Under Malaysia’s Stamp Act 1949, a true novation agreement is generally subject to nominal stamp duty of RM10, reflecting its legal nature as a substitution of contracting parties rather than transfer of property.
However, not all novation agreements are equal and whether one qualifies as a true novation for stamp duty purposes depends on how it operates in law.
To help, our guide sets out the current legal position as of November 2025, with a practical overview for business owners and corporate advisers.
How LHDN determines stamp duty
In practice, LHDN examines the substance and legal effect of the arrangement.
Even if expressly called a “novation agreement”, the Collector of Stamp Duties (LHDN) is not bound by that label.
If the agreement is viewed as effecting a transfer of property, rights or receivables, it may be treated as a conveyance or transfer for stamp duty purposes and be imposed ad valorem stamp duty (1~4% of the value).
This is why novation agreements may be examined more closely, particularly in higher-value transactions, and as evidenced by the appeal cases discussed below
Court decisions
The stamp duty treatment of novation agreements was considered by the Malaysian courts in a series of decisions in 2025, which provide useful guidance on how novations should be analysed.
Mesra Retail & Café Sdn Bhd v Pemungut Duti Setem (High Court, September 2025)
This case involved a master novation agreement for the substitution of an operating entity within a corporate group.
LHDN had imposed ad valorem stamp duty on the agreement by relying on section 16(1) of the Stamp Act 1949,
which treats the transfer of rights, interests, obligations and liabilities without consideration as a
deemed conveyance chargeable to stamp duty under Item 32(a) of the First Schedule.
The High Court disagreed with this approach. Although the agreement replaced one contracting party with another,
the court found that it did not involve any transfer of property. In substance, the arrangement was an
operating novation.
The High Court therefore held that the agreement was subject only to nominal stamp duty,
rather than ad valorem duty which had been assessed at RM7,478.
As this is a High Court decision,
it remains to be seen whether LHDN will appeal to the Court of Appeal.
Nike Global Trading B.V. v Pemungut Duti Setem (Court of Appeal, 3 September 2025)
This case concerned a novation arrangement involving the substitution of a lender, where the incoming party assumed the rights and obligations under an existing financing arrangement.
LHDN had taken the position that the novation amounted to a transfer of property (as debt repayment is legally recognised as property), on the basis that the right to receive repayment moved from the outgoing lender to the incoming lender. On this basis, the agreement was treated as attracting ad valorem stamp duty amounting to RM1,716,004.
The Court of Appeal rejected LHDN’s argument and emphasised that a novation operates by extinguishing the original contract and replacing it with a new contract, with the incoming party assuming both rights and obligations. This is legally distinct from an assignment, where only rights are transferred and the original contract continues.
On a proper construction of the novation agreement, the Court of Appeal held that there was no conveyance or transfer of property for stamp duty purposes, and that only nominal stamp duty of RM10 was applicable.
As this is a Court of Appeal decision, it represents the prevailing appellate position, subject to any further appeal to the Federal Court.
Takeaways
If dissatisfied, Section 38A of the Stamp Act 1949 allows taxpayers to submit an objection to LHDN requesting a review within 30 days from the date of the stamp assessment, and the 2025 court decisions provide guidance on how novation agreements are treated for stamp duty purposes:
- a novation agreement will generally attract nominal stamp duty if it is a genuine novation in substance
- if a novation is treated as involving a transfer of property, rights or receivables, it may be assessed to significantly higher ad valorem stamp duty
As stamp duty law continues to develop, keeping these principles in mind early in a transaction can help set clearer expectations and reduce cost uncertainty.
