Tax exemption for foreign-source income temporarily extended
After withdrawing the tax exemption for foreign-source income (FSI) for Malaysian residents as part of the 2022 Budget, the government has decided to temporarily reinstate the exemption for specific types of income.
Before the 2022 Budget, the FSI exemption was available to all persons, other than Malaysian-resident companies carrying on a banking, insurance, or sea or air transport business, on income derived from sources outside Malaysia and received in Malaysia under Paragraph 28 of Schedule 6 to the Income Tax Act 1967. The 2022 Budget, passed by both houses of parliament and gazetted under the Finance Act 2021 on 31 December 2021, withdrew the tax exemption for Malaysian residents (nonresidents continue to enjoy the exemption). As a result, Malaysian residents deriving FSI will be subject to income tax on FSI, in addition to income from sources within Malaysia. As a transitional relief measure, FSI received in Malaysia by a resident during the six-month period 1 January 2022 to 30 June 2022 is taxable at 3% of gross income; thereafter, the income will be taxable at the taxpayer’s prevailing tax rate.
The change to the FSI exemption regime was prompted by the inclusion of Malaysia on the EU’s “grey list” of noncooperative jurisdictions on 5 October 2021 (for prior coverage, see the article in the November 2021 issue of Corporate Tax News) because of the FSI exemption regime. (The EU grey list is comprised of jurisdictions that have not complied with all international tax standards but have made adequate commitments to reform the relevant tax policies. Such jurisdictions remain subject to monitoring by the EU until they have completed their commitments, at which time they will be removed from the list.) Malaysia committed to make the necessary changes to the FSI exemption by 31 December 2022, and this was accomplished within a relatively short time. However, while the Inland Revenue Board may have evaluated the implications of the elimination of the FSI exemption, it did not anticipate the extent of the practical concerns and impact on businesses and individuals.
Following feedback from various parties and stakeholders, the MOF issued a press release on 30 December 2021 that reinstates the FSI exemption for specified income during the five-year period, 1 January 2022 through 31 December 2026. Specifically, the government has agreed to exempt from certain types of FSI received in Malaysia by residents as follows:
While the guidelines on the qualifying conditions for the FSI exemption have not yet been issued, it is likely that they will be aimed at addressing the EU’s concerns over the double nontaxation of FSI.
The press release also states that FSI received in year of assessment 2022 is exempt from the one-time tax, known as the prosperity tax, “Cukai Makmur,” imposed on companies with chargeable income exceeding MYR 100 million for that year of assessment.
The temporary reinstatement of the FSI is welcome as it should address some of the concerns of businesses and individuals arising from the elimination of the exemption. Discussions between the Malaysian authorities, industry and tax practitioners on outstanding matters are ongoing and further developments are expected to be announced in due course.
Lem Kooi Kee