Typical due diligence issues

The regulatory regime can appear disorderly due to the intricate interplay of rules and regulations that are subject to government policy relating to the industry in which the target company is operating.

Not all governmental policies are written, and the guidelines or directives issued by the relevant regulators may not be publicly available for inspection. Therefore, it is common, as part of due diligence, to contact regulators to confirm the latest policy positions. It is also common for companies to hold "grandfathered" licenses that may not reflect the latest policy positions (for example, the  shareholding structure under an existing license may not comply with the latest equity requirements that would apply to a new license application made today). This would present difficulties and trigger regulatory approval requirements in a proposed share transfer.

It is important to inspect and review the internal documents of the target company and not to rely on public searches. Information obtained from searches conducted on registers that are maintained by governmental or other regulatory authorities may not be current (due to delays in updating information) or may be in accurately recorded in those registers by the relevant authorities.

There is no official centralized database from which litigation searches may be conducted. However, searches may be conducted at the relevant court registers if the buyer has details of the relevant litigation proceedings.

Pricing and payment

Share sale

A resident is allowed to make or receive payment in Malaysian ringgit or foreign currency in Malaysia to or from a non-resident for the settlement of shares in a Malaysian company.

Asset sale

In an asset sale, unless the foreign buyer already has an existing entity in Malaysia, a foreign buyer must first incorporate a local company or, if the buyer is a foreign company, register a branch with the Companies Commission of Malaysia before undertaking the business of the transferred assets.

The registered branch of a foreign company is treated as a resident for exchange control purposes. Payment between residents for a Malaysian asset must be made in the Malaysian local currency (Malaysian ringgit) (even where the payment for the asset transfer is to be settled between foreign shareholders outside of Malaysia) unless the prior written approval of Bank Negara Malaysia (BNM), the central bank of Malaysia, has been obtained for such payment to be made in foreign currency.

Signing/closing

Is a deposit required?

No, a deposit is not legally required. Deposit  payments are commonly requested by local sellers but foreign buyers will typically push back.

Is simultaneous signing/closing common?

Simultaneous signing and closing is not common for the following reasons:

• Most industries are regulated and regulatory approvals are typically required for an asset sale or share sale. The approval process can often be lengthy and involve several regulatory bodies.
• Licenses are not transferable and the buyer in an asset sale will have to apply for new licenses, permits or approvals to carry on the transferred business prior to closing.
• Unless the foreign buyer already has an existing entity in Malaysia to acquire the assets, a new entity needs to be incorporated, which will result in a gap between signing and closing in an asset sale.

It is possible for signing and closing to occur simultaneously when no regulatory approvals or other conditions precedent are required.

Foreign investment restrictions

Malaysia does not have a foreign investment screening procedure. However, foreign investment is regulated by way of imposing foreign equity restrictions and/or “Bumiputera”/local participation requirements in Malaysia. For further information, see the more detailed section on "Foreign investment restrictions".

Antitrust/merger control

Merger control in Malaysia currently only applies to mergers in the aviation service market and communications market, and notification is voluntary. There are no specified jurisdictional thresholds for authorities to investigate a merger, but the Malaysian Aviation Commission (“MAVCOM”) is more likely to investigate a merger where the combined turnover in Malaysia, or worldwide, meets certain thresholds. Licensees under the Communications and Multimedia Act 1998 (“CMA”) may also apply for authorization, which allows for conduct including mergers that could potentially result in substantial lessening of competition. This process is separate from the voluntary merger assessment regime and an application can be submitted at different times or without it. For further information, see the more detailed section on "Antitrust/merger control".

Other regulatory or government approvals

Generally, government policy (rather than statute) limits acquisitions in specific industries, although certain Malaysian legislation sets caps on foreign equity participation in Malaysian companies operating in particular industries.

An example is that foreign business operators engaged in "distributive trade services" in Malaysia are recommended to obtain the approval of the Ministry of Domestic Trade and Costs of Living before commencing operations under the Guidelines on Foreign Participation in the Distributive Trade Services Malaysia 2020 (“DTG”). There are shareholding restrictions depending on the format of distribution (such as hypermarkets and convenience stores).

The DTG is not law and it represents the Malaysian government's current policy. Although there are no legal sanctions against non-compliance, the DTG is enforced administratively via the refusal to register new business branches of foreign companies or through licensing restrictions and the issuance of immigration passes by other regulatory authorities (such as the immigration department).

Share sale

In a share sale, there is no change of employer, as the employees remain employed by the target company post-share sale. As such, no consent by employees is required.

Asset sale

There is no automatic transfer of employees in a business or asset sale in Malaysia, and an employer cannot unilaterally transfer an employee to another employer without the employee's consent. The employees must either resign or be terminated by the seller and offered new employment by the buyer.

If the employees earn MYR 4,000 per month or less, or are engaged in specified blue-collar work (e.g., manual labor, supervising manual labor or operating a motor vehicle) regardless of wages, the payment of termination benefits may be required by the seller, under the Malaysian Employment Act, unless the statutory conditions are met. The provision of minimum termination notice or payment of salary in lieu (which applies to all employees) as prescribed under the Malaysian Employment Act, Sarawak Labour Ordinance and Sabah Labour Ordinance may also be required, depending on the employee transfer route.

Share sale

In a share sale, stamp duty is payable on the share transfer form, as the instrument of transfer (and not the definitive agreement), at a rate of 0.3% of the higher of the consideration price or market value of the shares (calculated based on the net tangible assets value).

Capital gains tax (“CGT”) is payable on the gains derived from the disposal of the following assets where the disposer is a company, limited liability partnership, trust body or co-operative society, from 1 March 2024 onwards:

• shares of an unlisted company incorporated in Malaysia
• shares of a company incorporated outside Malaysia, where such company derives value from real property situated in Malaysia (i.e., at least 75% of the foreign company’s total tangible assets comprise of real property situated in Malaysia and/or shares in another company that itself holds at least 75% Malaysian real property)
• moveable or immovable property outside Malaysia, where the gains or profits are subsequently received in Malaysia

CGT is generally imposed at a rate of 10% on net gains, or where the shares disposed of were previously acquired before 1 January 2024, there is an option to elect to pay CGT at 2% on gross disposal price.

For real property gains tax (“RPGT”). Please see "Asset sale" below in respect of RPC Shares. With the introduction of CGT, RPGT will no longer apply to disposals of shares by a company, LLP, trust body or co-operative society, from 1 January 2024 onwards, as such disposals would be subject to CGT. Gains derived by individuals from the disposal of RPC Shares would continue to be subject to RPGT.

Asset sale

In an asset sale, stamp duty is levied on the instruments of transfer (such as an asset transfer agreement or assignment agreement) and is charged on an ad valorem basis, calculated on the higher of the market value of the property and the consideration paid, whichever higher. The applicable stamp duty rates vary depending on the asset transferred and the purchaser, namely:

• General rates: Stamp duty is imposed at an ad valorem rates of 1% on the first MYR 100,000, 2% on the next MYR 400,000, 3% on the next MYR 500,000 and 4% on any amount in excess of MYR 1 million
• Foreign purchasers (with effect from 1 January 2024): Where the purchaser is a foreign company, or a person who is not a citizen nor permanent resident, stamp duty is imposed at a flat rate of 4%
• Residential property acquired by foreign purchasers (from 1 January 2026): The sale of residential property to foreign company, or a person who is not a citizen nor permanent resident, is subject to stamp duty at a flat rate of 8%

The instrument of transfer must be submitted to the stamp office for adjudication within: (i) 30 days of the date of execution if executed in Malaysia; or (ii) 30 days after it was received in Malaysia if executed outside of Malaysia. The stamp duty must be paid within 30 days from the date of the notice of assessment issued by the stamp office.

Malaysia is implementing a self‑assessment regime for stamp duty in phases since 1 January 2026, including for instruments effecting transfers of ownership, which is scheduled to take effect from 1 January 2027. Until then, instruments for the transfer of ownership remain subject to the adjudication process under the Stamp Act 1949.

RPGT is imposed on gains arising from the disposal of real properties or the disposal of shares in a real property company (i.e., where real property forms 75% or more of the tangible assets of such company) ("RPC Shares") at a sliding rate of 10% to 30% depending on the holding period of the real property and whether the seller is a company incorporated in Malaysia, a citizen or a permanent resident. Where RPGT is payable: (i) the buyer must retain 3% of the purchase price (7% if the seller is not a citizen, permanent resident or a company incorporated in Malaysia) and they must pay such amount to the Inland Revenue Board (IRB) within 60 days of the disposal of the real property or the RPC Shares ("Date of Disposal"); and (ii) both the seller and buyer must file returns for the RPGT in the forms prescribed by the IRB to the IRB within 60 days from the Date of Disposal. From 1 January 2022 onwards, the retention rate of 3% was increased to 5% for disposals by a company incorporated in Malaysia within three years from the date of acquisition of the real property or RPC Shares.

Effective 1 January 2025, RPGT has transitioned from an assessment-based regime to a self‑assessment regime, under which the disposer is required to self‑assess the chargeable gain and RPGT payable in the prescribed return. Upon submission of the return, the RPGT declared by the disposer is deemed to be an assessment made on the disposer by the Director General of Inland Revenue.

OECD's Two Pillar Solution

The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting has put forward a so-called Two-Pillar Solution to address the tax challenges arising from the digitalization of the economy. Pillar Two is intended to introduce a global minimum effective rate of tax (“ETR”) of 15% for large businesses in each jurisdiction where they operate and will lead to fundamental changes in the international tax system. It is currently being implemented in many jurisdictions.

Groups will need to consider how the Pillar Two rules could impact on the life cycle of M&A transactions from the pre-acquisition phase (including transaction planning (such as the choice of acquisition structure and financing) and due diligence of the target group), the acquisition phase (such as contractual risk allocation around Pillar Two) to the post-acquisition phase and the impact of Pillar Two on any post-acquisition integration.

In Malaysia, the OECD Pillar Two rules were incorporated into the Malaysian Income Tax Act 1967 and these provisions came into effect from 1 January 2025. As a result, where the application of tax incentives leads to an ETR below the minimum threshold of 15%, affected entities may be subject to a top‑up tax to bring the effective tax rate up to that level. This may reduce the effectiveness or economic value of existing tax incentives and as such, there have been announcements and indications that substitute incentive mechanisms may be introduced to replace or supplement existing income‑based tax incentives. However, no official legislation, detailed guidance or confirmed implementation timeline has been issued, and the scope and design of any such incentives remain subject to further announcement.

For information on post-acquisition integration matters, please see our Post-acquisition Integration Handbook.