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.