Issue 108 September 2013 PP 9741/10/2012 (031262)

PwC Alert
Business trust An alternative listing vehicle

Page 4 What is a BT? Page 6 Pros and cons of a BT Page 8 Listing requirements Page 15 Considerations

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Introduction
With RM1.4 trillion worth of investments expected from the private sector as envisaged under the Economic Transformation Programme, Malaysias capital market will play an increasingly important role in mobilising domestic and international funds to finance the country's transformation initiatives. In an effort to broaden fund-raising avenues and provide flexibility in financing arrangements, the Securities Commission (SC) has introduced the Business Trust (BT) scheme as an alternative listing vehicle for raising capital. Formation of BTs in Malaysia is now possible following the amendments to the Capital Markets and Services Act 2007, and issuance of the Business Trust Guidelines by the SC on 28 December 2012. The BT vehicles offered in Malaysia encompass both conventional as well as Syariah compliant vehicles.

Business trust An alternative listing vehicle

PwC Alert Issue 108, September 2013

With the introduction of BTs, Malaysia joins the ranks of only Singapore and Hong Kong as countries in this region which offer BT as an alternative listing vehicle to raise funds. Since the first listing of a BT on the Singapore Exchange in 2006, Singapore now has 16 listed BTs. The assets managed by these BTs range from hospitality, infrastructure and shipping, commercial property, medical facilities and container ports to cable television. This year, the Singapore bourse has captured a further 3 BT listings up until August 2013 i.e.: OUE Hospitality Business Trust (hospitality industry) Croesus Retail Trust (retail real estate industry) Asian Pay Television Trust (cable television industry) In Hong Kong, the first BT was listed in 2011, followed by a second listing two years later. The former is in the telecommunications industry (Hong Kong Telecom Trust) while the latter is in the hospitality industry (the Langham Hospitality Trust). A third BT listing is currently in the pipeline. In Malaysia, no BT has been listed as at the time of writing this article. Please refer to the Appendix for a brief comparison of the BTs in Malaysia, Hong Kong and Singapore.

PwC Alert Issue 108, September 2013

Business trust An alternative listing vehicle

What is a BT?
A BT is a hybrid structure which incorporates both elements of a trust and a company. It is formed through a trust deed and managed by a trustee-manager who is the legal owner of the BTs assets. The unit holders of the BT have an economic interest in the business assets of the BT. They also have the rights to participate in the profits or income arising from the management of the assets in the BT via receipts of distributions declared by the trustee-manager. BTs in Malaysia could either be registered or recognised by the SC, as follows: (i) Registered BT - BT established in Malaysia which complies with the requirements stipulated by the SC. (ii) Recognised BT -BT established outside Malaysia which complies with both the requirements of its home jurisdiction and the SC.

Business trust An alternative listing vehicle

PwC Alert Issue 108, September 2013

The SC requires the trustee-manager to be a company incorporated in Malaysia or elsewhere, that is not an exempt company (or equivalent to an exempt company). The trustee-manager is required to be licensed by the SC for the regulated activity of fund management and set up for the sole purpose of managing the operations of the BT.

Unit holders
Holds units Holds units Management and trustee services

Promoter
Holds interest

Business trust

Trustee-manager

Beneficial ownership

Legal ownership

Assets/ properties

Business trust in a nutshell A business trust is created when a company hives off some of its assets into the care of an appointed party that acts as both trustee and manager of the assets. The trustee-manager, which then legally owns those assets, manages them for the benefit of unit holders looking to ride on the assets' prospects. Assets that are hived off and put into a business trust are essentially yieldgenerating assets.

PwC Alert Issue 108, September 2013

Business trust An alternative listing vehicle

Pros and cons of a BT

Advantages
Due to its unique structure, a BT extends a variety of advantages to both the owner of the assets or properties (the promoter) and the investors, notably in the following areas: 1. Distribution of returns Unlike companies, distribution of returns is not governed by the BTs accounting profits. A BT is able to pay out distributions so long as there is: sufficient cash flow, and the board of directors of the trustee-manager has declared in writing that the trustee-manager is able to fulfil the liabilities of the BT as and when they fall due. This feature is particularly attractive for capital intensive industries, such as infrastructure and telecommunications. The companies in these industries generally have strong stable cash flows but reduced operating margins due to substantial depreciation of their assets, which restricts the amount of dividends that can be paid.

Business trust An alternative listing vehicle

PwC Alert Issue 108, September 2013

2. Retaining control of the assets The promoter would normally hold majority interest in the trustee-manager as well as the predominant share of the units in the business trust. This gives them control over the assets of the BT and ensures optimal monetisation of assets to the promoter from the listing of the BT. In addition, the removal of a trustee-manager requires not less than two-thirds of the voting rights of all the unit holders entitled to vote at a general meeting. 3. No restriction on the type of assets held As the name suggests, a BT is free to operate a business in any industry and therefore there is no restriction on the type of assets it may hold. A BT is not subject to the requirements imposed on a real estate investment trust (REIT) by the SC in relation to the type of assets that can be held. 4. Gearing There is flexibility in meeting the funding arrangements for a BT as it is not subject to any gearing restrictions.

The drawbacks
From an investors perspective, a BT may be deemed a riskier form of investment due to the flexibility discussed above. Based on the experience of other countries, the typical concerns raised by investors include governance issues and the risk level of BTs compared to other forms of investments e.g. shares in companies and units in REITs.

PwC Alert Issue 108, September 2013

Business trust An alternative listing vehicle

Listing requirements
Legislative changes were made to the Main Market Listing Requirements of Bursa Malaysia Securities Bhd to facilitate the emergence of this new BT framework. The listing provisions applicable to a corporate listed issuer are generally also applicable to a BT, subject to the necessary modifications in light of its trust structure. These provisions include requirements on admission, public spread, composition of independent directors, and post listing obligations such as the requirements for disclosure including immediate announcement of specific events, quarterly reports and annual reports, requirements on related party transactions and financial condition. Bursa Malaysia is committed to ensure that investors in BTs are accorded the same level of investor protection as that given under a corporate issuer. Related amendments have also been made to the Rules of the Bursa Depository.

Business trust An alternative listing vehicle

PwC Alert Issue 108, September 2013

The more pertinent BT listing requirements under the Business Trusts Guidelines and the Main Market of Bursa Malaysia Securities Berhad are outlined in this table:

Criteria Financial / track record

Listing requirements Satisfy the market capitalisation test as follows: (a) Market capitalisation A total market capitalisation of at least RM1 billion based on the issue or offer price. (b) Pro forma accounts Where a listing of a BT is sought based on the strength of the BT group, the BT seeking listing (if it has been established) and the subsidiary entities of the BT must have common controlling unit holders or controlling shareholders for at least one full financial year prior to submission to the SC. (c) Operating history Has been in operation and generated operating revenue for at least one full financial year prior to submission to the SC. In addition to the above requirements, where the core business of the BT group is that of an infrastructure undertaking, it should also fulfil the following requirements: Concession or license to build and operate the infrastructure awarded by a government or a state agency in or outside Malaysia A development cost of at least RM500 million Remaining concession or license period of at least 15 years from the date of submission to the SC.

Core business

Identifiable core business of which the BT has majority beneficial ownership and the trusteemanager (acting on behalf of the BT) has management control. The core business is not the holding of investments in other listed BTs or listed corporations.

PwC Alert Issue 108, September 2013

Business trust An alternative listing vehicle

Listing requirements

Criteria Financial position and liquidity

Listing requirements The BT group has a healthy financial position, with: (a) sufficient level of working capital for at least 12 months from the date of the listing; and (b) positive cash flow from operating activities.

Public spread

Initial listing: 25% of total units in the hands of at least 1,000 public unit holders holding not less than 100 units each. Continuing basis: 25% in the hands of the public.

Board composition

At least 2 directors or 1/3 of the board, whichever is higher, as independent directors. Audit committee comprises a majority of independent directors. Based on terms and conditions which are not unfavourable to the BT and are not detrimental to the interests of the unit holders. All trade debts exceeding the normal credit period and all non-trade debts, owed by the interested persons or major unit holders to the BT, must be fully settled prior to the BTs listing.

Transactions with related parties (see diagram on the next page)

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PwC Alert Issue 108, September 2013

Related parties in a BT framework

Director or major shareholder** of trustee-manager

Trusteemanager

Related parties in a business trust

Major unitholder*

Person connected with any director or major shareholder of trusteemanager

Person connected with trustee-manager or a major unit holder

* A person who has an interest or interests in one or more units in a business trust and the unit, or the aggregate of those units, is: (a) equal to or more than 10% of the aggregate of the units in the BT; or (b) equal to or more than 5% of the aggregate of the units in the BT where such person is the largest unit holder of the BT. ** A person who has an interest or interests in one or more voting shares in the trustee-manager and the nominal amount of that share, or the aggregate of the nominal amounts of those shares, is: (a) equal to or more than 10% of the aggregate of the nominal amounts of all voting shares in the trustee-manager; or (b) equal to or more than 5% of the aggregate of the nominal amounts of all voting shares in the trustee-manager where such person is the largest shareholder of the trustee-manager.

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Tax treatment
Tax rate A BT is treated as a company for tax purposes. Therefore a BT is taxed at the prevailing corporate tax rate, currently at 25%. Residence status The residence status of a BT is determined based on the residence status of the trustee-manager. The trustee-manager is considered a Malaysian resident if the business of the BT is carried out in Malaysia and the management and control of the business is exercised in Malaysia. Tax incentives In general, a BT is eligible for tax incentives applicable to a company with the exception of those which are given to a company incorporated under the Companies Act 1965. Transfer of assets to a business trust The control transfer provisions of the Income Tax Act 1967 which apply to the transfer of assets between two parties (where one has control over the other or where both are subject to common control) on which capital allowances or other similar allowances had been claimed, are also extended to the transfer of assets from a unit holder to a business trust. The control transfer provision effectively allows the transferee to continue to claim capital allowances on the asset and defers the computation of balancing charge or allowance until subsequent disposal of the asset by the transferee. Control in the context of a BT refers to the right to not less than fifty per cent of residual profits of the BT available for distribution, or not less than fifty per cent of any residual assets of the BT available for distribution on a winding up.

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Business trust An alternative listing vehicle

PwC Alert Issue 108, September 2013

Group relief Group relief of tax losses which applies to companies within the same group is extended to BTs. Based on Public Ruling 10/2013 [Taxation of business trust], the Inland Revenue Board takes the view that the group relief provisions in the context of a BT are restricted to BTs within a group. Exemptions from stamp duty and real property gains tax To promote the establishment of BTs, the government has granted the following exemptions for purposes of initial offering of BTs: Stamp duty exemption on all instruments executed by a trustee- manager on behalf of a BT in relation to the transfer of any business, asset or real property to a BT Real property gains tax exemption for the transfer of real property and shares in real property companies to a BT. Taxation of unit holders Similar to a company, income tax of a BT is paid at the trust level while trust distributions (like dividends) are not taxable in the hands of unit holders.

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Considerations
If you are considering a BT as an alternative business and listing vehicle, here are some issues to consider: Ability of the business to generate strong regular cash flows This is relevant if the objective of the BT is to distribute regular high returns to unit holders. Funding requirements The size of funds and timing of when funds are required, are relevant factors in choosing between a BT or a company as the listed vehicle. Transaction costs - As with any restructuring exercise, there will be transaction costs involved because businesses/assets are being moved around. Identify these costs so you can determine the quantum involved and enable appropriate structuring of the transaction to achieve cost efficiencies. Tax efficiency of BT group Consider the tax position of the BT group upon formation of the BT, to minimise any tax inefficiencies/leakages and ensure that entitlement to existing tax incentives (if applicable) continues.

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Business trust An alternative listing vehicle

PwC Alert Issue 108, September 2013

Conclusion
The BT structure is suitable for businesses with large capital outlay and assets generating strong and stable cash flows. It can be used as a vehicle to unlock the value of capital assets held and ensure optimal monetisation of assets to the promoter, provide funding to the business within a relatively short period of time and give high returns to its investors/unit holders. On a macro level, the launch of the BT as an alternative listing vehicle, enhances the governments objective of further developing the Malaysian capital market. From a tax perspective, clarity on the treatment of BTs has been provided through legislative amendments and the recently issued Public Ruling 10/2013. In general, the tax rules put BTs and unit holders on the same footing as companies and shareholders respectively.

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A regional comparison of BTs

Malaysia Legal structure Created by a trust deed (not a separate legal entity) Hong Kong Created by a trust deed (structure involves a trust and a listed company which is a separate legal entity) Listed company Singapore

Appendix

Created by a trust deed (not a separate legal entity)

Legal ownership of trust assets Listing

Trustee-manager

Trustee-manager

Listed on the Main Market of Bursa Malaysia None None Paid out of cash flows, subject to solvency requirements

Listed on the Hong Kong Stock Exchange None None

Listed on the Singapore Stock Exchange; or may be unlisted None None Paid out of cash flows, subject to solvency requirements

Investment restrictions Gearing limit Distribution

Distributions from trust paid out of cash flows, subject to solvency requirements Distributions from listed company - restricted by legal requirements of jurisdiction of incorporation
BT - taxed at profits tax rate of 16.5% Unit holders - Trust distributions not taxable Hong Kong Companies Ordinance Hong Kong Stock Exchange Listing Rules Hong Kong Code on Takeovers and Mergers Securities and Futures Ordinance Hong Kong Stock Exchange

Tax treatment

BT- Taxed at corporate tax rate of 25% Unit holders - Trust distributions not taxable Capital Markets and Services Act 2007 Business Trust Guidelines Bursa's Main Market Listing Requirements

BT - Taxed at corporate tax rate of 17% Unit holders - Trust distributions not taxable Singapore Business Trusts Act 2004 Singapore Securities and Futures Act Singapore Exchange Listing Manual

Regulatory framework

Primary regulator

Securities Commission Bursa Malaysia Securities Berhad

Monetary Authority of Singapore Singapore Stock Exchange

* The concept of business trusts in Hong Kong is achieved using the share stapled units model whereby investors hold share stapled units jointly issued by the BT and listed company.
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Notes

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Business trust An alternative listing vehicle 17

Notes

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Lets talk
Jagdev Singh Senior Executive Director PricewaterhouseCoopers Taxation Services Sdn Bhd Tel:+603 2173 1469 jagdev.singh@my.pwc.com Phan Wai Kuan Senior Executive Director PricewaterhouseCoopers Taxation Services Sdn Bhd Tel:+603 2173 1589 wai.kuan.phan@my.pwc.com

Loh Lay Choon Partner PricewaterhouseCoopers Tel:+603 2173 1683 lay.choon.loh@my.pwc.com

Herbert Chua Executive Director PricewaterhouseCoopers Tel:+603 2173 0649 herbert.gh.chua@my.pwc.com

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