MM2H Visa Foreigners And RPGT
MM2H visa foreigners before making a decision to buy a house in Malaysia must consider what important factors like RPGT before doing so. MM2H visa is a long term visa that allows a foreigner to reside in Malaysia under Malaysia My Second Home program.
There are many important factors to consider such as, to name a few important ones:
#1 – Top of the list is will we have arbitrary rule change governing MM2H visa foreigners buying Malaysia properties.
#2 – What is the real property gain tax (RPGT) when selling the properties?
#3 – How liquid is the disposing of Malaysian properties when applies to MM2H visa foreigners?
#5 – How stable is the political leadership in Malaysia?
For this post, we just narrow to #1 and #2
How arbitrary rule change affects house buying decision under MM2H visa program.
This post is written with hindsight of a full lesson learnt and the experiences that I have undergone.
From the lessons learnt from my past experience, I will share on what happened in my case. I took up MM2H visa in year 2010 and went on to buy Malaysia properties during the time of my MM2H visa validity. In year 2019, I have to sell off my Malaysia properties and wind up my Malaysia affairs due to a set-up. This set-up was perpetrate by a rogue immigration officer.
On 1st Jan 2018, the Malaysia government makes some arbitrary rule change to RPGT on three major aspects that affected MM2H visa foreigners. This rule change left me hanging high and dry on all my Malaysia properties to lick my wounds from investing in Malaysia.
Aspect #1 – Tax Rates Increases affecting MM2H visa foreigners.
The Real Property Gain Tax (RPGT) tax regime was 0% after more than 5 years of ownership before 1st January 2018. This applies to foreigners under MM2H visa program under individuals.
After 1st Jan 2018 when the new rule was gazette, the tax regime became 10% up from 0% for foreigners under mm2h visa program. This was because under MM2H visa program, foreigner is no longer classified as permanent residence for RPGT purposes.
Aspect #2 – Penalized for long term holding of investment in property for MM2H visa holder.
This arbitrary rule change to RPGT also tweaked the years of ownership/long term holding of investment in property.
From a RPGT of (a) 0% for property held more than 5 years by Citizens/Permanent Resident to (b) 5% for property held more than 5 years by Non-Citizens/Foreigners.
We also saw rates jump of additional 15% for disposal in fifth year and fourth year for MM2H visa holders and foreigners instead of 5%.
In our MM2H visa case scenario, we have now been subjected to a 10% RPGT up from 0% RPGT. We have held our property for more than 5 years of ownership. In other words, we ended up a loser by the “shifting of goal posts”.
This is the unforeseen and hidden cost from RPGT and risks to investing in Malaysia properties. It is especially bad for those lure in by MM2H program.
“Shifting Of Goal Posts” By Malaysia Finance Minister
This unforeseen added cost of differences between 10% (beyond 5 years) to 30% tax (within 5 years) is indeed punishing. It is more so to buy a property for long term beyond 5 years ownership/holding as against short term speculation.
It is no longer an asset that can be a hedge against inflation. Even for investment purpose, the interest cost of holding the property long term is bad. But when added together with the RPGT of 30%, it is a worse investment for foreigners. We were told initially under MM2H visa, this holding of the property up to 5 years, we are told in 2010, would be a fair investment. Now it has become a nightmare because of the shifting of goal posts.
This ex-FM shifted the goal posts to implement even more anti-foreigners policy affecting even MM2H visa foreigners as below:
Aspect #3 – RPGT Retention Sum Policy.
This new policy change was enacted by the ex-Finance Minister (FM), Mr Lim Guan Eng, wef 1st January 2018. At that time, he was newly appointed but is now ousted and facing corruption charge currently.
“Further to the above, on 1st January 2018, the Finance (No.2) Act 2017 came into effect with amendments to the Real Property Gains Tax Act of 1976. Pursuant to the amendments, it is worth noting that if you are a foreigner wishing to dispose of a property, a sum not exceeding 7% must be retained by the purchaser’s lawyer for RPGT purposes.”
The above new amendment law put into place by Mr. Lim. One more important point about the rules change is that this is applies retroactively to meet “certain objectives” such as enlarging the trap net.
The Retention Sum policy requires the seller to deposit 7% of the total acquisition price of the property into the account of the Purchaser’s lawyer and payable to LHDN.
By the way, this 7% of the acquisition price is a hefty Retention Sum and could be 5 times the amount of the tax obligation of foreign owners seeking to sell off their property.
Policy is anti-foreigners investors and MM2H visa holders
From the table below, foreigners under MM2H visa program who now had to sell before the 5th year of ownership is subject to a high RPGT rate of 30% in comparison to the other two categories.
For the calculation of RPGT obligation, the profit you make is after deducting all your costs. The costs includes your RM10,000 State consent levy, bank loan legal fees and stamp fees, expenditure on enhancing/preserving the value of the asset (renovation), agent’s commission and lawyer’s fees.
This then becomes the justification to set the Retention Sum to such a hefty sum. It is indeed a cunning move against investors who are foreigners, some lure in through MM2H visa.
All these “shifting of goal posts” added new unforeseen cost and risks to foreigners including MM2H visa holders when investing in Malaysia.
This Retention Sum policy and change in RPGT rate was a trap for foreigner who bought properties in Malaysia. Clearly such policy formulated is anti-foreigners including MM2H visa holders. It would do well for foreigners to stay away from buying any Malaysia properties.
MM2H visa and all these arbitrary rules change is to make foreigners lose their hard-earned money to help the Malaysia coffers that had been depleted. This is notwithstanding that most MM2H visa holders helped the local economy through their substantial spending.
Understanding RPGT 7% Retention Sum
Two year ago in April of 2019 we managed to find a buyer for our property. Prior to making the decision to let go of the property, we were unable to use the property and problematic to maintain in my current situation.
We were told by the buyer’s lawyer about this Retention Sum that is applicable to MM2H foreigners before agreeing to the sale.
As a seller who is a MM2H foreigner, we have to deposit the 7% Retention Sum before the sale can proceed.
This is a hefty amount which could be as much as 5 times more than your actual tax obligations (based on our calculated tax obligation of 10% of the real property gains). We will used a case study to show this exceptional big amount withheld.
The conjured justification for the Retention Sum is that foreigner will scoots away without fulfilling their tax obligations. But to date, there is no official data to support the idea that foreigner had scoot away without meeting their tax obligations.
Why RPGT Retention Sum such a high arbitrary value of 7% for foreigners.
One of the purposes is for them to works out as high a rate payable as can be seen from my experience. It is easy to works backward to see how much they can makes you pay for the RPGT. Firstly, you will notice that the Notice of Assessment (NOA) that you receive will have a high tax amount chargeable.
Then you will experience an appeal process that is deliberately difficult and lengthy. They will tried to wear you down through a lengthy period of unresponsive and stone-walling.
I got a shock upon receiving the Notice of Assessment (NOA). LHDN had arbitrarily denied me to claim all allowable deductibles for my RPGT, a very substantial amount.
From the correspondences with LHDN, I noticed that they tried ways, means and methods not to refund any amount to you. It is for the simple fact that the big amount of money is in their hands.
Case study of RPGT & Retention Sum
As a foreigner, I have bought a Malaysian house for my own stay under the MM2H visa.
As I could not use this house, I faced many challenges with holding on to this house as well as unable to manage the property.
We sold the property to move on with my life back in Singapore. I will be subjected to a 10% tax on any profit made from the sales under the new law, since my house was bought and hold for more than 5 years,
The following example would show the calculation. All figures used are hypothetical:
Purchase (cost) price on Sales and Purchase document is: RM1,000,000
Selling price stated on Sales and Purchase document: RM1,200,000
To arrive at the profit from the sale, the following deductibles are allowed. These are costs incurred on acquiring the property:
Deductibles for RPGT – Costs on acquiring the property
State consent levy: RM10,000
Agent’s commission (2% of selling price): RM24,000
Lawyer’s fee: RM1,800
Expenditure or enhancing/preserving the value of the asset: RM30,000
Total of above deductibles: RM65,8000
Profit is as follows: (1,200,000-1,000,000-65,800) = RM135,000
Hence RPGT is (10% of RM135,000) = RM13,500
7% of acquisition price (withholding tax)
Before the completion of the sale, the lawyer must forward a withholding tax of (7% of the RM1,200,000) = RM84,000 to Lembaga Hasil Dalam Negeri Malaysia (LHDN).
To put it simply, Malaysia LHDN collected RM84,000 to make sure that a foreigner will pay the RM13,500 (tax on any profit gained from buying Malaysia property).
So we can now see the huge difference of RM70,500 (5 times more) between what was owed against what was the collection.
How the high 7% Retention Sum can be abused when you are a foreigner
What was in the assessment notice was shocking. Why was it shocking?
1. There was totally no deduction for all the costs in acquiring the property allowed at all.
2. It arbitrary slap me a 10% late payment penalty of the tax payable. They slapped this penalty even when there is no prior notice sent to me at all.
3. My Power of Attorney who was appointed to act for me was assessed at 30% RPGT. So for the same property two person have to pay the RPGT.
4. I cannot help noticing that the sum claimed from me comes to about the hefty 7% retention figure. It seems like someone did a deliberate calculation to work out the numbers from the 7% retention Sum. This is the numbers to match it to the Retention Sum since the money is already in their hand.
The above four points are the glaring issues.
Seeking clarifications Re. RPGT from LHDN
So the first order of the day was to shoot out an email to the lawyer to clarify what is actually happening. We were giving LHDN the benefits of doubt and clarify matters up.
From the urgent appeal email sent out by my lawyer on 4th June 2020 to LHDN, I came to understand the following:
1. The lawyer stated there are two assessments to me and my Power of Attorney on the same property.
2. There should be no RPGT chargeable to the Power of Attorney. LHDN to cancel and repeal this notice.
3. We have issue with the disposal price used.
4. We have issue with the consideration price used.
5. We have issue with the gain claimed by LHDN.
6. We have issue with the wrong tax rate used.
7. We have issue with no deductions at all for renovations supported by receipts.
8. We have issue with the amount remitted that was a big difference (much more) to what LHDN claimed.
9. Appeal to waive off the 10% penalty. We have remitted the 7% Retention Sum money on 23.09.2019 to LHDN, KL. which is before the 60 days deadline.
10. And now the most important part: my lawyer has not received the official receipt. This receipt acknowledged the 7% Retention Sum mandated under Section 21B of CKHT Act 1976.
11. My lawyer categorically requested for the official receipt in this correspondence dated 4th June 2020.
Conclusion on MM2H Visa foreigner in Malaysia
Even as at the time of writing this post, there are outstanding issues of RPGT with LHDN that is still unresolved or unanswered.
This is in spite of me writing an official complaint letter on this matter to the office of the Director General, Public Complaints Bureau (KL).
The Director General never replied to this letter, despite sending him three reminders. It is either a shell office or an inactive office with only a signboard on the door. We just have to leave it as a public record of all events.
Needless to say, all my properties since disposed suffered losses and a lot of griefs from all the transactions and the processes.
So the lesson learnt is there are lots of perils and unseen traps for foreigners, including MM2H visa holders in Malaysia. For investment and buying of Malaysia property, it is never again for me.
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