Background
Two shareholder's loan agreements were executed between Company A and Company B (collectively, "Original Shareholder's Loan Agreements"), with Company A providing loans to Company B ("Loans"). These agreements were stamped with an ad valorem duty under Item 27(a) of the First Schedule of the SA.
In August 2023, as part of an internal restructuring, Company A transferred its 100% equity interest in Company B to the Taxpayer. To facilitate this restructuring, the Taxpayer, Company A, and Company B entered into a novation agreement to replace Company A with the Taxpayer as the lender under the Original Shareholder's Loan Agreements ("Novation Agreement").
Upon submission for stamping, the Collector assessed the Novation Agreement with an ad valorem duty of 1% - 4% of the loan amount, resulting in a stamp duty of RM 8.2 million, based on Section 17 and Item 32(a) of the First Schedule of the SA ("Assessment"). The Taxpayer contested this Assessment, arguing that the Novation Agreement should be stamped at a nominal duty of RM 10.
Key arguments
The arguments advanced by parties are as follows:
The Collector's main contention
The Collector argued that the Novation Agreement constitutes a conveyance on sale and should be stamped under Item 32(a) of the First Schedule of the SA. According to the Collector, the primary effect of the Novation Agreement is the transfer of debt from Company A to the Taxpayer, as the loans had been fully disbursed, and consideration was provided under the agreement. The Collector asserted that since the loans were fully drawn down, the Novation Agreement could not be a novation in substance. Instead, it merely transferred the rights and benefits to receive loan repayments to the Taxpayer. Under the SA, "property" includes debt, making the Novation Agreement an instrument for the transfer of property.
The Taxpayer's main contention
The Taxpayer contended that the Novation Agreement is not an assignment, conveyance, or transfer of property because a novation extinguishes rights and obligations under the old contract, as stipulated in Section 63 of the Contracts Act 1950. The Taxpayer argued that the Novation Agreement did not transfer any debt between Company A and the Taxpayer. Instead, it extinguished the contractual relationship between Company A and Company B, substituting Company A with the Taxpayer in the Original Shareholder's Loan Agreements. Consequently, the Original Shareholder's Loan Agreements now govern the relationship between the Taxpayer and Company B. The presence of consideration in a novation does not necessarily indicate a transfer of property. Since novation agreements are not specifically provided for in the First Schedule of the SA, the Novation Agreement should be stamped at a nominal duty of RM 10.
High Court's decision
The High Court ruled in favor of the Taxpayer and held that the Novation Agreement should be stamped at a nominal duty under Item 4 of the First Schedule of the SA.
Conclusion
This ruling is a welcome development, particularly in view of the Stamp Office's recent stringent stance on imposing ad valorem duty on novation agreements. However, it is important to note that the High Court reached different conclusions regarding the applicable stamp duty for loan novation agreements in other cases, which are pending appeal before the Court of Appeal. We anticipate that further clarity will be forthcoming from Malaysia's appellate courts regarding the stamp duty implications of novation agreements.
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Anlynn Ng, Senior Associate and Wen Ying Tan, Legal Assistant, contributed to this legal update.
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