The Malaysian tax system is territorial in nature. In Malaysia, income will be taxed in Malaysia if it is sourced in Malaysia (i.e. arises in or originates in Malaysia), or if the income is sourced outside Malaysia but received within Malaysia (with certain exemptions).

Since tax year 1998 (the “tax year”), foreign source income received in Malaysia by a resident company has been and will continue to be exempt from tax. However, this exemption does not apply to companies operating banking, insurance, shipping or air freight businesses.

From tax year 2014, dividends received by Malaysian companies under the single-tier dividend regime are no longer subject to income tax. The tax on corporate profits will be final, while dividends distributed to shareholders will not be further taxed.

Currently, income remitted to Malaysia by non-resident individuals, resident companies and unit trusts is exempt from tax. With effect from tax year 2004, to enhance domestic investment, remittance income by any person, including resident individuals, trusts, cooperative societies and Hindu joint families, is exempt from tax. Effective from tax year 2016, the income tax rate in Malaysia for resident and non-resident companies (other than small and medium-sized companies (“SMEs”)) is 24%. Starting from the 2017 tax year, small and medium-sized enterprises with paid-in capital not exceeding or equal to 2.5 million ringgit will be levied income tax at the rate of 18% on the first 500,000 ringgit of their taxable income, and the remaining taxable income will be taxed at the rate of 24%. Income tax is levied at the tax rate. In addition, for tax years 2017 and 2018, resident companies incorporated under the Companies Law, 2016, may be eligible for a deduction from the income tax rate of 1% to 4% on incremental income.

The current maximum personal income tax rate is 28%.

There is no capital gains tax (except for real estate gains tax), but gains that have an income character or are considered to be “risky business in the nature of a trade” may be subject to income tax. If an asset entitled to capital expenditure allowance is sold for more than its taxable depreciation value, the sale proceeds will be taxed as depreciation equalization tax.

Generally speaking, tax losses can be carried forward indefinitely but can only be offset against future business income. However, a company’s accumulated tax losses may not be carried forward unless the company’s shareholders are substantially the same during the relevant period. This provision is intended to prevent companies from profiting from losses. However, the Treasury has used its legislative powers to exempt all companies (other than dormant companies) from this restriction (this exemption is currently in place).

Effective from tax year 2006, the Malaysian Income Tax Act (the “Income Tax Act”) provides for group tax relief for all locally incorporated resident companies to promote private sector investment in high-risk projects. Subject to certain conditions being met, group tax relief is limited to 70% of the current year’s unabsorbed tax losses, which can be offset against the income of another company within the same group.

In addition, the company currently enjoys tax incentive benefits such as pioneer enterprise status, investment tax relief or Malaysian shipping exemption, reinvestment relief and/or income tax exemption under Section 127 of the Income Tax Act, or has entered into an approved food production business , the costs or proprietary rights of the acquisition of a foreign company or a tax deduction claimed under any provision of section 154, it is not eligible for group tax relief. With the introduction of the above incentives, existing group tax relief incentives for approved businesses such as food production, silviculture, biotechnology, nanotechnology, optics and photonics have been discontinued. However, companies that have received group tax relief incentives for the above-mentioned activities can continue to offset 100% of losses incurred by their subsidiaries against their income.

Expenses incurred “wholly and entirely” in the production of taxable income are generally deductible (including pre-business training expenses and interest on borrowings used to generate income), unless otherwise prohibited by the Income Tax Act.

Generally, unused capital expenditure allowances can be carried forward indefinitely but can only be offset against income from the same business. Similar to the tax loss carry forward restriction, the carry forward of a company’s unused capital expenditure allowances is not allowed unless the shareholders are substantially the same in the relevant year, but there is currently an exemption to this restriction. This exemption applies to all companies except dormant companies.

The following are some of the provisions and restrictions in the Foreign Exchange Notice that apply to residents and non-residents:

Residents are free to make or receive foreign exchange payments from non-residents for any purpose, including settlement of trade in goods and services, except for derivatives as follows:

1. Denominated or measured in Ringgit unless approved by Bank Negara;
2. Provided by residents and denominated in foreign currency, unless approved by the National Bank; and
3. Provided by a non-resident and denominated in a foreign currency unless:

• Derivative products purchased by licensed onshore banks on their own account, except for exchange rate derivatives with Ringgit as the measurement currency;
• Derivatives offered on designated exchanges through resident futures brokers; and
• Interest rate derivatives agreed with Labuan banks to manage interest rate risk exposure arising from approved foreign currency borrowings.

Settlement between residents and non-residents in Malaysian ringgit (“ringgit” or “ringgit”) is only permitted for settlement of the following:

1. Ringgit assets;
2. Trade in goods and services;
3. Commodity murabahah trading;
4. Income earned or expenses incurred in Malaysia;
5. Reinsurance business of domestic insurance business or reinsurance business of domestic takaful business between residents and persons licensed to carry on Labuan insurance or takaful (Yakaful) business;
6. A ringgit-denominated non-financial guarantee issued to a resident by a person licensed to conduct banking business in Labuan; and
7. For any purpose between immediate family members (i.e. spouse, parents, children and siblings) as long as:

• Such payments are made in ringgit by a resident into a non-resident or an external account at a non-resident financial institution (i.e. an account maintained in ringgit with a Malaysian financial institution); and
• Payments made in ringgit by non-residents are also made from external accounts.

Generally, a resident (company or individual) is allowed to borrow up to RM1 million from any non-resident (other than a non-resident financial institution). Notwithstanding this, resident individuals may also borrow any amount from their non-resident immediate relatives or non-resident employers in Malaysia (subject to their terms and conditions of service). A resident company can borrow any amount from:

1. Borrowings from non-resident companies within its own group or its direct non-resident shareholders to finance activities in the Malaysian entity sector. “Real sector activities” includes: (A) the production or consumption of goods or services (excluding activities in the financial services sector, and does not include the purchase of securities or financial instruments, whether Islamic or not); and ( B) The construction or purchase of residential or commercial property (other than a simple land purchase); or
2. Borrow money from any non-resident by issuing securities:

• Negotiable private debt securities or Islamic private debt securities as specified in the relevant guidelines of the Securities Commission of Malaysia; or
• Ringgit or Islamic debt securities issued by the Malaysian federal government.

A non-resident (company or individual) may obtain ringgit borrowings from residents in the following manner or for the following purposes:

1. By issuing ringgit private debt securities or Islamic private debt securities approved by Bank Negara Malaysia; or
2. Provide funding for activities in the physical sector in Malaysia. Non-residents can also obtain ringgit borrowings for specified purposes from licensed onshore banks, resident stockbroking firms and resident insurance companies.

Resident individuals can borrow up to an equivalent of MYR 10 million in foreign currency from licensed onshore banks or non-residents, while there is no limit on the amount of foreign currency borrowed from their immediate family members; resident companies can borrow from Borrow any amount of money in foreign currency from:

1. Licensed onshore bank;
2. A resident or non-resident company within the group of entities to which it belongs (other than a company established solely to obtain borrowings);
3. its resident or non-resident direct shareholders;
4. Issue foreign currency debt securities to another resident; or
5. Loans of up to an equivalent amount of MYR 100 million (based on the total amount the corporate group can borrow from other non-residents).

Non-residents are allowed to borrow any amount in foreign currency from a licensed onshore bank, another non-resident in Malaysia or any of their immediate family members. Non-residents can also borrow from residents, subject to certain limits, depending on whether the resident has domestic ringgit borrowing available at that time.

Residents and non-residents may bring in or out of any amount of foreign currency, but only up to the equivalent of US$10,000 in ringgit.

Effective April 1, 2007, limits on the number of residential or commercial property loans that non-residents can obtain have been eliminated.

There are other exchange control provisions that apply to foreign investments, the issuance, transfer or substitution of securities or financial instruments, financial guarantees, exports of goods, opening of foreign currency accounts, payments and hedging, and transactions with designated individuals and companies. transaction.