Malaysia: Updates regarding taxation of foreign-sourced income

In brief

The Malaysian Ministry of Finance (MOF) announced at the end of December 2021 the exemption of certain foreign-sourced income (FSI) received in Malaysia. 

In the latest development, the Malaysian Inland Revenue Board (IRB) announced in a media statement on 11 March 2022 ("Media Statement") that it would be abolishing the Special Income Remittance Programme (PKPP) with effect from 11 March 2022 in light of the exemption announced by the MOF. We summarise the latest developments on the taxation of FSI and implications for taxpayers in this alert. 


Contents

Background

During the Budget 2022 announcement, the government, in a move that surprised many, proposed that it would be resuming taxation on FSI received by residents in Malaysia with effect from 1 January 2022. The Finance Act 2021 ("Finance Act") implemented this proposal.

To ease the transition into resuming taxation on FSI, the IRB, on 16 November 2021, introduced the PKPP effective from 1 January 2022 to 30 June 2022 ("Transition Period"). During this Transition Period, FSI received in Malaysia by Malaysian residents will only be subject to income tax at 3%.

Notwithstanding the above, the MOF on 30 December 2021 announced that subject to certain conditions, the government has agreed to exempt (i) all types of FSI for individuals (except those in a partnership business in Malaysia); and (ii) foreign-sourced dividends received by companies or limited liability partnerships in Malaysia (collectively, "Exemption"). This Exemption will be effective for five years from 1 January 2022 to 31 December 2026.

In the latest development, the IRB has recently announced in the Media Statement on 11 March 2022 that it would be abolishing the PKPP effective from 11 March 2022 in light of the Exemption. The Media Statement has also provided some clarification on how FSI will be taxed in the coming years.

What does this mean for taxpayers?

Firstly, whilst we know the effective period of the Exemption, the eligibility requirements have yet to be confirmed by the government. The Media Statement issued by the IRB has stated that the conditions for exemption will be provided in an Income Tax (Exemption) Order to be issued under Section 127 of the Income Tax Act 1967. At the time of writing, this has yet to be issued and we understand from informal feedback that this Order is estimated to be issued around April 2022. Taxpayers should keep a lookout for an announcement regarding this Order to confirm if their FSI qualifies for this Exemption.

Secondly, whilst the PKPP has been abolished, the Media Statement confirms that the 3% concession rate will continue to apply to FSI, which does not fall under the Exemption, but is received in Malaysia within the Transition Period, as provided for under the Finance Act. Companies will see the largest benefit from this as they can still enjoy the concessionary rate of 3% if their FSI, other than dividend income, is brought into Malaysia between 1 January 2022 and 30 June 2022. Ultimately, it would still be important for companies to assess whether any remittances from outside Malaysia would be characterized as being income in nature since only income would be subject to tax. Capital gains (other than gains from the disposal of real property or real property shares) are still not taxable in Malaysia.

In respect of reporting obligations, taxpayers should take note that FSI which do not fall under the Exemption and which have been brought into Malaysia after 1 January 2022 will have to be reported in the annual tax return for the relevant year of assessment.

The IRB has also confirmed that after 30 June 2022, taxpayers will be taxed on non-exempted FSI at the prevailing tax rate according to their respective categories, which is consistent with the position under the Finance Act.

Implications & next steps

With the abolishment of the PKPP, the IRB is now updating its earlier FAQs issued in respect of the PKPP and it remains to be seen whether the original guidance in the said FAQs (e.g., on when income is considered to be "received" in Malaysia, the claiming of tax credits, etc.) will remain applicable for the non-exempted FSI remitted to Malaysia.

The sudden removal of the PKPP appears to be unnecessary since exempted FSI (under the Exemption) would have enjoyed the exemption from tax in any case, whether or not the PKPP is in place. In fact, all efforts should be put to ensure that the relevant legislation be passed as soon as possible to give legal effect to the Exemption.

Without understanding the eligibility criteria for the Exemption, it would still be uncertain for companies and individuals as to whether the Exemption applies to their FSI. This is especially since there is only a short window between now and 30 June 2022, before the 3% concessionary tax rate for FSI "expires". If such income would not qualify for the Exemption, a decision will need to be made quickly as to whether such income should be remitted back to Malaysia by 30 June 2022 to enjoy the 3% concessionary tax rate.

In the meantime, we would advise that taxpayers remain diligent in maintaining records of their gains and transfers of money into and out of Malaysia and to record the nature of such remittances. Companies and individuals should also obtain advice to assess the characteristics of such remittances as to whether they are income or capital in nature, in the first place.

 

This client alert was issued by Wong & Partners, a member firm of Baker McKenzie International, a global law firm with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a "partner" means a person who is a partner or equivalent in such a law firm. Similarly, reference to an "office" means an office of any such law firm. This may qualify as "Attorney Advertising" requiring notice in some jurisdictions. Prior results do not guarantee a similar outcome.

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