Budget 2027: Can Malaysia make its tax framework more M&A-friendly?

Businesses pursue M&A for a myriad of commercial reasons including pursuing rapid inorganic growth, expanding market reach, unlocking synergies, or raising funds.

While "doing a deal" still ultimately involves either selling shares or assets, its art has become more complex over the years through innovative mechanisms like earn-outs, locked box accounts, and M&A insurance.

Anchored by strong GDP growth of 6% in 2026 Q2, Malaysia is expected to continue to have a robust M&A scene building on the strong momentum from previous years. Healthcare and education sectors continue to attract domestic and foreign interest due to its cost competitiveness relative to Singapore and Hong Kong, while benefiting from world-classcinfrastructure and access to the broader Asean market through Malaysia's strategic location.

Deal momentum is also picking up in the local data centre space, attracting those seeking to earn stable yields from the early movers that have shifted from greenfield to the operating space. There is also sector consolidation across industries such as financial services and insurance as well as grocery and consumer retail optimising efficiencies in response to regional supply chain shifts and digital infrastructure demands.

Building a robust M&A tax framework is therefore necessary against this backdrop. Ideally, it should balance between stimulating transactions and adapting to increasingly complex cross border deals, while ensuring the correct amount of tax is collected.

Since the introduction of Capital Gains Tax (CGT) on unlisted local shares in 2024, the tax authorities have made a concerted effort to provide guidance to taxpayers navigating the new regime. For example, their confirmation that tax treaties which provide CGT relief would generally be respected on a self-assessment basis was well received.

Yet certainty is only one part of an effective M&A tax framework. The other is ensuring that tax outcomes keep pace with commercial reality. Currently, CGT must be paid within 60 days of signing the deal, with an additional 30 days being allowed under certain circumstances. A deferral to a much later date is allowed only if the transaction is conditional upon prior approval from the federal or state government—a concept relevant for real property transactions, but perhaps less so for shares.

While parties may have signed the dotted line, it is common deal practice that various key conditions must be satisfied first before the deal is legally completed. These "conditions precedent" could include securing consent from creditors and extending tenancies, typically subject to a deadline. Except for customary "earnest deposit," the seller typically receives the full price only upon completion as there is a risk that the deal may still crumble if all conditions cannot be met. Satisfying conditions therefore could take longer than 90 days depending on complexity.

In simpler words, the current CGT regime effectively taxes the seller on a share sale which has not happened yet—and could still be uncertain pending fulfilment of conditions. The timing of paying CGT could be further enhanced, not only to align with deal reality, but also to create awin-win situation for taxpayer and taxman as it avoids having to deal with CGT refunds if the transaction is rescinded.

Entrepreneurial SMEs, especially those with diversified interests, often reorganise their businesses prior to an M&A transaction. This is typically undertaken to facilitate investors in a common holding company or where the M&A target is a particular business segment only. While it is commendable that tax exemptions are provided for internal restructuring, there may be scope to make them more effective in practice. For example, some of them still require taxes to be paid first followed by a refund later, while others require prior approval from the tax authority.

A friendlier approach could be to allow these exemptions to be enjoyed first without paying taxes, accompanied by monitoring through tax audits in line with the self-assessment spirit. This would help conserve cash flows as these internal exercises are not profit-driven. Liberalising them would also enable speed in execution, which is critical in an M&A. Providing for tax neutrality on qualifying corporate reorganisations would also be much welcomed.

While these could be quick fixes, bolder moves are required to move Malaysia up the ASEAN M&A chain, particularly amidst intense regional competition for capital. Singapore has an M&A scheme which offers tax benefits such as M&A allowance, stamp duty relief, and double deduction on transaction costs to encourage local companies, especially SMEs, to grow through strategic acquisitions. Malaysia could consider something similar especially as SMEs form the backbone our economy—contributing roughly 39.7 per cent of the GDP in 2025.

While tax will always be an important deal consideration, it is often not, and should not be, a deal breaker as the wider M&A thesis must take precedence. Tax is ultimately part of the overall deal economics and parties will seek to manage it appropriately within the confines of the law.

Stability and predictability of the tax landscape is crucial to fully unlocking our country's M&A attractiveness.

Gan Pei Tze is the Partner and Head of Deals Tax, PwC Malaysia. Lee Boon Siew is the Director of Deals Tax, PwC Malaysia