Can you sell industrial property to a Malaysian REIT without paying RPGT?

Can you sell industrial property to a Malaysian REIT without paying RPGT?

What property owners should know before disposing of a factory, warehouse or other industrial property to a REIT.

If you are selling a factory, warehouse or other industrial property in Malaysia to a Malaysian Real Estate Investment Trust (“REIT”), one of the first questions is whether the gain from the disposal will be subject to Real Property Gains Tax (“RPGT”).

The Short Answer

The short answer is: the disposal may qualify for an exemption from RPGT, provided the statutory requirements are satisfied.

This is an important distinction. It is not technically correct to say that RPGT “does not apply”. The disposal falls within the RPGT regime, but the chargeable gain may be exempted from RPGT under the relevant exemption order.

What is the RPGT exemption?

The relevant legislation is the Real Property Gains Tax Act 1976 (“RPGTA”), together with the Real Property Gains Tax (Exemption) (No. 4) Order 2003.

The exemption provides for chargeable gains arising from the disposal of a chargeable asset to a qualifying REIT or property trust fund (“PTF”) to be exempt from RPGT, with effect from 13 September 2003. LHDN’s published REIT guidance expressly recognises this exemption.

In practical terms, this means that a property owner may potentially dispose of qualifying industrial property to an approved REIT without having to bear RPGT on the chargeable gain.

However, the exemption should not be assumed simply because the purchaser is described as a “REIT”.

The status of the purchaser and the structure of the transaction should first be verified.

Step 1 — check who the purchaser really is this is one of the most important points.

The purchaser should be verified to determine whether it is a REIT or PTF that falls within the relevant regulatory framework.

The securities commission Malaysia (“SC”) regulates REITs in Malaysia and maintains the applicable REIT regulatory framework.

A purchaser being:

• Associated with a REIT;
• Managed by a REIT manager;
• Owned by an entity connected with a REIT; or
• Described commercially as a REIT,

Does not, by itself, necessarily mean that the purchaser qualifies for the RPGT exemption.

What this means:

Before relying on the exemption, the legal and regulatory status of the purchaser should be independently confirmed.

Step 2 — check what is actually being sold

The exemption should also be considered based on the actual asset and transaction structure.

For example, the transaction may involve:

• A direct sale of industrial land;
• A factory building;
• A warehouse or logistics facility;
• A commercial or mixed-use property;
• A transfer through a trustee;
• An acquisition through a special purpose vehicle (“SPV”); or
• A disposal of shares rather than the property itself.

These structures should not automatically be treated as being the same.

What this means:

A disposal of the property itself and a disposal of shares in a company holding the property may have different tax consequences. The transaction documents and structure should therefore be reviewed before confirming the exemption.

Step 3 — is your factory or industrial property covered?

The nature and legal status of the property should also be considered.

This may include:

• Industrial land;
• Factories;
• Warehouses;
• Manufacturing premises;
• Logistics facilities; or
• Other property falling within the definition of a chargeable asset under the RPGTA.

The fact that a property is commonly described as an “Industrial Property” is not, by itself, the complete legal test.

What this means:

The title, nature of the property and the actual transaction should be reviewed before the RPGT exemption is relied upon.

Step 4 — do not forget the RPGT filing requirements

An RPGT exemption does not necessarily mean that the seller can simply ignore the RPGT filing process.

The parties should still comply with the applicable statutory filing and reporting requirements under the RPGTA.

LHDN provides prescribed procedures and timelines for RPGT filings, including the relevant forms for the disposer and acquirer.

What this means:

Even where the gain is ultimately exempt from RPGT, the necessary documents and returns should still be properly prepared and submitted.

Failure to comply with the procedural requirements may create unnecessary tax and compliance issues.

What about other taxes and costs?

RPGT is only one part of the transaction.

Depending on the structure, the parties should also consider:

• Stamp Duty;
• Income Tax;
• SST, where applicable;
• Financing and Security Arrangements;
• Sale-and-Leaseback Arrangements;
• regulatory requirements applicable to the REIT; and
• The legal and tax consequences of any SPV or trustee structure.

In particular, the tax treatment of the overall transaction should not be considered solely by looking at RPGT.

Important things to note

Before completing a disposal of industrial property to a REIT, we recommend that the seller confirm at least the following:

1. Is the purchaser a qualifying REIT or PTF?
2. Is the transaction a direct disposal of the property?
3. What exactly is being transferred?
4. Does the property fall within the relevant statutory definition of a chargeable asset?
5. Have the necessary RPGT filings and supporting documents been prepared?
6. Have stamp duty, income tax, SST and other relevant tax implications been separately considered?

These matters should ideally be addressed before the sale and purchase agreement is finalised, rather than after completion.

Conclusion

A disposal of a factory, warehouse or other qualifying industrial property to an approved Malaysian REIT may qualify for exemption from RPGT under The Real Property Gains Tax (Exemption) (No. 4) Order 2003.

However, the exemption is not automatic.

The purchaser’s status, the nature of the property, the transaction structure and the applicable statutory requirements should all be verified before the exemption is relied upon.

Most importantly, the availability of the exemption should be considered on a transaction-by-transaction basis.

If you are considering selling industrial property to a REIT, obtaining legal and tax advice at the structuring stage can help identify potential RPGT and other tax issues before the transaction proceeds too far.

Chiong & Partners

This article is intended for general information only and does not constitute legal or tax advice. The application of RPGT depends on the specific facts, transaction structure and applicable law at the relevant time. Professional advice should be obtained before relying on any exemption or completing a transaction.