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CLOSED END FUND COMPANY

Definition
Closed end fund company
s 60H(5) -a public limited company incorporated in Malaysia and approved by the Securities Commission to engaged wholly in the investment of fund in securities. Amount invest by the company restricted by paid up capital. The increase of the capital may not be as flexible as unit trust.
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CONT
Securities -debentures, stocks and shares in public company or corporation, or bonds of any government, corporate, unincorporated and also include any right or options in respect there of and any interest in unit trust schemes. Examples -Amansfb are listed in Bursa Malaysia. -Adams Express Company is listed in New York Stock Exchange.
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INCOME RECOGNITION
Closed end fund is allowed to carry out investment in securities only It can acquire shared and bond as listed in: Bursa Malaysia Malaysian Government securities Private limited company or; Invest in unit trust The income comprise: dividend income Interest income

EXAMPTION ON FOREIGN INCOME


Closed end fund company: Is a resident company Enjoy the benefit (para 28 of sch 6) w.e.f YA 2004- The closed end fund company invest in overseas shares and bonds, such foreign dividend income or interest income received in Malaysia will be exempted from income tax. The amount of income exempted is allowed to credit into an exempt income amount from which exempt dividend can be paid out on a twotier basis. Prior to YA 2004 (YAs 1998-2003) Foreign source income received in Malaysia will be tax exempt by virtue of Income Tax(Exemption)
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INTEREST OR DISCOUNT INCOME


Interest or discount paid or credited will be tax exempt: a)Securities or bond issued or guaranteed by the Government b)Debentures, other than convertible loan stock, approved by Securities Commission c)Bon Simpanan Malaysia issued by Bank Negara Malaysia

INCOME TAX (EXEMPTION)


w.e.f YA 1997 (06 October 1997)

Individual, unit trust or closed end fund deriving interest income from non convertible loan stock issued by companies listed in Malaysia Exchange of Securities Dealing and Automated Quotation Berhad (MESDAQ) will be exempt.
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Expenses Deduction
1.Wholly and exclusively (Sec33) 2.Special provision (Sec 34) Not applicable to closed end fund companies. Will result in the gross income being subject to tax with no deduction of revenue expenses.

Scope of s33
Revenue expenses that are incurred directly in the production of dividend income or interest income is not allowed. Fund managers remuneration employed directly in the investment of protfolio is not deductible in arriving at the adjusted income of the investment source. Remuneration is included in permitted expenses as defined in Sec 60H(6)

Interest Expenses
Closed end fund is allowed to borrow as long as the borrowing do not exceed 30% of it net asset value at any time. No tax relief for the interest expenses incurred in production of interest income.

Permitted Expenses
Permitted expenses are allowed to extend of the permitted fraction as determined by Sec60(4). Permitted expenses means expenses incurred by closed-end fund company in respect of: a. Managers remuneration b. Maintenance of register of shareholders c. Share registration expenses d. Secretarial, audit and accounting fee, telephone charges, printing and stationery costs and postage.

Example 1
Success Guarantee Bhd is a public listed company incorporated in Malaysia on 1.1.2009 and approved by SC to invest in shares and bonds. The income as follow: RM000 Gross dividend - Bursa companies 360 Gross dividend - private limited companies 70 Malaysia Government bonds 45 Interest from listed bonds (Bursa) -Convertible 120 -Unconvertible 105 Profit from sales of shares 400

Expenses incurred in year ended 31.12.2009: Salaries & wages Fund managers remuneration Travelling Accounting & auditing Subscription to business magazines Rental expenses Share registration expenses Stationary & postage Utility expenses (electricity & water) Maintenance of shareholders register Secretarial charges Loss on disposal of shares Telephone & fax Cash donation to government Depreciation

RM000 58 80 12 27 4 116 2 5 13 9 6 18 7 13 16 386

Required: 1.Compute the gross income chargeable to tax. 2.Expenses available for deduction in relation to the closed-end fund company.

Answer:
Success Guarantee Bhd Computation of gross income for YA 2009 Sec 4 (c) Gross dividends: -Bursa companies -Private limited companies Interest income: Msia government bond -Unconvertible bonds -Convertible bonds Gross income RM000 360 70 430 exempted exempted 120 _120_ 550

Expenses available for deduction:


RM000 Fund managers remuneration 80 Accounting & auditing 27 Share registration expenses 2 Maintenance of shareholders registration 9 Secretarial charges 6 Telephone & fax 7 Stationary & postage 5_ 136 *No tax relief for other revenue expenses incurred by Success Guarantee Bhd is allowed.

Computation of total income


Whichever is higher.

A : Total of the permitted expenses incurred for the basic period B : Gross income consisting of dividend and interest chargeable to tax for that basic period C : Aggregate of the gross income consisting of dividend and interest (whether exempted or not) and gain made from the realization of investments (whether chargeable or not) for that basic period. ** Unlike unit trust, exempted interest income is part of the C defination.

Maintenance of register expenses

Managers Remuneration
Share registration expenses

Secretarial Audit & accounting fees Telephone Charges Printing &stationary Cost Postage

Permitted Expenses

B
( GROSS INCOME )

DIVIDEND CHARGEABLE TO TAX

INTEREST CHARGEABLE TO TAX

EXEMPT DIDIDEND

TAXABLE DIVIDEND

DERIVED FROM: LOAN TO SPOUSE, RELATIVE OR FRIENDS, SUCH INTEREST INCOME WOULD BE ASSESSD TO TAX

DIVIDEND INCME PAID OUT FROM EXEMPT INCOME ACCOUNT AND SINGLE TIER DIVIDEND SYSTEM

Example 2
Using example 1 information.. The company incurred RM 136,000 permitted expenses. RM000 Gross income chargeable to tax (example 1) 550 Exempted interest -Malaysia Government bonds 45 -Unconvertible bonds 105 Profit from sales of shares 400 Loss of sale of shares (not included) -___ C 1100__

Required: 1. Calculate fraction of permitted expenses. 2. Income tax payable for Success Guarantee Bhd.

Higher of: 1. A * B/ 4C = 136 * 550/ 4(1100) = RM 17000 2. 10% * 136,000 = RM 13600 So, the higher RM 17000is fraction of permitted expenses.
Income Tax Payable for Success Guarantee Bhd for YA 2009
Gross income Less: Fraction of permitted expenses Less: Approved donation Total income Dividend income (deemed total income) RM000 120 (17) 103 (13) 90 430

Chargeable income Income tax payable (520k* 25%) Less: S 110 set off (tax credit in dividends) (25%*430k) Net income tax payable

520 130 (107.5) 22.5

Restriction on carrying forward of unabsorbed expenses


The amount of deduction to be made shall not be <10% of the total permitted expenses incurred for that basis period
Where, by reason of an absence/insufficiency of AI for that year of assessment, effect cant be given/cant be given in full to any deduction falling to be made to the closed end fund company under this section for that year, that deduction which has not been so made shall not be made to the closed-end fund company for any subsequent year of assessment.

Example 3
Using information in example 2, assumed that gross income chargeable to tax is RM 8000. So, RM000 Gross income 8 Less: Fraction of permitted expenses (17) Permanent Loss (9) No tax relief is available. No tax relief is available for the approved donation.

GAINS FROM REALISATION OF INVESTMENT


When closed-end fund company received an amount in respect of gains from realization of investment in the basis period for a YA, such amount shall be exempt from income tax for that YA.

Two-Tier Exemption
The gain from realization of investment and interest or discount income exempted will be credited to an exempt income account. Exempt dividend can be subsequently declared to its shareholders which is on a two-tier basic.

Corporate shareholders receiving exempt dividend from the closed-end fund company (First Trier) would be able to pay , credit or distribute those exempt dividend to its shareholders as tax exempt dividends (Second Trier). Further distribution by the shareholders will no longer be tax exempt.

Real Property Gains Tax


Prior to 1.4.2007 Since the Gain from the realization of shares are specifically exempted from income tax by virtue of s60H(2) such shares would not be subject to real property gains tax even though they fall into the ambit of Real Property Company Shares.

Format of Tax Computation


Closed End Fund Company Tax Computation for YA 2010

RM Gross interest ( Malaysian) XX Aggregate income XX Less: -fraction of permitted expenses (s 60H special deduction) (XX) -approved donation ( restricted to 10% x aggregated income) (XX) Total income XX Section 4(c) Gross dividend (Malaysian)(deemed total income) XX Chargeable income XX
Income tax payable @ 25% - s110 set off ( 25% x gross dividend) Net income tax payable XX (XX) XX
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Comparison between:
Unit Trust Property Trust (Special Type of Unit Trust) Investment Holding Company Closed-end Fund Company

Unit Trust Section Definition


Sec 61 Created by a trust deed between managing company & public trustees of unit holders (individual/companies)

Investment Holding Company


Sec 60F

Closed-end Fund Company


Sec 60 H

a) Company a) Public limited company b) Resident in Msia incorporated in Msia c) Mainly in the holding b) Approved by the SC of investments c) Wholly making of investment d) Deriving 80% in securities investment income (exempt & taxable) N/A N/A

Relief of capital expenditures

10% of the qualifying capital (p/m) expenditure against rental income. Unabsorbed deduction cannot be c/f

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Unit Trust Permitted expenses (A)


a) b) c) d) Managers remuneration Maintenance of register of unit holders Share registration expenses Secretarial, audit & accounting fees, telephone charges, printing & stationery costs & postage Which are not deductible under s33(1)

Investment Holding Company


a) b) c) d) Director fees Wages, salaries, allowances Management fees Secretarial, audit & accounting fees, telephone charges, printing & stationery costs & postage Rent & other expenses to the maintenances of an office Which are not deductible under Sec 33 (1)

Closed-end Fund Company


a) b) c) d) Managers remuneration Maintenance of register of shareholders Share registration expenses Secretarial , audit & accounting fees, telephone charges, printing & stationery costs & postage Sec 33 & 34 is not applicable

e)

Scope of B

Gross income : 1.Dividend 2.Interest 3.Rental

Gross income: 1.Dividend 2.Interest 3.Rental Chargeable to tax for the basic period

Gross income: 1.Dividend 2.Interest Chargeable to tax for the basic period

Unit Trust

Investment Holding Company


Aggregate of gross income from dividend (E+NE) Interest Rent Gain made from realization of investment

Closed-end Fund

Scope of C

Aggregate of gross income from dividend (E+NE) Interest rent Gain made from realization of investment (C+NC) Higher of A*B/4C Or 10% * A No No income tax. RPGT exempted

Aggregate of Gross income from dividend Interest (E+NE) Gain made from realization of investment (C+NC)

The Deduction

Lower of A*B/4C Or 5% * B No Prima facie capital gain

Higher of A*B/4C Or 10% *A No Exempted from income tax. No RGPT even if disposal of real property company shares

Unabsorbed expenses c/f Disposal of investment

End of Discussions