Budget 2013 paves way for business trust IPOs in Malaysia from 2013

KUALA LUMPUR (Sept 28): Malaysia is ready for the introduction of business trust IPOs from 2013, with taxation structure for the new asset class tabled with Budget 2013 on Friday.

"To encourage the development of business trusts, it is proposed that the transfer of any business, asset and real estate to a business trust be given stamp duty exemption and real property gains tax (RPGT) exemptions at the early stage of the establishment of a business trust," Prime Minister Datuk Seri Najib Razak said in his speech.

These incentives takes effect from January 1, 2013.

"Being suitable for businesses which are capital incentive with stable cash flow, business trusts are able to distribute quicker returns. The introduction of business trusts will broaden the range of investment products and asset classes in the capital market," appendices to the Budget speech read.

Business trusts, like real estate income trusts (REITs), generally commit to pay regular dividends.

However, business trusts are free to pay any amount of dividends from its cash flow even if it does not make any profits and are generally of higher risk relative to REITs.

Business trusts, which are already available in Singapore and Hong Kong, usually dangle higher yields to be more palatable to investors.

REITs have to pay out over 90% of its profits as dividends to be exempted from tax.

Business trusts pay the same amount of tax as a regular corporation but may enjoy certain tax incentives. Malaysia's corporate tax rate is currently at 25%.

"Business operations through trust entities have certain advantages, particularly in enhancing their ability to obtain financial resources based on assets owned," Najib said in his speech.

Financial executives have said the setting up of the framework for business trusts provide entities with regular cash flow and sizeable capital needs like independent power producers (IPPs) an alternative structure for capital raising.

Malaysia's top two IPPs, Malakoff Bhd and 1Malaysia Development Board (1MDB), are both reportedly planning for an IPO. State-owned 1MDB is also the master developer of the Tun Razak Exchange (TRX), which the government wants to turn into an international financial hub.

Najib, in tabling Budget 2013, also announced  a 10-year income tax exemption for TRX-status companies as among incentives to encourage major international financial institutions to make Kuala Lumpur a preferred investment centre.

Other incentives include tax exemptions for property developers at the TRX.