THE gazette order legalising the announcement made in December 2021 to exempt foreign income received in Malaysia from outside the country was issued on July 18. Although it is more than six months after the announcement, it is welcomed and never too late because it provides certainty, now that it is embodied in the tax law rather than relying on media releases by the authorities.
The latest position
Individuals tax resident in Malaysia receiving income arising from sources from outside and brought into the country will be exempt from income tax in Malaysia. Companies and limited liability partnerships (LLP) tax resident and incorporated or registered in Malaysia will be exempt on foreign dividends received in Malaysia.
Where is the catch?
The exemption appears straightforward. However, there are some important conditions to meet to benefit from the exemption. For both individuals and companies/LLP, the key requirement to enjoying the benefit is that the foreign income and the foreign dividend income should have been subjected to tax in the foreign country to a tax similar in character to the Malaysian income tax.
Examples of foreign income being subject to other forms of taxation could be in the form of a levy, a tax on the turnover, on deemed profits, or based on private rulings with foreign tax regimes which imposes tax on different measurable values. If the foreign income was subject to such taxes, the foreign income will not enjoy the exemption.
Foreign dividend received by companies and LLP in Malaysia are subject to another very important condition that requires the foreign dividend to be subject to income tax, and the rate of tax in the foreign country should be no less than 15%. In the event the Malaysian companies or the LLP receive dividends from countries whose highest tax rate is less than 15%, this exemption is not available to the companies/LLP.
Issues of concern
Individuals should clearly keep records to distinguish between income and capital to prove that the monies remitted into Malaysia can enjoy the exemption. Capital gains is not taxable in Malaysia. With this exemption order, it is important to have evidence to support that the income remitted has been subjected to a tax regime similar to the Malaysian income tax regime in the foreign country, otherwise, the foreign income will be taxed in Malaysia.
Companies and LLP receiving foreign dividends face additional hurdles. They have to prove that the income which gives rise to the foreign dividend has been subjected to a tax similar to income tax at no less than 15%. One should not confuse this with the withholding tax that may be applicable on the remittance from the foreign country.
There is an important component that is still “hanging in the air”. The gazette order states that in addition to the above conditions, there will be guidelines issued by the Inland Revenue Board in relation to the above conditions. These guidelines have not been made known to the taxpayers and we do not know if there are any further hurdles that taxpayers will have to cross before they can enjoy this exemption.
Overall, the government has kept its word. However, the taxpayers must be careful that they follow the conditions announced and further conditions that may be introduced in the upcoming guidelines. We anticipate there will be disputes in the future on the above conditions and largely this is expected to be centered on the records kept by the taxpayers to prove their position or on whether the income has been subjected to a tax regime similar to our income tax regime.
This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (www.thannees.com).
