In review: corporate tax planning developments in Malaysia

All questions

Local developments

i Entity selection and business operations

The most common forms of business entities are companies (private or public), partnerships, limited liability partnerships and sole proprietorships. For foreign enterprises, business activities can also be carried out through a local branch as opposed to an incorporated local subsidiary.

Under the Malaysian Income Tax Act 1967 (ITA), most of the business entities above are taxable given the non-exhaustive definition of a taxable person under the ITA.⁴ However, Malaysia offers a multitude of tax exemptions under the ITA and the Promotion of Investments Act 1986 (PIA), which exempt either the entirety of the income of an entity from tax or income in respect of specific business activities. Tax incentives are also offered in the form of allowances or increased tax deductions.

The Malaysian government has recently embarked on a comprehensive review and revamp of the existing tax incentive framework to increase its sustainability, competitiveness, transparency and attractiveness. To make room for the study to be completed, existing tax incentives, including those relating to aerospace, ship building and repairing, BioNexus status, and economic development corridors, which expire in 2020 are now being extended to at least 2024. Most notably, the Malaysian government is placing heightened focus on the electric vehicle (EV) industry, with various incentives extended or introduced to support or attract EV industry-related investors into Malaysia. Other proposed tax incentives for 2023 include:

1. extension of existing tax deductions on the cost of listing on the ACE and LEAP Markets to the year of assessment 2025, and expansion of the scope to include the cost of listing technology-based companies in the Bursa Main Market;
2. a new carbon capture and storage tax incentive, allowing eligible taxpayers to claim various incentives, including investment tax allowances, tax exemptions, tax deductions, and duty and sales tax exemptions;
3. accelerated capital allowance and income tax exemption offered to chicken rearers who adopt environmentally friendly closed house systems; and
4. expanding the current tax incentives for food production projects to include agricultural projects based on controlled environment agriculture.

Entity forms

For multinational businesses considering establishing a presence in Malaysia, entity selection plays a pivotal role as it will affect the rate of tax payable and tax incentives available.

Sole proprietorships and partnerships

Sole proprietorships and partnerships are not recognised as 'persons' for income tax purposes. Consequently, the profits and losses of a proprietorship or partnership flow through to the business owners, who are taxed on their individual income at the graduated rates of tax for individuals.⁵ In a partnership, each partner is assessed on his or her share of the partnership income.⁶ It is proposed that the rates of tax for individuals with chargeable income between 100,001 ringgit and 1 million ringgit are to be increased by varying degrees.

Companies

Companies are generally taxed at the corporate rate of 24 per cent.⁷ Previously for the year 2022, a special 'prosperity tax' at a rate of 33 per cent was imposed for every ringgit on chargeable income exceeding 100 million ringgit.⁸ However, the same is noticeably absent from the Finance Bill 2023. For a company resident and incorporated in Malaysia that has a paid-up ordinary share capital of 2.5 million ringgit or less and with gross income of not more than 50 million ringgit, income tax is chargeable at a rate of 17 per cent for the first 600,000 ringgit and 24 per cent for every ringgit thereafter.⁹ In line with the government's aim to promote economic growth, it was also proposed in the Finance Bill 2023 that a new lower tier be inserted into the progressive tax tiers. If passed, the first 150,000 ringgit will be taxed at a lower rate of 15 per cent.¹⁰ However, this reduced rate does not apply to certain companies within a group structure.¹¹ It is also proposed in the Finance Bill 2023 that the applicability of this reduced rate excludes companies with 20 per cent of their paid-up capital owned by foreign companies or foreign individuals.¹²

Locally incorporated and resident companies can enjoy significant tax incentives, most notably in the form of pioneer status and investment tax allowance under the PIA.¹³ Companies that are granted pioneer status by participating in a promoted activity or producing a promoted product are generally allowed tax exemption on 70 per cent of their statutory income for five years.¹⁴ Investment tax allowance, however, is normally granted on 60 per cent of the capital expenditure incurred for a promoted activity or in the production of a promoted product for a period of five years, to be utilised against 70 per cent of the statutory income.¹⁵

Reinvestment allowance (RA) is also available on 60 per cent of the capital expenditure incurred on a factory, plant or machinery used in Malaysia for the expansion, modernisation, or diversification of a company's business.¹⁶ As all three incentives are mutually exclusive, it may be more advantageous for businesses that qualify for both investment tax allowance and RA to apply for RA as it can be enjoyed for a longer period of 15 years.¹⁷

Local branches

Local branches of non-resident entities are generally treated as non-residents for income tax purposes unless it can be established that the management and control of its affairs or businesses is exercised in Malaysia.¹⁸ Branches are taxable at a rate of 24 per cent¹⁹ on income accruing in or derived from Malaysia, which is the same as the tax rate imposed on local incorporated companies.

Given their non-resident status, tax incentives under the ITA and PIA are generally unavailable to local branches. Thus, from a tax perspective, it may be more tax-efficient for foreign enterprises to carry on their business activities in Malaysia by incorporating a local subsidiary rather than by registering a branch.

Labuan company

In a bid to attract investors and promote the Federal Territory of Labuan as an international offshore financial centre, preferential tax rates are provided under the Labuan Business Activity Tax Act 1990 (LBATA) for companies incorporated under the Labuan Companies Act 1990 undertaking Labuan trading activities such as banking, insurance, trading, management, licensing, shipping operations or any other activity that is not a Labuan non-trading activity.²⁰ Before 1 January 2019, Labuan entities could choose between paying tax at a rate of 3 per cent²¹ or a flat rate of 20,000 ringgit per year. However, legislative amendments have now removed the tax ceiling of 20,000 ringgit.²²

Profits of Labuan companies undertaking Labuan non-trading activity such as the holding of investments in securities, stock, shares, loans, deposits, or any other properties situated in Labuan on its own behalf are not chargeable to tax.²³ However, royalty and other income derived by Labuan companies from an intellectual property right will still be chargeable to tax under the ITA if this income is receivable as consideration for the commercial exploitation of such right.²⁴ If a Labuan company has never commenced operations since the date of its incorporation, has ceased operations or business or did not record entries in the company accounts other than the minimum expenses for compliance with stipulated statutory requirement before the occurrence of substantial change in its equity shareholding (i.e., 50 per cent or more), it is considered dormant.²⁵ Dormant Labuan companies are not required to comply with the 'minimum number of full-time employees in Labuan', 'minimum amount of annual operating expenses' and audit requirements.²⁶

Limited liability partnerships

Limited liability partnerships (LLPs) are recognised as taxable persons for income tax purposes and are taxed at a rate of 24 per cent.²⁷ Where an LLP has a capital contribution of 2.5 million ringgit or less and gross income of not more than 50 million ringgit, the LLP will enjoy a reduced tax rate of 17 per cent for the first 600,000 ringgit of its income and 24 per cent for the remainder.²⁸ Significantly, profits paid or distributed to partners in an LLP are exempt from tax²⁹ and no withholding tax is applicable. The reduced rate proposed for companies in the Finance Bill 2023 is also offered to limited liability partnerships³⁰ subject to exceptions.³¹ Most notably, the exclusion of foreign companies or foreign individuals proposed for a company's income tax rates is also replicated for limited liability partnerships.³²

Real estate investment trusts (REITs)

REITs enjoy tax exemption on their income where 90 per cent or more of their total income for the year of assessment is distributed to the unit holders.³³ A REIT must be approved by the Securities Commission as a real estate investment trust or property trust fund and listed on Bursa Malaysia, the Malaysian stock exchange.³⁴

Domestic income tax

Malaysia's income tax system is territorial in nature. Income tax is levied on any person's income accruing in or derived from Malaysia or received in Malaysia from outside Malaysia,³⁵ including business gains or profits, employment income, interests, rents and royalties.³⁶ However, foreign income received in Malaysia by a non-resident will not be taxed.³⁷ In respect of dividends, Malaysia operates on a single-tier system where income tax imposed on a company is a final tax and dividends are tax exempt in the hands of shareholders.³⁸

Non-resident businesses are taxed on income accruing in or derived from Malaysia if they have permanent establishments in Malaysia. Recent amendments to Section 12 of the ITA have amended the definition of 'place of business' in the ITA to mirror the definition of permanent establishment that is commonly found in all DTAs.³⁹

Further, it was announced in the retabling of Budget 2023 that from 1 June 2023 to 31 December 2024, the special voluntary disclosure programme will be reintroduced for taxes, and taxpayers who participate in this programme will enjoy a remission of penalty at 100 per cent.

International tax

Previously, foreign-sourced income is not subject to income tax in Malaysia under Malaysia's territorial tax system. In other words, the income of a person derived from sources outside Malaysia and received in Malaysia is tax-exempt. However, beginning from 1 January 2022, the Malaysian government has removed the exemption for foreign-sourced income received by residents in Malaysia. Hence, income tax will be charged on foreign-sourced income received by residents in Malaysia from outside Malaysia⁴⁰ at the rate of 3 per cent of the gross income.

Nonetheless, the Malaysian government provided a tax exemption to resident individual taxpayers for all foreign-sourced income (except for business partnerships) from 1 January 2022 to 31 December 2026.⁴¹ Companies, individuals in partnership businesses and limited liability partnerships are also given a tax exemption on foreign-sourced dividend income..⁴² However, it is arguable that the taxability of foreign-sourced income would require actual remittance of such income into Malaysia.

Capitalisation requirements

Earning Stripping Rules (ESR) have been introduced in Malaysia by virtue of Section 140C of the ITA and the Income Tax (Restriction on Deductibility of Interest) Rules 2019 to restrict the deductibility of interest expenses on financial assistance between related persons. The ESR apply where the total interest expense exceeds 500,000 ringgit in a year.⁴³ The maximum amount of deduction in respect of any interest is 20 per cent of the taxpayer's tax EBITDA (earnings before interest, taxes, depreciation and amortisation).⁴⁴ Nevertheless, taxpayers may carry forward any excess interest expense indefinitely and deduct the expenditure in future years of assessments provided that the company's shareholders remain substantially the same.⁴⁵

On the face of the legislation, the ESR appear to apply to both cross-border and domestic related-party financial assistance. IRB's guidelines interpret the scope of ESR application to the following:

1. a person within the charge to tax under the Act; and
2. where in cross-border transactions, interest is paid to:
   • related parties outside Malaysia;
   • related parties outside Malaysia that operate through a permanent establishment in Malaysia; and
   • third parties outside Malaysia where the financial assistance is guaranteed by the entity's holding company or any other enterprises under the same MNE group, regardless of the tax residence country of the guarantor.⁴⁶

Be that as it may, the legislature had excluded certain categories of taxpayers from the applicability of the ESR.⁴⁷

ii Common ownership: group structures and intercompany transactionsOwnership structure of related parties

Unlike countries such as Australia and the United States, Malaysia does not allow income tax consolidation where wholly owned or majority-owned companies are treated as a single entity for income tax purposes. The ITA does, however, offer group relief for related companies⁴⁸ incorporated in and resident in Malaysia in respect of the transfer or surrender of losses.⁴⁹

Under Section 44A of the ITA, a company (the 'surrendering company') could surrender not more than 70 per cent of its adjusted loss in a year of assessment to one or more related companies (the 'claimant company'), with no time limitation. If the surrendering and claimant companies are owned indirectly by a third company (that is also resident and incorporated in Malaysia) through medium-sized companies, such medium-sized companies must now also be resident and incorporated in Malaysia from the year of assessment 2022 onwards.⁵⁰

While group relief is certainly advantageous, businesses should be aware that where a surrendering company furnishes an incorrect return in respect of the amount of loss surrendered, the company may be liable to a penalty equal to the amount of tax that had been undercharged on the claimant company in consequence of the incorrect information.⁵¹

Domestic intercompany transactions

In Malaysia, transactions between related domestic companies are subject to the same legislative provisions and rules that govern international intercompany transactions (discussed below). Domestic groups of companies are required to maintain proper transfer pricing documentation in respect of their domestic intercompany transactions, especially where there are differences in the tax incentives enjoyed by the related companies or where different tax rates are applicable to them.

Nevertheless, tax benefits are available in the form of exemptions on stamp duty or real property gains tax (RPGT). Relief from stamp duty is available for reconstructions or amalgamations of companies⁵² or for the transfer of property between associated companies,⁵³ subject of course to the fulfilment of certain conditions. Similarly, RPGT relief may be granted where real property is transferred between companies in the same group to bring about greater efficiency in operation or transferred between companies in any scheme of reorganisation, reconstruction or amalgamation.⁵⁴

International intercompany transactions

Apart from the ESR as described above, Malaysia has implemented transfer pricing legislation in an effort to counter BEPS. Cross-border related-party transactions are subject to the transfer pricing provisions in the ITA as well as the Income Tax (Transfer Pricing) Rules 2012 (the TP Rules). Businesses must ensure that their intercompany transactions are priced at arm's length in accordance with traditional transactional methods (comparable uncontrolled price method, resale price method or cost plus method) or if impractical, transactional profit methods (profit split method or the transactional net margin method).⁵⁵ Section 140A of the ITA empowers the IRB to substitute the price in respect of a related-party transaction to reflect an arm's-length price of the transaction. Additionally, the IRB can also disregard any transaction structure where the economic substance of that transaction differs from its form, or where the arrangement would not have been adopted by independent persons behaving in a commercially rational manner.⁵⁶ On top of that, the IRB may now also impose a surcharge of up to 5 per cent on any transfer pricing adjustment made.⁵⁷

Companies are also required to maintain contemporaneous transfer pricing documentation setting out, among others, the organisational structure of the business, the nature of the business, the controlled transaction, selection of the transfer pricing method, and comparability, functional and risk analyses.⁵⁸ Beginning 1 January 2021, the failure to provide the contemporaneous transfer pricing documentation on request of the IRB is an offence and could be fined between 20,000 and 100,000 ringgit.⁵⁹ Given that the IRB has seven years to raise an additional assessment,⁶⁰ businesses should ensure that their documentation is in order.

In respect of withholding taxes, tax must be withheld on the payment of interest derived from Malaysia to non-residents⁶¹ at a rate of 15 per cent.⁶² The rate could be lower depending on the existence and terms of a DTA between Malaysia and the home country of the non-resident. No withholding tax applies to payments of dividends.

While the Malaysian government has removed the tax exemption given to foreign-sourced income, foreign-sourced dividend income received by companies, limited liability partnerships and individuals that have received dividend income from a partnership business in Malaysia⁶³ is exempted. Additionally, individual residents are also exempted from paying income tax on all sources of foreign income (excluding a source of income from a partnership business in Malaysia).⁶⁴ However, these exemptions are subject to the condition that the exempted income has been subjected to tax of a similar character to income tax under the foreign jurisdiction.⁶⁵ Both exemptions are slated to be in operation from 1 January 2022 until 31 December 2026.

iii Third-party transactionsPayments made to agents, dealers or distributors

Following the introduction of withholding tax obligations, which came into force on 1 January 2022, companies are now required to deduct 2 per cent from an agent's, dealer's or distributor's payment⁶⁶ in the event the total sum of payments made to the agent, dealer or distributor arising from sales, transactions or schemes exceeding 100,000 ringgit (whether in monetary form or otherwise).⁶⁷ Currently, companies are required to render an account and pay the amount of tax to the IRB within the 30 days following paying or crediting the payments.⁶⁸ To facilitate compliance and ease of business operations, the Finance Bill 2023 proposed an amendment that will allow companies to discharge these obligations not later than the end of the following calendar month after payment or crediting.⁶⁹ Thus, companies are afforded more time to comply with their statutory obligations. In the event the company fails to pay the withholding tax to the IRB, a penalty of 10 per cent will be imposed on the amount.⁷⁰

Sales of shares or assets for cash

In general, income tax is not chargeable on income from the sale of shares unless the seller is involved in the business of trading shares. Similarly, there are largely no income tax consequences for the sale of assets as they are not the stock in trade of a business unless the sale involves capital assets for which capital allowances have been granted and the disposal value exceeds the tax written-down value of the assets.⁷¹

Currently, Malaysia's taxation regime does not impose capital gains tax. However, the government announced during the retabling of 2023's budget that capital gains tax will be implemented on sale of shares in unlisted companies from 2024 onwards. Although the government had indicated that the rate of tax would be low, the exact rate of tax to be imposed has not been ascertained at this juncture. The government had also indicated that a consultation process with the relevant stakeholders would be held in order to particularise and fine-tune the introduction of this tax.

Notwithstanding the introduction of capital gains tax, sellers are currently only required to pay real property gains tax (RPGT) on gains from the sale or disposal of real property or shares in a real property company (RPC). An RPC is a controlled company in which real property or shares in another RPC make up at least 75 per cent of its total tangible assets. For companies, RPGT is imposed at varying rates depending on the period after acquisition.⁷²

The sale of shares or assets will, however, attract stamp duty. Stamp duty on the share transfer instrument is payable at an ad valorem rate, calculated on the price or value of the shares on the date of transfer, whichever is greater. Three ringgit is payable for each 1,000 ringgit or fractional part of 1,000 ringgit.⁷³ Similarly, ad valorem stamp duty is payable on the transfer instrument of any asset.⁷⁴

Tax-free or tax-deferred transactions

RPGT relief is available where an asset is distributed by a liquidator of a company and the liquidation of the company was made under a scheme of reorganisation, reconstruction or amalgamation.⁷⁵

International considerations

Under the ITA, withholding tax is imposed on selected cross-border payments to non-residents, including interest,⁷⁶ royalties,⁷⁷ contract payments in respect of services rendered in Malaysia⁷⁸ and special classes of income deemed to be derived from Malaysia.⁷⁹

Notably, recent legislative amendments have widened the scope of special classes of income under Section 4A(ii) of the ITA, which provided that income in respect of 'technical advice, assistance or services' rendered by non-residents is subject to tax. The amendments have removed the phrases 'technical' and 'technical management or administration'.⁸⁰ Consequently, now any amount paid in consideration of any advice given, or assistance or services rendered in connection with any scientific, industrial or commercial undertaking, venture, project or scheme is subject to income tax. 'Technicality' is no longer required for a service to be taxed under this provision. In effect, taxes would now have to be withheld and paid for payments made to offshore service providers for any services provided in Malaysia.

Further, the legislature currently provides for a 'no gain, no loss' approach on disposals of real property to non-resident companies controlled by an individual⁸¹ for a consideration of shares or a combination of shares and money payment.⁸² However, it is proposed in the Finance Bill 2023 that disposals of this nature to a company not incorporated in Malaysia will now be subjected to an ad valorem RPGT rate, even if it is controlled by the same individual.⁸³

iv Indirect taxes

Malaysia's goods and services tax (GST) was replaced with sales and services tax (SST) beginning on 1 September 2018.⁸⁴ Unlike GST, the scope of SST is much narrower and the number of items exempted from SST is far greater than that under the GST system.

Sales tax is charged on taxable goods that are manufactured in Malaysia by a registered manufacturer and sold, used, or disposed of by him or her, or imported into Malaysia.⁸⁵ Manufactured goods that are exported would not be subject to sales tax. Unlike under the GST regime, there is no system of input tax or output tax.

Service tax is imposed on specific prescribed services⁸⁶ provided in Malaysia by a registered person carrying on his or her business, or any imported taxable service⁸⁷ at a rate of 6 per cent.⁸⁸ Services subject to service tax include the operation of hotels and restaurants, betting and gaming, professional and consultancy services, and IT services.⁸⁹ Unlike under the GST regime, any service tax incurred is not recoverable and would thus be a business cost, albeit deductible for income tax purposes. From 1 January 2019 onwards, registered service tax companies enjoy specific business-to-business service tax exemptions.⁹⁰ The special voluntary disclosure scheme for income tax is also extended to indirect taxes. However, a remission of indirect tax as was implemented previously remains to be seen. To increase the country's tax base and in line with the global trend to collect consumption tax on low-value goods, the government also seeks to impose sales tax for low-value goods not exceeding 500 ringgit sold online, which was slated to come into effect on 1 January 2023 but has currently been deferred.⁹¹ The imposition of service tax on delivery services slated to be effective on 1 January 2023 is also postponed to a date to be determined later.⁹²