applicable. Emphasising the plain-meaning interpretation in tax law, the Court observed that S.15 imposes no restriction limiting exemptions to a single instrument, provided the relevant conditions are met. Moreover, the use of the term “any instrument” in S. 15 suggests applicability to multiple documents. If Parliament had intended otherwise, it would have stated so explicitly.

The High Court decision, was unanimously upheld by the Court of Appeal, dismissing the Collector’s appeal.

Let us now delve deeper into the specific conditions outlined in S.15 and S.15A below.

Exemption under S.15 of the SA 1949

The conditions under S.15 of the SA 1949 are as follows:

The SA 1949 further clarifies that the above conditions must occur within the framework of a reconstruction or amalgamation scheme. However, the SA 1949 does not define ‘reconstruction’ and ‘amalgamation’ – nor indicate what amounts to reconstructions or amalgamation. In this regard, we draw guidance from case laws that has been decided before the Courts. In the case of Cold Storage (Malaysia) Bhd v Pemungut Duti [1988] 2 MLJ 93 the Supreme Court agreeing with the judgment of an English case in Brooklands Selangor Holdings Ltd v Inland Revenue Commissioners [1970] 2 All ER 76drew a conclusion that a company satisfies the term ‘reconstruction’ if it is evident that:

• There must be a transfer of undertaking of an existing company to a new company;
• The members of the new company should substantially be the same persons who were members of the existing company; and
• The new company must carry on substantially the same business as the business transferred to it.

Interestingly, in the case of Crane Fruehauf v IRC [1975] 1 ALL ER 429 the court interpreted the phrase “scheme for the amalgamation of any companies” by identifying the following 2 circumstances:

1. A transaction where the existing company’s business is acquired by a transferee company in return for an issue of shares in the transferee company to the existing company or to its shareholders; and
2. An acquisition of shares of the existing company in exchange for shares in the transferee company issued to the shareholders of the existing company.

Exemption under S.15A

Section 15A of the SA 1949 provides an exemption for transfers of property between associated companies if:

1. Either company (transferor or transferee) is the beneficial owner of not less than 90%of the issued share capital in the other company; or
2. Both companies are owned by one holding/parent company with not less than 90%shareholding of the issued share capital.

There are also several factors to consider regarding the characterisation of associated companies, such as the applicability of the Sixth Sch of the SA 1949to calculate the shareholding percentage of the holding or parent company. Other conditions for this stamp duty exemption include:

• Companies owned by the same private person cannot be considered associated companies.
• The share-holding company must be the beneficial owner of the shares.
• The transferee company must be incorporated in Malaysia.
• The transfer must be for the purpose of achieving greater efficiency in the operation of both companies.
• Consideration must be proven to have been fully provided or received by both companies at the time of application for the exemption.
• The property must be completely transferred from the transferor to the transferee.

The SA1949 does not define “to achieve greater efficiency” nor provides further guidance on this condition for stamp duty exemption under S.15A.However, some insights into HASiL’s stance can be gleaned from the Garis Panduan Permohonan Pelepasan Duti Setem Di Bawah Seksyen 15A, Akta Setem 1949(Pindaan 2022), which states that companies must demonstrate increased efficiency and a clear operational plan for their business within 3 years after the property transfer.

In the absence of specific guidelines on what constitutes a ‘justification’ or evidence of increased efficiency, logical assumptions suggest that relevant documents or information must be provided to HASiL when applying for this exemption. This includes a written explanation, either in narrative form or visually presented through graphs, charts, or schedules, to demonstrate the expected increase in profit, business output, or resource input. Additionally, the companies must provide their objectives and plans to enhance operational efficiency over the next 3 years following the property transfer. Supporting documents, such as approval letters from monitoring agencies like Ministry of Investment, Trade and Industry (MITI), Securities Commission, or Bank Negara Malaysia (BNM), may also be submitted to further substantiate the anticipated annual increase in efficiency.

“To achieve greater efficiency in operation”

So what really is “greater efficiency” in business operations? Theoretically speaking, it could be ‘measured’ through practical observation across various aspects of the company’s activities. It may be practical to assess indicators such as cost reductions from streamlining resources and lowering operational expenses, improved productivity by optimising resource use for higher output, and the integration of resources to minimise production overlap and eliminate redundancies. Additionally, the strategic alignment of property transfers with the companies’ business strategies and operational plans is key, as is the sustainability of long-term benefits that enhance the companies’ market position without a proportional rise in costs.

It is still worth noting that despite the deductions made above on the most practical and logical ways to evaluate the increase in efficiency, further clarification on this condition remains direly necessary. Additional stipulations through legislation or HASiL guidelines would greatly assist duty payers in navigating the application process for stamp duty exemption under S.15A.

Emphasis is given on the fact that S.15A does not apply to instances involving general transfer of business as HASiL does not consider transfer of business as a means of achieving greater efficiency. Guidelines issued by HASiL in 2019, which was further amended in 2022 provides very clearly that S.15A is only available specifically for the transfer of real estate, shares and/or company assets within the related transferee and transferor.

It is clear that S.15A stamp duty relief is intended for transfer of property within a group of companies, however HASiL appears to take the position that in order to qualify for the relief, the transfer needs to meet the objective of achieving greater operational efficiency in both the transferee and the transferor. Perhaps a more conclusive practice should be looking at the ‘greater efficiency’ outside just the transferee and transferor and at the operation of group of companies as a whole.  The commerciality of group restructuring generally benefits the group of company as whole, but not necessarily achieve greater efficiency in the continued operations of both the transferee and the transferor (for example, transferring certain assets from one subsidiary to another subsidiary with the intention to liquidate the first subsidiary to reduce operational costs should arguably achieve greater efficiency for the group as a whole).

Application for Exemption under S. 15 or 15A

As with most applications for stamp duty exemption, the reliefs under S.15 and S.15Amust be applied for by the transferee company through the online STAMPS system, followed by submission of the supporting documents to be served by hand at any HASiL office. Following the recent updated list of supporting documents required by HASiL, stipulated in the Garis Panduan Permohonan Pelepasan Duti Setem Di Bawah Seksyen 15, Akta Setem 1949 (Pindaan 2022) and the Garis Panduan Permohonan Pelepasan Duti Setem Di Bawah Seksyen 15A, Akta Setem 1949 (Pindaan2022) (“Guidelines”), a statutory declaration by an advocate and solicitor of the High Court of Malaya (“Statutory Declaration”) is one of the required documents to be submitted.

The requirement for the Statutory Declaration is statutorily provided under S.15A(7)of the SA 1949, which was only recently introduced following the amendment by S.67 of the Finance Act 2018 – perhaps to mirror the requirement for exemption under S.15 (i.e. S.15(4) of the SA 1949). Prior to that, a Statutory Declaration was not a requirement

The Statutory Declaration, in which the template is provided as annexures in the Guidelines, essentially requires a lawyer to affirm their personal knowledge of the companies’ transactions, whether involving a restructuring scheme or property transfers between associated entities. In addition to outlining the companies’ details, the relevant transactions and the instruments involved in such transactions, the Statutory Declaration also requires the lawyer to confirm that the statutory requirements under either S.15 or S.15A have been met, and that the companies shall continue to comply with the law.

Requiring an advocate and solicitor to make such a declaration in their personal capacity is considered onerous as it imposes a duty of care and exposes them to the risk of professional misconduct. The lawyer bears the legal responsibility for ensuring that the contents of the Statutory Declaration are accurate, truthful, and supported by evidence. If the Statutory Declaration is found to be false or misleading, the lawyer may face disciplinary action and potential civil liability for negligence or misrepresentation. In a much severe scenario, where the Statutory Declaration is made with knowledge that it contains false or misleading statements, the lawyer could be charged with professional misconduct.

Besides the above, for the stamp duty exemption under S.15A, the documentary requirements are mostly similar. However, documents evidencing corporate restructuring should be substituted with an application letter justifying the increase in business operation efficiency and an approved copy of Borang CKHT2A for the transfer of property.

Extended Requirements

Based on the Guidelines issued by HASiL in supplement to the SA 1949, duty payers must fulfil several requirements. Besides the conditions previously stated, companies must also ensure the correctness and accuracy of the Statutory Declaration and any statement or document in support of the company’s application for exemptions under S.15 and 15A. Moreover, specific requirements for either provisions must be fulfilled even after the approval, as listed below:

Exemption under S.15:

Exemption under S.15A:

Failure to adhere to the requirements stated above, as well as the previously outlined conditions, will result in the revocation of stamp duty exemptions under S.15 or S.15A.  Consequently, the stamp duty amount will be payable with 6% interest per annum from the date of the transfer instrument. In addition, a penalty for late payment of stamp duty may also be imposed in accordance with S. 47A of the SA 1949.

Additional challenges

Pursuant to the provisions of the SA 1949 and the guidelines issued by HASiL, the application for stamp duty exemptions under S.15 and S.15A are subject to a “post-payment refund” approach where the duty payers are required to pay the stamp duty upfront for the transfer instruments and claim for refund after the exemption application is approved.

This procedural step puts the duty payers at a disadvantage, requiring them to pay a potentially substantial ad valorem amount and wait for an uncertain period for their exemption application to be approved and the refund to be processed, which may take months. This process may impose significant financial strain on duty payers. Implementing a more practical approach could align with the spirit of S.15A, to “achieve greater efficiency” in handling exemption applications.

A procedure allowing a duty payer to simultaneously submit their transfer instruments for adjudication and apply for stamp duty exemption under S.15and/or S.15A can potentially be a better approach. In this situation, HASiL can immediately determine whether a duty payer is eligible for stamp duty exemption. Based on this assessment, HASiL may either issue the required stamp duty payment for unsuccessful applications or exempt the duty payer from the upfront payment.

The suggested approach aims for cost and time efficiency for both duty payers and HASiL. It can be assumed that the current requirement for duty payers to pay upfront is to prevent tax avoidance. However, the onus is on HASiL to further clarify its basis for this post-payment refund procedure for the exemption when stamp duty remission can be applied for before the instrument is stamped. If this complexity lies within the law itself, then it is suggested that tax legislation be examined and S.15 and S.15A of the SA 1949 be revisited with the consideration of these issues.

The provision of S.15A should also be revisited to address ambiguity and uncertainty. The requirement that the transfer of property must be for “achieving greater efficiency” to qualify for stamp duty exemption under S.15A is simply too abstract and open to many interpretations that may change overtime based on specific sector and industry practices.  

Conclusion

In summary, the exemptions under S.15 and 15A are appealing to many businesses due to the frequent occurrences of reconstructions, mergers and inter-party transactions both in Malaysia and worldwide.  For companies to fully enjoy the benefits of these exemptions, the law and procedures must be clear and effective.

If you have any questions or require any additional information, please contact  Kellie Allison Yap or the partner you usually deal with in Zaid Ibrahim & Co. This article was prepared with the assistance of Muhammad Alif Afifi Shohaimi, Associate at Zaid Ibrahim & Co.

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

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Introduction

Recent amendments to the Stamp Act 1949 (SA 1949), as outlined by the Finance (No.2)Act 2023, have heralded significant shifts in stamp duty law.

The case of Lee Koy Eng v Pemungut Duti Setem (2022) MSTC 30-483 (“Lee Koy Eng”) may have played a pivotal role in shaping legislative responses to amendments in the SA 1949, specifically:

The legal journey regarding stamp duty appeals has been marked by significant rulings and legislative revisions, with a crucial turn occurring in earlier Federal Court decisions such as Pemungut Duti Setem v Muhibbah Engineering (M) Berhad [Civil Application No: 08(F)-163-03/2017(W)] (“Muhibbah”). In 2017, the Muhibbah case tested the appealability of stamp duty matters to the Federal Court, as the duty payer filed a preliminary objection against the Collector of Stamp Duty’s(“Collector”) appeal.

The duty payer argued, amongst others, that the High Court did not hear the matter in its originating jurisdiction thereby rendering the appeal non-compliant with S. 96(a) of the Courts of Judicature Act 1964. Following deliberations on both parties’ submissions, the Federal Court decided in favour of the duty payer. The Collector(the appellant in this case) was denied leave to appeal to the Federal Court.

In 2022, a similar issue arose on whether a stamp duty appeal can be heard in the Federal Court. Challenging the precedent set by earlier cases, the Federal Court in Lee Koy Eng recognised that stamp duty appeals can indeed find their way to the Federal Court, provided certain conditions are met. This marked a departure from the position established in Muhibbah and other trite law.

Consequentially, we saw the SA 1949 undergoing significant amendments providing much-needed clarity on the appeal process and eliminating ambiguities that had persisted in the past.

Background of Lee Koy Eng

In this case, the deceased died intestate, leaving assets, including 5 pieces of land. Co-administrators were appointed by the Shah Alam High Court, and a Deed of Family Arrangement (“DFA”) was executed, transferring the deceased’s interest solely to the duty payer. Subsequently, a Memorandum of Transfer, Form 14A, was completed to transfer a two-thirds portion to the duty payer. The Collector then imposed an ad valorem stamp duty on the forms, citing Item 66(c) of the First Sch of the SA 1949,considering it a "release or renunciation of property by way of gift".

The duty payer objected, seeking review under S. 38A(1) of the SA 1949, and argued for classification under Item 32(i) of the First Sch of the SA 1949 with a fixedRM10 rate, as a "conveyance or transfer not specifically charged with stamp duty”. This was rejected by the Collector, leading to the duty payer paying the stamp duty and filing an appeal to the High Court pursuant to S. 39 of the SA 1949. Both the High Court and the Court of Appeal were in favour of the duty payer, affirming that a memorandum of transfer giving effect to a renunciation of an entitlement to an intestate estate is subject to a nominal duty of RM10under Item 32(i).

The Collector subsequently filed an appeal to the Federal Court as it was not satisfied with the decisions of the learned courts. The Federal Court granted leave to the Collector, prompting the duty payer to file a motion to set aside the leave granted on the ground that the Federal Court lacked jurisdiction to hear the appeal.

Amendments to the First Sch of the SA 1949

As the SA 1949 did not provide for such transfer of interest in Lee Koy Eng, it was amended to provide clarity in the duty imposed. A new Item 32(h) was inserted in the First Sch where the conveyance or transfer of any property “by way of release or renunciation by a beneficiary of a deceased estate to another beneficiary entitled under the same estate” shall be subjected to a fixed rate of “RM10.00”. 

The reasoning behind the amendment may be deduced from the decision of the Court of Appeal. The Court of Appeal agreed with the High Court’s findings that the beneficiaries in Lee Koy Eng had no vested interest or right in the property to make a gift of such interest. This was due to the incomplete administration of the property, and the beneficiaries’ refusal of the inheritance ab initio through the signed DFA. Hence, the Court held that the purpose of the memorandum of transfer was to give effect to the beneficiaries’ renunciation of entitlement pursuant to the DFA.

Although the Courts held that the renunciation falls under Item 32(i), a catch-all provision for conveyances that do not fall under the various heads of charges under Item 32, the legislature introduced the new provision to clearly differentiate between a conveyance by way of gift, which requires actual beneficial and legal right in the estate, and a conveyance by way of renunciation.

Amendments to S. 39 of the SA 1949

In Lee Koy Eng, the judges delved into key principles that led to the Court’s decision. These principles, drawn from various cases, offer crucial insights into the nuanced nature of stamp duty appeals:

1. Limited nature of case stated appeals: The Court emphasised the confined scope of appeals by way of case stated. It reiterated that these appeals solely address questions of law and do not involve a rehearing off actual evidence.
2. Purpose of case stated procedure: The Court underlined the case stated procedure’s purpose, emphasising that it seeks the High Court’s opinion on legal questions based on established facts. It clarified that the High Court’s role is to answer specific legal questions posed in the case stated, not to engage in a comprehensive trial.
3. Clarity in stating facts and questions: The Court expressed concern about the confusion surrounding the jurisdiction and proper procedure for handling case stated appeals. It emphasised the importance of clarity instating facts and questions, directing the focus toward legal issues.
4. Appealability and jurisdiction of the Federal Court: The Court clarified that case stated appeals are indeed appealable to the Federal Court. It affirmed the Federal Court’s jurisdiction to hear such appeals, particularly when questions of law have been granted leave for consideration.
5. Procedural issues: Addressing procedural matters, the Court scrutinised the way appeals by way of case stated were lodged at the High Court. It noted the confusion caused by the absence of an originating motion under the new Rules of Court 2012, which deleted the originating motion process.
6. Affirmation of leave granted: The Court affirmed the decision to grant leave for the appeal based on the questions posed in the case stated. It dismissed a motion to set aside the leave granted, asserting that the case stated falls within the jurisdiction of the Federal Court.

Questions of fact

The Federal Court, in its decision, focused on understanding the function of case stated appeals. Although a notice of appeal is lodged at the High Court and then categorised as an appeal, S. 39(2) requires the Collector to state and sign a case, therefore qualifying it as a case stated appeal. The Federal Court referred to several cases dealing with the income tax regime, given that income tax appeals had also once involved case stated appeals. Citing the Privy Council in Chua Lip Kong v Director-General of Inland Revenue [1982] 1MLJ 235, the Court emphasised that the findings of primary facts by the Commissioners are “unassailable”. The High Court is not in a position to overrule nor supplement and conduct the fact findings themselves. If needed, the case should be remitted to the Commissioners for further findings. The Federal Court also referred to the case of Director-General of Inland Revenue v Rakyat Berjaya Sdn Bhd [1984] 1 MLJ 248, explaining how appeals from the decisions of the Special Commissioners of Income Tax (SCIT) in income tax cases are made by way of case stated under Para 34, Sch 5 of the Income Tax Act 1967(ITA 1967). It is expressly mentioned that any appeal is on a “question of law” and therefore “pure findings of fact may not be challenged on an appeal”.

The Federal Court reinforced that the High Court does not have the jurisdiction to determine questions of fact but only questions of law when exercising its appellate function. It is trite law that appellate courts would not interfere in the trial court’s primary findings and only determine issues of law. Regardless, for a stamp duty appeal specifically, the distinction between an appeal by case stated and a full appeal was outlined. Although the case stated was filed as an appeal, it does not alter the “true nature of proceedings before the High Court”. Essentially, although the SA 1949 refers to ‘appeals’, it does not negate the High Court’s original jurisdiction to hear appeals against decisions of statutory bodies or tribunals.

Originating jurisdiction

The legal saga surrounding stamp duty appeals extends beyond the courtroom, delving into the intricacies of legislative provisions.

S.39(1) and (1A) of the SA 1949, the focal point of such appeals, mention that a duty payer dissatisfied with the Collector’s decision may appeal to the High Court by filing a notice of appeal. This implies that the High Court shall exercise its appellate jurisdiction. However, Order 5 Rule 1(1) of the Rules of Court 2012 provides, amongst others, that an appeal under any written law from any decision of any person to the High Court shall be by way of an originating summons, implying that the High Court is exercising its originating jurisdiction.

This contradiction in modes of commencing an appeal to the High Court has caused significant confusion within the industry. The law governing the High Court’s appellate jurisdiction, S. 27 of the Courts of Judicature Act 1964 further compounds the ambiguity by specifying that the appellate civil jurisdiction of the High Court only covers appeals from subordinate courts. Appeals from statutory bodies or tribunals, such as the SCIT tribunal or the decision of the Collector, are explicitly excluded from its appellate jurisdiction.

Referring to the High Court’s appellate jurisdiction under the Rules of Court 2012, while Order 55 of the Rules of Court 2012 governs appeals from subordinate courts, Order 55A Rule 1 provides the procedure for appeals provided for any decision of any individuals or bodies (i.e., tribunals or statutory bodies) under any written law. Under Order 55, appeals from the subordinate courts are through notices of appeal, while appeals under Order 55A against decisions of tribunals or statutory bodies are by way of filing originating summons. Order 55A further complicates matters by vesting the High Court with jurisdiction to hear appeals from tribunals, as specified in relevant written laws, such as S. 39 of the SA1949. This sets the stage for a contradictory scenario, as Order 55Acontradicts the previous S. 39 of the SA 1949, which mandates filing via a notice of appeal.

On 29 December 2023, the Finance (No. 2) Act 2023 was gazetted, effecting substantial modifications to the SA 1949. Among key amendments to the SA 1949 is the introduction of a provision that purports to eliminate any ambiguity concerning the High Court’s jurisdiction when hearing stamp duty appeals.

Effective1 January 2024, an amended S. 39(1) of the SA 1949 was introduced, stipulating that stamp duty appeals to the High Court made “in accordance with the procedure and practice for the time being in force in the High Court”, without referring to a notice of appeal (as provided for prior to these amendments).

In summary, the Federal Court’s decision in Lee Koy Eng reflects a departure from the restrictive stance adopted in earlier cases on this point. The judges, while acknowledging the limited nature of case stated appeals, provided clarity on procedural matters, and affirmed the Federal Court’s jurisdiction in stamp duty appeals.

In addition to this amendment, a new subsection (6) was inserted:

“Unless it is otherwise provided by rules of court, the rules of court for the time being in force in relation to appeals in civil matters from the High Court in its original jurisdiction to the Court of Appeal and the Federal Court shall apply with the necessary modifications to appeals under this section to the High Court, the Court of Appeal, and the Federal Court respectively.”

Hence, it is now clear that the amended legislation provides that the High Court invokes its original jurisdiction when hearing an appeal against the decision of the Collector. The amendments to the SA 1949 signify a paradigm shift in the realm of stamp duty appeals. By empowering the High Court to hear appeals against the Collector’s decision in its original jurisdiction, the legislature has not only resolved a long-standing jurisdictional debate but has also paved the way for a more streamlined and efficient appeals process.

Conclusion

In summary, the path through stamp duty appeals has been marked by twists and turns, influenced significantly by key cases that have shaped the legal framework. The Muhibbah case initially set a seemingly unassailable precedent, aligning with established laws. However, the decision in Lee Koy Eng brought a fresh perspective to the discussion, introducing nuances and laying the groundwork for legislative changes.

The amendments to the SA 1949, encompassing appeal provisions and the elimination of physical franking, represent a pivotal moment in the development of stamp duty laws. Lee Koy Eng played a crucial role in instigating this legislative intervention, prompting a thorough review of the existing framework. The Federal Court’s departure from the Muhibbah precedent, followed by legislative adjustments, emphasises the dynamic relationship between judicial decisions and statutory amendments.

Lee Koy Eng and subsequent legislative amendments signify a paradigm shift in stamp duty appeals, bringing clarity and streamlining the appeals process. However, they also shed light on broader challenges in harmonising appeal procedures across different statutes. Lee Koy Eng and its aftermath highlight the dynamic nature of tax law, with each case contributing to the evolving tapestry of legal principles. As tax consultants navigate this evolving chapter in stamp duty appeals, understanding the interplay between judicial decisions and legislative responses becomes paramount.

In this ever-changing landscape, tax consultants not only interpret statutes but also discern the underlying principles guiding judicial decisions. The journey continues, and stamp duty appeals are poised for further evolution, shaped by the interwoven threads of legal precedents, legislative amendments, and the unwavering pursuit of justice in tax matters.

If you have any questions or require any additional information, please contact 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.

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.