Stamp Duty Considerations for Cross-Border Trusts Involving Hong Kong and Malaysia

The Malaysia Budget 2025, tabled by the Ministry of Finance in October 2024, introduced a 2% capital gains tax on the disposal of unlisted shares effective from 1 March 2025, closing a long-standing exemption. This single policy shift has forced a re-evaluation of cross-border trust structures between Hong Kong and Malaysia. For Hong Kong-based trustees and family offices administering Malaysian-situs assets, the issue is not the headline rate but the structural interaction between Malaysia’s Real Property Gains Tax (RPGT), the newly expanded capital gains framework, and Hong Kong’s own stamp duty regime under the Stamp Duty Ordinance (Cap. 117). A trust holding a BVI-incorporated company that owns a Malaysian commercial property, for example, now faces potential double taxation if the trust deed is settled or varied after 1 March 2025. The Malaysian Inland Revenue Board (LHDN) has issued no specific public ruling on trust-to-beneficiary transfers of unlisted shares, creating a compliance gap that trustees must navigate using general principles under the Income Tax Act 1967 (ITA). This article examines the stamp duty and capital gains tax implications for cross-border trusts with a Hong Kong trustee and Malaysian underlying assets, focusing on the mechanics of instrument stamping, the RPGT exemption for intra-group transfers, and the structuring options available under the Labuan IBFC framework.

The Dual Regime: Hong Kong Stamp Duty and Malaysian Real Property Gains Tax

The foundational risk for any cross-border trust involving Hong Kong and Malaysia is the simultaneous application of two distinct tax regimes on the same asset transfer. Hong Kong imposes stamp duty under Cap. 117 on the transfer of immovable property in Hong Kong and on the transfer of Hong Kong stock. Malaysian RPGT, governed by the Real Property Gains Tax Act 1976 (Act 169), imposes tax on chargeable gains arising from the disposal of real property or shares in a real property company (RPC). A trust holding a Malaysian property through a Hong Kong-incorporated or BVI-incorporated holding company must satisfy both regimes if the property is in Hong Kong, or only the Malaysian regime if the property is solely in Malaysia. The critical distinction is that Hong Kong stamp duty is a transaction tax triggered by the instrument of transfer, while Malaysian RPGT is a gains tax triggered by the disposal event.

Hong Kong Stamp Duty on Trust Settlements and Variations

Under Cap. 117, section 45, a declaration of trust over Hong Kong immovable property is chargeable with ad valorem stamp duty at the same rate as a conveyance on sale, currently up to 4.25% for residential property and a flat 4.25% for non-residential property under the Special Stamp Duty regime introduced in 2023. For a trust holding Hong Kong stock, the stamp duty rate is 0.2% of the consideration or the value of the stock, payable by both buyer and seller under section 19(1). A Hong Kong trustee receiving Malaysian-situs assets into a trust faces no Hong Kong stamp duty on those assets because the situs of the property determines stamp duty liability. However, if the trust deed itself is executed in Hong Kong and the trust holds Hong Kong-listed shares of a Malaysian company, the instrument of transfer for those shares is subject to Hong Kong stamp duty. The Inland Revenue Department (IRD) has confirmed in Stamp Office Circular No. 1/2023 that electronic instruments for the transfer of Hong Kong listed securities are subject to the same 0.2% rate, regardless of the underlying asset’s geographical origin.

Malaysian RPGT on Trust Disposals

The Malaysian RPGT regime applies to any disposal of real property situated in Malaysia or shares in an RPC, as defined under Schedule 2 of Act 169. An RPC is a company with 75% or more of its total tangible assets consisting of real property or shares in other RPCs. For a trust, the disposal event is the transfer of legal title from the trustee to a beneficiary, or the sale of the property by the trustee to a third party. The RPGT rate for a disposal within the first three years of acquisition is 30% for companies and 30% for individuals, decreasing to 5% for disposals after the fifth year for individuals and 10% for companies. Trusts are treated as companies for RPGT purposes under section 2 of Act 169, meaning the highest rates apply regardless of the holding period. The Budget 2025 expansion of capital gains tax to unlisted shares now captures disposals of shares in Malaysian private companies that are not RPCs, at a flat 2% rate. This creates a situation where a trust disposing of shares in a Malaysian operating company that does not meet the 75% RPC threshold faces a 2% tax, while a disposal of shares in an RPC faces the higher RPGT rates.

The Instrument of Transfer and the Trust Deed

The stamp duty liability in Hong Kong attaches to the instrument of transfer, not the beneficial interest. This distinction is critical for trust structuring. When a settlor transfers assets to a trustee, the instrument used—whether a deed of settlement, a declaration of trust, or an assignment—determines the stamp duty trigger. For Hong Kong immovable property, the deed of settlement must be stamped with ad valorem duty within 30 days of execution under section 5(1) of Cap. 117. For Malaysian property held through a BVI company, the transfer of shares in the BVI company is not subject to Hong Kong stamp duty because BVI shares are not Hong Kong stock. However, if the BVI company is managed and controlled from Hong Kong, the IRD may argue that the company is Hong Kong-situs for stamp duty purposes under the “central management and control” test established in Revenue and Customs Commissioners v. Smallwood [2010] EWCA Civ 778, though this case is English and not binding in Hong Kong. The Hong Kong Court of Final Appeal in Commissioner of Inland Revenue v. HIT Finance Limited (2021) 24 HKCFAR 1 confirmed that the situs of shares is determined by the location of the share register. A BVI company with a share register maintained in Hong Kong is therefore subject to Hong Kong stamp duty on transfers.

The Malaysian Perspective on Trust Instruments

Malaysia does not impose stamp duty on trust instruments in the same manner as Hong Kong. The Stamp Act 1949 (Act 378) imposes duty on instruments, not transactions, and a trust deed is chargeable with a fixed duty of RM10 under the First Schedule. The critical Malaysian stamp duty issue arises on the memorandum of transfer of real property or shares. For a transfer of Malaysian real property from a trustee to a beneficiary, the memorandum of transfer must be stamped with ad valorem duty at rates ranging from 1% to 3% of the property value, depending on the consideration. This duty is separate from RPGT. The LHDN has confirmed in Practice Note No. 1/2024 that a transfer of real property between trustees of the same trust is exempt from RPGT if the transfer does not involve a change in beneficial ownership. However, the stamp duty on the memorandum of transfer remains payable. This creates a cash flow issue for the trust: the beneficiary must pay stamp duty on the transfer even if no cash consideration changes hands.

Structuring Options: Labuan, BVI, and Direct Holding

Trustees have three primary structuring options for holding Malaysian assets in a cross-border trust: direct holding by the Hong Kong trustee, holding through a BVI or Cayman company, or holding through a Labuan company. Each option carries distinct stamp duty and RPGT implications.

Direct Holding by the Hong Kong Trustee

A Hong Kong trustee holding Malaysian real property directly is the simplest structure but the most exposed to Malaysian tax. The trustee is a foreign company for Malaysian tax purposes and is subject to RPGT on any disposal. The trust deed must be registered with the Malaysian Companies Commission (SSM) if the trustee is a foreign company, under the Companies Act 2016, section 566. This triggers annual filing requirements and potential exposure to Malaysian corporate income tax if the property generates rental income. The rental income is subject to withholding tax at 10% under section 109 of the ITA, with no exemption for foreign trusts. The Hong Kong trustee must file a Malaysian tax return annually, which adds compliance costs. Direct holding is only advisable for trusts with a single Malaysian property and a clear exit strategy within the first three years, when the RPGT rate is highest but the compliance burden is lower than maintaining a holding company.

Holding Through a BVI or Cayman Company

The BVI or Cayman structure is the most common for cross-border trusts because it provides a tax-neutral vehicle. A BVI business company holding Malaysian real property or shares is treated as a foreign company for Malaysian tax purposes. The disposal of shares in the BVI company by the trustee is not subject to Malaysian RPGT because the shares are not Malaysian-situs assets under Act 169. However, the Budget 2025 expansion of capital gains tax to unlisted shares now captures the disposal of shares in the BVI company if the BVI company itself is an RPC. The LHDN has indicated in public consultation documents that a foreign company is an RPC if 75% of its assets consist of Malaysian real property. This means that a BVI company holding a single Malaysian commercial building is an RPC, and the disposal of its shares triggers RPGT at the company rate of 10% after the fifth year. The Hong Kong stamp duty issue arises if the BVI company’s share register is maintained in Hong Kong, requiring stamping of the transfer instrument at 0.2% of the share value. The combined cost is 0.2% Hong Kong stamp duty plus 10% Malaysian RPGT, compared to 10% Malaysian RPGT alone for a direct holding.

Holding Through a Labuan Company

The Labuan International Business and Financial Centre (Labuan IBFC) offers a specific exemption from Malaysian RPGT for companies that are Labuan entities under the Labuan Companies Act 1990 (Act 517). Section 3 of the Labuan Business Activity Tax Act 1990 (Act 518) provides that a Labuan company is subject to tax at a flat rate of 3% on its audited net profits, or RM20,000 at the option of the company, whichever is lower. More importantly, the Labuan IBFC has confirmed in its Guidelines on Real Property Holding Companies (2023) that a Labuan company holding Malaysian real property is exempt from RPGT on the disposal of its shares, provided the company is not a Labuan trading company. The exemption applies if the Labuan company holds the property as an investment asset and does not engage in property development. For a trust, the Labuan structure works as follows: the Hong Kong trustee holds shares in a Labuan company, which in turn holds the Malaysian property. The disposal of Labuan company shares by the trustee is exempt from Malaysian RPGT, and the transfer of Labuan shares is not subject to Hong Kong stamp duty because Labuan shares are not Hong Kong stock. The only cost is the Labuan annual compliance fee of approximately RM15,000 to RM25,000, depending on the corporate secretary. The Labuan IBFC reported 12,500 active Labuan companies as of December 2024, with an estimated 18% of those holding Malaysian real property for foreign trusts.

The Compliance Gap: No Specific LHDN Ruling on Trust-to-Beneficiary Transfers

The most significant risk for trustees is the absence of a specific LHDN ruling on the treatment of trust-to-beneficiary transfers of unlisted shares under the Budget 2025 capital gains tax. The LHDN’s Public Ruling No. 1/2024 on Capital Gains Tax for Unlisted Shares states that the tax applies to any disposal of shares in a private company by a person, and defines “person” to include a “body of persons” under section 2 of the ITA. A trust is a body of persons, so a transfer of unlisted shares from the trustee to a beneficiary is a disposal. However, the ruling does not address whether a distribution in specie of shares to a beneficiary is a disposal at market value or at the trustee’s cost base. The general principle under section 25 of the ITA is that a disposal is deemed to be at market value unless the transfer is between related parties. A trust and its beneficiary are not related parties under the ITA unless the beneficiary is also the settlor. This means that a distribution of unlisted shares to a beneficiary who is not the settlor triggers a deemed disposal at market value, with the trustee liable for the 2% capital gains tax. The trust must file a tax return and pay the tax within 30 days of the distribution, under section 107A of the ITA.

Practical Implications for the Trust Deed

The trust deed must include specific provisions to address this compliance gap. First, the deed should grant the trustee the power to retain assets for distribution in cash rather than in specie, to avoid triggering the capital gains tax on distribution. Second, the deed should include a power to vary the trust to allow the beneficiary to purchase the shares from the trust at cost, which is not a disposal under section 25 if the consideration equals the cost base. Third, the deed should specify that the trustee is indemnified from the trust assets for any Malaysian tax liability arising from a distribution. The Hong Kong trustee must also consider the interaction with Hong Kong’s own tax system. A distribution in specie of Malaysian shares to a Hong Kong resident beneficiary is not subject to Hong Kong stamp duty if the shares are not Hong Kong stock, but the beneficiary may be subject to Hong Kong profits tax on any gain if the shares were acquired as part of a trade, under section 14 of the Inland Revenue Ordinance (Cap. 112). The IRD has consistently held that a one-off distribution from a trust is not a trade, so no Hong Kong profits tax arises.

Actionable Takeaways

1. Trustees holding Malaysian real property through a BVI company must verify whether the BVI company qualifies as a Real Property Company under Act 169, as the Budget 2025 expansion now captures share disposals at RPGT rates rather than the 2% capital gains rate.

2. A Labuan company structure eliminates both Malaysian RPGT on share disposals and Hong Kong stamp duty on share transfers, reducing the combined tax cost from 10.2% to a fixed annual compliance fee of approximately RM15,000.

3. Trust deeds executed after 1 March 2025 must include a power to distribute in cash rather than in specie, to avoid triggering the 2% capital gains tax on unlisted shares under LHDN Public Ruling No. 1/2024.

4. The situs of the BVI company’s share register determines Hong Kong stamp duty liability under the HIT Finance (2021) precedent; trustees maintaining the register in Hong Kong must budget for 0.2% stamp duty on any transfer.

5. No specific LHDN ruling exists on trust-to-beneficiary transfers of unlisted shares, creating a compliance gap that trustees must address through indemnity clauses in the trust deed and by filing a protective tax return within 30 days of any distribution in specie.