Closed End Fund Company

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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 theSecurities Commission to engaged wholly in

the investment of fund in securities.

Amount invest by the company restricted bypaid 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 inpublic company or corporation, or bonds of any government, corporate, unincorporatedand also include any right or options inrespect there of and any interest in unit trustschemes.

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 MalaysiaMalaysian Government securitiesPrivate limited company or;Invest in unit trust

The income comprise: dividend incomeInterest income

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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 overseasshares and bonds, such foreign dividend income or interest incomereceived 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 two-tier basis.

Prior to YA 2004 (YAs 1998-2003)Foreign source income received in Malaysia will be tax exempt byvirtue 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 Governmentb)Debentures, other than convertible loan stock, approved by SecuritiesCommissionc)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 nonconvertible loan stock issued by companies listed in Malaysia Exchange ofSecurities 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 fundcompanies.

• 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 manager’s 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 byclosed-end fund company in respect of:

a. Manager’s 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 1Success 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: RM’000

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: RM’000

Salaries & wages 58

Fund manager’s remuneration 80

Travelling 12

Accounting & auditing 27

Subscription to business magazines 4

Rental expenses 116

Share registration expenses 2Stationary & postage 5

Utility expenses (electricity & water) 13

Maintenance of shareholders’ register 9

Secretarial charges 6

Loss on disposal of shares 18

Telephone & fax 7

Cash donation to government 13

Depreciation 16

386



Required:

1.Compute the gross income chargeable to tax.

2.Expenses available for deduction in relation tothe closed-end fund company.



Answer:

Success Guarantee Bhd

Computation of gross income for YA 2009Sec 4 (c) RM’000

Gross dividends:

-Bursa companies 360

-Private limited companies 70

430

Interest income:

M’sia government’ bond exempted

-Unconvertible bonds exempted

-Convertible bonds 120 _120_

Gross income 550



Expenses available for deduction:

RM’000

Fund manager’s 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 bySuccess Guarantee Bhd is allowed.



Computation of total income

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 periodC : 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.

Whichever is higher.



PermittedExpenses

Shareregistration

expenses

Maintenance ofregister expenses

ManagersRemuneration

Secretarial

Audit & accounting fees

Telephone Charges

Printing &stationary Cost

Postage



“B” ( GROSS INCOME )

DIVIDEND CHARGEABLE TO TAX

EXEMPT DIDIDEND

DIVIDEND INCME PAID OUT FROMEXEMPT INCOME ACCOUNT AND

SINGLE TIER DIVIDEND SYSTEM

TAXABLEDIVIDEND

INTEREST CHARGEABLE TO TAX

DERIVED FROM:

LOAN TO SPOUSE,

RELATIVE OR FRIENDS,

SUCH INTEREST INCOME WOULD BEASSESSD TO TAX



Example 2

Using example 1 information..

The company incurred RM 136,000 permitted expenses.

RM’000

Gross income chargeable to tax (example 1) 550

Exempted interest

-Malaysia Government bonds 45

-Unconvertible bonds 105

Profit from sales of shares 400Loss 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

RM’000

Gross income 120

Less: Fraction of permitted expenses (17)

103

Less: Approved donation (13)

Total income 90

Dividend income (deemed total income) 430Chargeable income 520

Income tax payable (520k* 25%) 130

Less: S 110 set off (tax credit in dividends) (25%*430k) (107.5)

Net income tax payable 22.5



Restriction on carrying forward of

unabsorbed expenses

Where, by reason of an absence/insufficiency of AI for that year

of assessment, effect can’t be given/can’t 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 notbeen so made shall not be made to the closed-end fund company

for any subsequent year of assessment.

The amount of deduction to be made shall not be

<10% of the total permitted expenses incurred

for that basis period



Example 3

Using information in example 2, assumed that gross incomechargeable to tax is RM 8000. So,

RM’000

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

INVESTMENTWhen closed-end fund company received anamount in respect of gains from realization of

investment in the basis period for a YA, suchamount shall be exempt from income tax forthat YA.



Two-Tier Exemption

•

The gain from realization of investment and interest or discountincome exempted will be credited to an exempt incomeaccount.

• Exempt dividend can be subsequently declared to itsshareholders which is on a two-tier basic.

• Corporate shareholders receiving exempt dividend from theclosed-end fund company (First Trier) would be able to pay ,credit or distribute those exempt dividend to its shareholders astax exempt dividends (Second Trier).

• Further distribution by the shareholders will no longer be taxexempt.



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 CompanyTax 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% XX

- s110 set off ( 25% x gross dividend) (XX)

Net income tax payable 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 Investment Holding

Company

Closed-end Fund Company

Section Sec 61 Sec 60F Sec 60 H

Definition Created by a trust deed

between managing

company & public

trustees of unit holders

(individual/companies)

a) Company

b) Resident in M’sia

c) Mainly in the holding

of investments

d) Deriving 80%

investment income

(exempt & taxable)

a) Public limited company

incorporated in M’sia

b) Approved by the SC

c) Wholly making of investment

in securities

Relief of capital

expenditures

•10% of the qualifyingcapital (p/m)

expenditure against

rental income.

•Unabsorbed

deduction cannot be

c/f

N/A N/A

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Unit Trust Investment Holding Company Closed-end Fund Company

Permitted

expenses

(A)

a) Manager’s remuneration

b) Maintenance of register

of unit holders

c) Share registration

expenses

d) Secretarial, audit &

accounting fees,

telephone charges,

printing & stationery costs

& postage

• Which are not deductible

under s33(1)

a) Director fees

b) Wages, salaries, allowances

c) Management fees

d) Secretarial, audit & accounting

fees, telephone charges,

printing & stationery costs &

postage

e) Rent & other expenses to the

maintenances of an office

• Which are not deductible

under Sec 33 (1)

a) Manager’s remuneration

b) Maintenance of register

of shareholders

c) Share registration

expenses

d) Secretarial , audit &

accounting fees,

telephone charges,

printing & stationery costs

& postage

• Sec 33 & 34 is not

applicable

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

Closed-end Fund

Scope of C Aggregate of

•

gross income fromdividend (E+NE)

•Interest

• rent

•Gain made from

realization of

investment (C+NC)

Aggregate of

•

gross income fromdividend (E+NE)

•Interest

•Rent

•Gain made from

realization of investment

Aggregate of

•

Gross income from dividend•Interest (E+NE)

•Gain made from realization of

investment (C+NC)

The

Deduction

Higher of

A*B/4C

Or

10% * A

Lower of

A*B/4C

Or

5% * B

Higher of

A*B/4C

Or

10% *A

Unabsorbed

expenses c/f

No No No

Disposal of

investment

No income tax.

RPGT exempted

Prima facie capital gain Exempted from income tax.

No RGPT even if disposal of real

property company shares



End of Discussions

Closed End Fund Company

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