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Sunday, February 22, 2009

NON- LISTED - INVESTMENT HOLDING COMPANY (IHC)

For TAX PURPOSES IHC is

Before 2006

a company engaged wholly (100%) in the holding of investments where its income is normally derived from dividends, rental and interest.

After 2006

a company whose activities consist mainly of the holding of investment and not less than 80% of its gross income (whether exempt or not) is derived therefrom.

Tax Effect

From 2006 all in income (investment and non investment) of IHC is treated as non business source.

Income tax treatment

Before 2006

Income of IHC is deemed as passive income.

Certain income may be treated as business income if meet the necessary requirement.

After 2006

Income from the holding of investments is not to be treated as business income

Income other than income from the holding of investments is to be treated as other non-business gains or profits under Section 4(f) of the Income Tax Act 1967.

Deductibility of expenses

The company has no grounds for deducting expenses unless they relate to specific type of income and come within the general test of deductibility.

E.g. Loan interest for loan taken to acquire an investment, maintenance expenses against rental income.

IHC is allowed deduction of up to a maximum of 25% of permitted expenses only calculated as follow:-

A = Permitted expenses which include the following (do not qualify for deduction against specific income) reduced by any receipts of a similar kind

(a) directors’ fees

(b) wages, salaries and allowances

(c) management fees

(d) secretarial, audit and accounting fees, telephone charges, printing and stationery costs and postage, and

(e) rent and other expenses incidental to the maintenance of an office

B = Gross income consisting of dividends, interest and rent chargeable to tax for the basis period

C = Aggregate gross dividends (whether chargeable to tax or not), interest and rent and gains made from the realization of investments in the basis period.

Formula A x B/4C

The amount of deduction is limited to 5% of the gross income consisting of dividend (non exempt), interest and rental.

Tax Strategy

Reduce investment income to below 80% to avoid becoming IHC or increase non investment income to more than 20% of gross i

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