The Inland Revenue Board of Malaysia (IRBM) has published guidelines on tax treatment of hybrid instruments, providing clarification about the general characteristics of hybrid instruments and how the tax treatment of distributions or profits from a financial instrument is based on whether the holding of the instrument is an equity or debt in nature.
The guidance explains the application of current tax treatment would have to consider specific
features of the hybrid financial instrument which carries both equity and debt features.
In this regard, the test to determine whether the features of the hybrid instrument are equity or debt must be carried out first before the tax treatment is applied.
These guidelines are intended to provide an explanation on:
- Key features of a hybrid instrument and factors that are taken into consideration in determining whether a hybrid instrument is classified as equity or debt for tax purposes;
- Tax treatment related to the distribution or profit on a hybrid instrument for both the holder and issuer of the instrument.
The guidance explains that “hybrid instrument” is a financial instrument that exhibits both equity and debt features and an “instrument holder” is a person who subscribed to a hybrid instrument.
Additionally, it refers to an “instrument issuer” as the person responsible for authorising a hybrid instrument that encompasses a broad range of persons but is not limited to:
- a Company incorporated in Malaysia, including the Labuan entity; or
- a Trustee of a REIT.
The guidance explains that the accounting treatment of a hybrid instrument should be determined in accordance with prevailing accounting standards adopted in Malaysia and factors will help determine whether the instrument should be classified as equity or debt.
The same considerations apply when determining whether an Islamic hybrid instrument is categorised as equity or debt.
