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January 20, 2022
2022-0106

Malaysia announces foreign-sourced income exemptions for resident taxpayers until 2026

Executive summary

On 30 December 2021, the Malaysian Ministry of Finance (MOF) announced that it will continue to exempt certain categories of foreign-sourced income (FSI) received by Malaysian tax residents until 31 December 2026, when certain qualifying conditions are met.

This Alert summarizes the key aspects of Malaysia's new position on FSI and the recent MOF announcement.

Detailed discussion

Overview of Malaysia's new FSI rules

In Malaysia's Budget 2022 announcement on 29 October 2021, the Government declared that it would remove Malaysia's long-standing income tax exemption on FSI received by Malaysian resident corporate1 and individual taxpayers. The proposal was enacted into law on 31 December 2021 via the Finance Act 2021 (the Act) and took effect from 1 January 2022. Nonresidents will continue to be exempt from Malaysian tax on FSI.

Shortly before the Act was passed, the Malaysian MOF issued a press release on 30 December 2021 announcing that Malaysia will continue to exempt from tax the following categories of FSI received by Malaysian resident taxpayers, effective for five years from 1 January 2022 to 31 December 2026:

  1. Foreign-sourced dividend income of Malaysian tax resident companies2 and limited liability partnerships.
  2. All FSI of Malaysian resident individuals, excluding individuals carrying on business in Malaysia through a partnership.

The exemption has yet to be enacted into law and the Government is still designing the qualifying conditions that taxpayers will need to meet to access the tax exemption. These conditions, when finalized, are expected to be released in the form of a tax authority guideline.

Implications
Malaysia's new FSI exemption provides multinational corporations that have Malaysian holding companies and subsidiaries in their structures with the potential for continued access to an income tax exemption on foreign sourced dividends received in Malaysia for at least the next five years, until 31 December 2026. Certainty on exemption eligibility will not be available until the qualifying conditions are finalized.

As the new FSI exemption is limited in scope, passive financing and intellectual property companies in Malaysia that receive FSI and have relied on Malaysia's FSI tax exemption in the past may be greatly affected.

Multinational corporations should promptly review their structures, assess their exposure to Malaysian income tax on FSI and develop a plan to minimize the impact of the new rules moving forward.

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For additional information with respect to this Alert, please contact the following:

Ernst & Young Tax Consultants Sdn Bhd, Kuala Lumpur

Ernst & Young LLP (United States), Asia Pacific Business Group, New York

Ernst & Young LLP (United States), Asia Pacific Business Group, Chicago

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ENDNOTES

1 The previous exemption applied to any person except a Malaysian resident company carrying on the business of banking, insurance or sea or air transport.

2 Tax residence status in Malaysia is established for corporates if at any time in the calendar year, the control and management of the company is exercised in Malaysia.

 

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