January 20, 2022
Malaysia announces foreign-sourced income exemptions for resident taxpayers until 2026
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.
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:
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.
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.
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
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.