Malaysia’s tax system

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 (except for 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 “entirely 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.

In Malaysia, income tax is currently assessed by the Inland Revenue Department of Malaysia (the “Inland Revenue Department”) under the Self-Declaration System (the “Self-Declaration System”). Taxpayers are required to self-assess their tax liability and complete a tax return within 7 months of the end of the company’s financial year. Tax calculations and audited statements should be retained by the company for audit or inspection by the tax authorities. The tax bureau will conduct audits on taxpayers from time to time to ensure compliance.

Companies must provide estimates of tax liability for the current year, which estimates should not be lower than previous year estimates or revised estimates. Companies can revise their estimates in the 6th and 9th months of their financial year.

Companies that overpay income tax will be given tax refunds. The tax refund mechanism is provided under the investment tax exemption system.

Goods and Services Tax is a form of consumption tax that came into effect on April 1, 2015 at a rate of 6%. The Goods and Services Tax is administered by the Royal Malaysian Customs and Excise Department, replacing the sales tax and service tax previously levied under the Sales Tax Act 1972 and the Service Tax Act 1973 respectively. All goods and services supplied by a taxable person in Malaysia are subject to GST unless they are zero-rated items, exempt items or fall under a special scheme.

Goods and Services Tax is levied under the Goods and Services Tax Act, 2014 (“GST Act 2014”) and its subsidiary regulations. According to the provisions of the Goods and Services Tax Act 2014, with effect from 1 April 2015, all goods and services supplied by a taxable person in Malaysia in the course of carrying on or promoting the business carried on by the taxable person will be taxed at a rate of 6%. Goods and Services Tax is levied at the rate unless such goods and services supplied are expressly exempt from tax. Goods and services imported into Malaysia are also subject to and collected Goods and Services Tax. Taxable persons are responsible for charging the goods and services tax on the goods or services they supply and remitting the goods and services tax collected (output tax) to the Royal Malaysian Customs. In Malaysia, the Goods and Services Tax is based on a billing tax credit mechanism in which a taxable person is entitled to claim that the Goods and Services Tax incurred is related to the conduct or furtherance of a business, subject to certain specified conditions being met. offset against the output goods and services tax payable.

For any person who makes a taxable supply of goods or services for a business purpose, if the annual taxable turnover of the supply exceeds a prescribed limit of MYR 500,000 based on past turnover or future turnover projections, the goods are And service tax registration is mandatory. Businesses with taxable turnover equal to or less than MYR 500,000 may choose to register voluntarily, but once registered, they must remain in the system for a further 2 years.

The main practical consequence of the dividend taxation rules so far as foreign shareholders are concerned is that dividends paid out of profits by a Malaysian resident company will not be subject to any tax in the hands of foreign shareholders if such profits have been subject to full Malaysian tax. Further Malaysian taxes.

Malaysia imposes a withholding tax on certain payments to non-residents, such as royalties, technology fees, installation fees and movable rentals. Withholding tax rates generally range from 10%-15% and are considered final (except on payments to non-resident contractors in respect of contract payments; in such cases, the non-resident may submit a tax return, claim deductions for losses and expenses).

However, in certain circumstances, if a double taxation agreement exists between Malaysia and the non-resident’s treaty country, the non-resident may enjoy the protection of a treaty, in which case the rate of withholding tax may be reduced.

With effect from January 17, 2017, payments to non-residents for certain services under section 4A of the Income Tax Act, such as technical advice, assistance or services provided in connection with the management or implementation of any project, are deemed to be For income sourced in Malaysia, the tax liability is borne by the Malaysian Government or a resident of Malaysia (whether the services are provided within or outside Malaysia) and, therefore, a 10% withholding is payable under Section 109B of the Income Tax Act Tax. However, the Income Tax (Exemption) Order (No. 9) 2017 which came into effect on 6 September 2017 provides that non-residents are exempt from paying Section 4A(i) and 4A(ii) if the services are provided outside Malaysia. Income tax and withholding tax on income described in Article 1.

For fees paid to non-resident contractors, consultants or professionals for services performed under a contract in Malaysia, the applicable withholding tax rate is 13%, which includes 10% of the contract payment due to the non-resident’s tax liability and Non-resident employees pay 3% on their tax liability (which will eventually be refunded when filing their tax return). This is not a final tax and any withholding amount in excess of the final tax will be refunded.

The Income Tax Act contains specific provisions on transfer pricing (i.e. Section 140A), which regulates transactions between related companies and requires related companies to conduct transactions fairly and reasonably, failing which the Commissioner of Inland Revenue may make necessary adjustments or disqualify the transaction. Ignore it.

The Income Tax (Transfer Pricing) Rules 2012 (“Transfer Pricing Rules”) issued in May 2012 are the first legislation to specifically regulate transfer pricing and require documentation of all related party transactions. The Rules have Retrospective, can be traced back to January 1, 2009.

In order to supplement the Transfer Pricing Rules, the tax bureau also issued the Transfer Pricing Guidelines in July 2013. In addition to stipulating relevant penalties for violations, it also provides taxpayers with administrative requirements and transfer pricing methods for related parties. Guidance on applicable aspects of party transactions. The Transfer Pricing Guidance was further updated in July 2017 to broadly incorporate recommendations under Actions 8-10 of the Organization for Economic Co-operation and Development (“OECD”) Base Erosion and Profit Shifting Project. The tax bureau has also issued a specific transfer pricing audit framework, explaining the processes and procedures that will be carried out during transfer pricing audits.

Given that pricing is an area of increasing concern to the Inland Revenue Department, with effect from tax year 2014, the Malaysian Corporate Income Tax Return form has been revised to include a new “tick-box” disclosure confirming whether transfers have been prepared for any related party transactions reported Pricing documents. This form, along with other forms and questionnaires issued by the CRA, constitutes the CRA’s key risk assessment tool when identifying potential targets for audit. Therefore, designing and arranging related party transactions fairly and reasonably, and preparing appropriate transfer pricing documents that comply with local regulations can minimize and reduce the risk of being forced to make adjustments after an audit.

Effective from 1 January 2017, Malaysia has also adopted country-by-country (CbC) reporting rules requiring relevant reporting entities (i.e. the ultimate parent entities of Malaysian multinationals with total annual consolidated group revenue of at least RM3 billion) Prepare and submit country reports.

The Commissioner of Inland Revenue may, within 7 years after the relevant tax year, increase the tax assessment amount or propose additional tax amounts due to transfer pricing adjustments resulting from price substitutions under section 140A(3) of the Income Tax Act.

Currently, if the consideration paid for the disposal of real property consists wholly or partly of money, the purchaser is required to retain and remit to the tax bureau the entire amount of such money or an amount not exceeding 3% of the total consideration within 60 days after the date of the relevant disposal. amount (whichever is the lower, the “Retention Amount”). In accordance with the provisions of the Finance Act 2017 (No. 2), with effect from 1 January 2018, the retention amount ratio for transactions where the disposer is not a Malaysian citizen or permanent resident has been increased from 3% to 7%.

Disposal period Real Estate Profits Tax Interest Rate
Company Individual (citizen/permanent resident) Individuals (non-citizens)
Disposed within the previous 3 years 30% 30% 30%
Disposal in Year 4 20% 20% 30%
Disposal in fifth year 15% 15% 30%
Disposal in the sixth year and subsequent years 5% 0% 5%

Since 1975, Malaysia has had laws in place to impose real property profits tax (“PRT”). This tax applies to all “persons”, including individuals, companies, partnerships, bodies and sole proprietorships, regardless of whether the person is resident in Malaysia during the relevant tax year.

Starting from January 1, 2015, the real estate profit tax rate has been significantly increased. The revised real estate profit tax rate applicable to the disposal of real estate and real estate company shares is as follows:

The concept of a “real estate company” (“real estate company”) was introduced as a tax avoidance mechanism to prevent people from avoiding real property gains tax by using a company to acquire land and then selling shares in the company instead of selling the land.

A real estate company refers to a controlled company that owns land with a confirmed value of not less than 75% of its total tangible assets. Capital gains on the disposal of shares in a real estate company will be taxed in the same manner as capital gains on the disposal of land.

As of August 2017, Malaysia has concluded double taxation relief agreements with approximately 75 countries and regions, including Albania, Argentina, Australia, Austria, Bahrain, Bangladesh, Belgium, Bosnia Herzegovina, Brunei, Canada, Chile, China , Croatia, Czech Republic, Denmark, Egypt, Fiji, Finland, France, Germany, Hong Kong SAR, Hungary, India, Indonesia, Iran, Ireland, Italy, Japan, Jordan, Kazakhstan, South Korea, Kuwait, Kyrgyzstan, Laos, Lebanon, Luxembourg, Malta, Mauritius, Mongolia, Morocco, Myanmar, Namibia, Netherlands, New Zealand, Norway, Pakistan, Papua New Guinea, Philippines, Poland, Qatar, Romania, Russia, San Marino, Saudi Arabia, Seychelles, Singapore, South Africa , Spain, Slovak Republic, Sri Lanka, Sudan, Sweden, Switzerland, Syria, Taiwan (by way of exemption order), Thailand, Turkey, Turkmenistan, United Arab Emirates, United Kingdom, United States, Uzbekistan, Venezuela, Vietnam and Zimbabwe. However, the treaties with Argentina and the United States of America have a limited scope of application and only cover the profits of shipping and/or air transport enterprises.

Source of this article:
Wong&Partners Baker & McKenzie, Malaysian law firm