For businesses that are part of a larger corporate group, internal transactions are a daily reality. One company in the group might rent office space or equipment to another. The question is: do these internal “sales” need to be charged with the 8% Service Tax (SST)?

The good news is that under specific conditions, they do not. The Royal Malaysian Customs Department (RMCD) provides a special relief known as “Intra-Group Relief,” which exempts certain services provided between related companies from SST. This guide will break down the three crucial conditions for claiming this relief specifically for

rental services.

The 3 Conditions for Intra-Group Rental Service Exemption

To qualify for this SST exemption, a transaction between two companies in the same group must meet all three of the following conditions:

Condition 1: The Companies Must Be “Related” (Defining Control)

First, the two companies involved must legally be considered “related,” which is determined by control. According to the guidelines, one company is considered to control another if either of these situations applies:

•  

  A) Over 50% Shareholding: One company holds, directly or indirectly, more than 50% of the other’s issued share capital.
•  

  B) 20%-50% Shareholding PLUS Board Control: One company holds between 20% and 50% of the other’s issued share capital AND has the power to appoint or remove all or a majority of the board of directors.

(Note: For this purpose, shares held through nominees, trustees, or as security for a loan are not considered part of the shareholding calculation.)

Condition 2: Both Parties Must Be SST-Registered

This is a fundamental requirement for most B2B exemptions. Both the company providing the rental service and the company receiving the rental service must be registered for SST with RMCD.

Condition 3: The 5% Rule for External Services

This is the most complex condition. The company providing the rental service (let’s call it Company A) is allowed to also provide the same rental services to third parties outside the group. However, there is a limit:

• The total value of rental services provided by Company A to

  all third parties within any 12-month period cannot exceed 5% of the total value of all rental services provided by Company A (both to group companies and to third parties) in that same period.

If the value of external services exceeds this 5% limit, the company will not be eligible for Intra-Group Relief.

A Practical Example in Numbers

Let’s use the example provided in the infographic to make this clear.

• Company A provides rental services and is in a group with Company B. Company D is a third party outside the group.
• In a 12-month period:
  • Company A’s total rental services value = RM10,000,000.
  • It rents equipment to the group’s Company B for RM9,600,000.
  • It also rents equipment to the third-party Company D for RM400,000.

Calculation:

1. First, we calculate the 5% threshold: 5% of RM10,000,000 =

   RM500,000.
2. Next, we compare Company A’s external sales to this threshold. The value of services provided to the third party, Company D, is

   RM400,000.
3.  

   Conclusion: Since RM400,000 is less than the RM500,000 threshold, Company A is eligible for Intra-Group Relief.

The Tax Impact:

• The RM9,600,000 rental transaction between Company A and Company B is

  exempt from SST.
• The RM400,000 rental transaction between Company A and the third-party Company D is

  still subject to 8% SST, as Company A is an SST-registered entity providing a taxable service.

What This Means for Your Corporate Group

1. Map Your Group Structure: Clearly identify all companies within your group that meet the legal definition of “control.”
2. Analyze Internal Transactions: Identify all intra-group services being provided, especially high-value ones like rental.
3. Track External Sales: If a group company serves both internal and external customers, you must implement a system to monitor the 5% external sales limit to maintain your eligibility for relief.
4. Apply for Relief: Note that Intra-Group Relief is not always automatic and often requires a formal application to RMCD.

Expert Guidance on Corporate Tax Strategy

Managing intra-group transactions and applying for tax reliefs requires a deep understanding of corporate structures and tax law. At SMONE, we help corporate groups structure their affairs for maximum tax efficiency while ensuring full compliance. We can help you assess your eligibility for Intra-Group Relief and manage the application process.

Contact us today for a strategic consultation.

(Disclaimer)
This article is for general informational purposes. It does not constitute legal or tax advice. Please consult with a qualified professional for advice tailored to your specific situation.