The Malaysian tax system
Malaysia welcomes and encourages foreign direct investment. Apart from a few strategic industries, the Government has, over the years, significantly liberalized ownership restrictions in various industries. Further, there are no restrictions on the repatriation of profits, dividends, capital or interest from Malaysia.
There are a range of business entities in Malaysia and this article sets out some income tax factors to consider for key business vehicles and provides an overview of certain other taxes in Malaysia.
Private limited company: The most common business vehicle in Malaysia is the private limited company. The corporate income tax rate is 24% on assessable business profits (referred to as “chargeable income”). This applies to both resident and non-resident companies. It is important to note that Malaysia generally adopts a territorial system of taxation, meaning Malaysia only imposes tax on income which is sourced from Malaysia. This is with the exception of Malaysian resident companies that engage in banking, insurance, shipping or air transport, which are assessable on their worldwide income. It has been proposed that for the years of assessment 2017 and 2018, the rate of 24% be reduced by one to four percentage points, based on an increase in chargeable income (as compared to the immediate preceding year of assessment). Details of the proposal have not yet been released and it is expected that there may be further qualifications and conditions imposed. This reduced rate (where relevant) will only apply on the increased chargeable income. The Income Tax Act 1967 (ITA) provides that a company is considered resident in Malaysia if at any time in the year its management and control are exercised in Malaysia. The place of incorporation is irrelevant.
A concessionary tax rate is given to a Malaysian incorporated and resident company that has a paid-up ordinary capital of RM 2,500,000 or less at the beginning of the tax basis period and which is not directly or indirectly related (by more than 50% in terms of ordinary share capital) to another company that has a paid-up ordinary capital of more than RM 2,500,000 (SMEs). The concessionary tax rate is 19% on the first RM 500,000 of chargeable income, with the excess taxed at 24%. Effective from the year of assessment 2017, a 1% reduction in the concessionary tax rate, from 19% to 18%, on the first RM500,000 of chargeable income has been proposed.
Although Malaysia imposes withholding tax on certain types of payments to non-residents such as interest (15%) and royalties (10%), Malaysia does not impose withholding tax on dividends. Dividends paid by a Malaysian resident company are also exempt from income tax in the hands of the shareholders.
The income tax system in Malaysia is a self-assessment system and the Inland Revenue Board (IRB) is the authority responsible for the implementation and administration of direct taxes in Malaysia. Companies are required to file their tax returns within seven months after the end of their accounting period. The tax return is deemed to be an assessment made on the date of filing the return. Companies are required to provide an estimate of tax payable before the beginning of the tax year and make monthly instalment payments based on the tax estimate. Any balance of tax payable must be settled when filing the tax return.
Branch: A foreign incorporated company may choose to carry on a business in Malaysia by registering a branch. The foreign incorporated company that establishes a Malaysian branch would be subject to a 24% tax rate on the profits attributable to the branch. A branch would generally be treated as a non-resident for tax purposes and hence the impact of the Malaysian withholding tax laws on the branch would need to be considered. As mentioned above, it has been proposed that the 24% tax rate potentially be reduced on incremental chargeable income, for the years of assessment 2017 and 2018. It is not yet known whether this benefit will be available to Malaysian branches of foreign companies.
Limited liability partnership: A limited liability partnership (LLP) is another business vehicle in Malaysia and combines the features of a company and a partnership. An LLP is taxed as a company.
Partnership / sole proprietorship: Individuals can also undertake business in Malaysia via a partnership or sole proprietorship. However, note that only Malaysian citizens and permanent residents can be registered as sole proprietors and as a matter of practice, foreign individuals are not permitted to be partners in a partnership. Each partner and the sole proprietor will be taxed at their respective individual tax rates on their share of profits accruing in or derived from Malaysia.
Tax residence and personal income tax rates
Residents are taxed at graduated rates ranging from 0% to 28% depending on the level of their taxable income after deducting personal tax reliefs; whilst a non-resident individual, for tax purposes, is not entitled to personal tax reliefs and is taxed at a flat rate of 28%. An individual is generally considered a resident if he is physically present in Malaysia for more than 182 days in a calendar year, though there are also other residency rules to consider. Individuals in Malaysia are taxed on income for the calendar year and individuals must submit their tax returns in the year following the year of assessment.
For individuals carrying on a business in Malaysia, the submission deadline is 30 June; otherwise, the submission deadline is 30 April. Similar to companies, monthly withholdings (in the case of employees) and monthly instalment payments (in the case of non-employees) are made to the IRB and the individual must settle the balance of tax liability (if any) when filing the tax return.
If a foreign investor intends to apply for any tax incentives, it is important to note that these are usually only granted to a resident company incorporated under the Companies Act 1965. Malaysia offers many tax incentives under the ITA and the Promotion of Investments Act 1986, covering a variety of industries and activities. These range from manufacturing and related services to targeted services such as environmental management, education and medical tourism as well as areas such as regional services, information and communication technology (ICT), bio-technology, Islamic products as well as customized incentives and incentives for specific economic focus areas. To further attract multinationals to locate their operational hubs in Malaysia, Malaysia launched the Principal Hub incentive on 6 April 2015. For investors that use Malaysia as a base for conducting, managing and supporting their regional and global businesses, a three-tiered corporate tax rate of 0%, 5% and 10% for 10 years will be granted based on the extent of the activities and employment and spending commitments of the company. The Principal Hub incentive replaced the International Procurement Center, Regional Distribution Center and Operational Headquarters incentives. Companies which have completed their tax exemption period under these incentives may apply and be granted the Principal Hub incentive subject to meeting eligibility requirements.
The Government also has a reinvestment allowance (RA) incentive regime, wherein a company undertaking qualifying activities (manufacturing activities and selected agricultural activities) that reinvests for the purpose of expansion, modernization, diversification or automation is entitled to claim RA for 15 consecutive years, beginning from the year of assessment the RA is first claimed. RA is an additional deduction given at the rate of 60% of qualifying capital expenditure and can be set off against 70% of statutory income (or 100% of statutory income provided the company achieves the productivity level as determined by the Minister of Finance). To encourage reinvestment by these companies, the Government has introduced a special RA incentive for qualifying capital expenditure incurred from the years of assessment 2016 to 2018. This three-year special RA applies to companies who have completed their 15-year RA claim period in the year of assessment 2015 or previous years of assessment. Companies which complete their 15-year RA claim period in the year of assessment 2016 can only claim the special RA in the years of assessment 2017 and 2018, whilst companies whose 15-year RA claims expired in the year of assessment 2017 would only be eligible for the special RA in the year of assessment 2018. The rates of special RA are the same as the current RA incentive.
Real Property Gains Tax
Malaysia has a limited form of capital gains tax known as real property gains tax (RPGT) that applies to gains on disposal of real property or shares in closely controlled companies with substantial real property interests. There has been a proposal to make the RPGT system a self-assessment system in the future. The RPGT rate under the Real Property Gains Tax Act 1976 ranges from 0% to 30% for individuals who are citizens and Malaysian permanent residents, and 5% to 30% for companies and individuals who are not Malaysian citizens nor permanent residents, depending on the period of ownership.
Malaysia also has a transaction tax known as stamp duty that is chargeable on certain instruments and documents. The rate of duty varies according to the nature of the instruments/documents and transacted values. The more common instruments and documents subject to stamp duties include those for conveyance, assignment or transfer of shares in an unlisted company (at 0.3%) or property/assets (at a graduated scale of 1% to 3%). Stamp duty exemptions are available in certain cases.
Unique to the Malaysian tax and commercial landscape is Labuan, an international business and financial centre (Labuan IBFC) located in East Malaysia. Labuan has a separate income tax regime under the Labuan Business Activity Tax Act 1990 that provides preferential tax treatment for Labuan-incorporated companies carrying on prescribed Labuan business activities, with income taxes at either a fixed sum of RM20,000 or 3% of net audited profits. Income derived from wholly “non-trading” activities, such as investment holding activities, is tax-exempt. Labuan companies may alternatively elect to be taxed under the ITA.
Goods and Services Tax
In terms of indirect taxes, Malaysia introduced a broad-based tax on consumption called the goods and services tax (GST) at the rate of 6% from 1 April 2015. The GST is similar to the “value-added tax” implemented in other countries. The GST is a multi-stage consumption tax applicable to the taxable supply of goods and services made in Malaysia, as well as the importation of goods and services into Malaysia. GST replaced Malaysia’s previous sales and services tax. Input tax credits can be claimed against output tax collected on supplies of goods and services which are standard rated or zero rated. Input tax credits will, however, not be available in respect of supplies that are exempt, such as public transportation, residential property, private education and healthcare. The Royal Customs of Malaysia ("Customs") is the authority responsible for the implementation and administration of GST.
Tax treaty network
Investors may also benefit from Malaysia’s extensive tax treaty network comprising 74 countries that are in force to date.
This article contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Member firms of the global EY organization cannot accept responsibility for loss to any person relying on this article.
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