| Direct
Corporate Taxation |
The Ministry of Finance coordinates
the Malaysian Government's tax system through the Inland Revenue
Department and the Customs and Excise Department. The main
taxes are income taxes on companies and individuals; indirect
taxes such as sales tax, service tax, and customs and excise
duties; estate and stamp duties; and real property gains tax.
The Malaysian tax year is the calendar year. There is no tax
on capital gains, with the exception of a tax on the gain
from real property held for less than five years.
There
are stamp duties and some excise duties. Sales tax at rates
varying from 5% to 15% were levied on goods imported for local
consumption and on locally-manufactured goods. There was also
a service tax of 5% on restaurants, hotels etc.
In
the 2005 budget, it was announced that the sales and service
taxes would be replaced with a single consumption tax, the
goods and services tax (GST). This was scheduled to take place
in January 2007, but as at January 2009, the GST had not been
introduced.
In
September 2007, as expected, Malaysian Prime Minister Abdullah
Ahmad Badawi announced another 1% cut in the rate of corporate
tax in the budget. In addition, he announced a slew of other
tax measures designed to boost investment, notably in the
area of Islamic finance.
In
July of that year, Second Finance Minister Nor Mohamed Yakcop
revealed that the government would press ahead with its corporate
tax cutting programme, shaving an additional percentage point
off of the rate in 2009 to 25%, a pledge that Abdullah duly
delivered on in his budget speech.
This
continued a rolling programme of corporate tax cuts announced
the previous year by the Prime Minister.
Abdullah
also announced a generous package of tax breaks for the investment
industry in an attempt to consolidate and build upon Malaysia's
position as one of the leading centres for Islamic finance.
As
a result of the budget measures, fund management companies
were to be given income tax exemption on all fees received
for Islamic fund management activities until the 2016 year
of assessment.
Special
rules apply to Labuan offshore entities
Although
Malaysia itself is not regarded as a low-tax jurisdiction,
in addition to Labuan it does have a number of tax-friendly
incentive regimes, which are described in http://www.lowtax.net/lowtax/html/offon/malaysia/malhom.html.
 Scope of Income Tax
A
company, regardless of its place of incorporation, is
a tax resident if it is at any time during a tax year
managed and controlled in Malaysia. Generally, a company
is deemed to be managed and controlled in the place where
its directors' meetings are held. Malaysian residents
are taxed on Malayasian-source income and on foreign income
remitted to Malaysia, ie it is a territorial basis of
taxation. For nonresidents, only Malaysian-source income
is taxable.
Income taxable in Malaysia includes:
- gains
and profits from employment;
- gains
and profits from trade, profession and business;
- dividends,
interest or discounts;
- rents,
royalties or premiums;
- pensions,
annuities or other periodic payments; and
- other
gains or profits of an income which nature is not mentioned
above.
Income
from the exploration and discovery of petroleum is subject
to 38% petroleum income tax instead of regular income tax.
Malaysia generally does not tax foreign-source income; thus
no foreign tax relief is available. However, banking, insurance,
shipping and air transport are taxed on their world-wide
income, and they may claim foreign tax credits.
Rates of Income Tax
Prior to the
introduction of a rolling tax reduction programme, income
tax was imposed at the rate of 28% on chargeable income for
resident companies.
A non-resident
company paid 28% on chargeable income from Malaysian sources
other than:
- Interest:
15%
- Royalties
10%
- Technical
fees 10%
- Payments for
use of movable property 10%
- Payments
to Nonresident Contractors 20%
- Branch Remittance
Tax nil
In
September 2006, Malaysia's Prime Minister Abdullah Ahmad Badawi
unveiled the aforementioned package of tax cuts, including
a corporate tax cut and tax breaks for businesses across a
number of economic sectors.
The
corporate tax rate has subsequently been reduced year-on-year,
to 27% in 2007, 26% in 2008, and 25% in 2009.
Additionally,
in May 2007, it
emerged that the Malaysian Finance Ministry was working with
the financial authorities of Labuan to establish a new tax
structure aimed at attracting more companies to the Labuan
International Offshore Financial Centre (IOFC).
Speaking
at the release of the Labuan Offshore Financial Services Authority
(Lofsa) annual report for 2006, Tan Sri Dr Zeti Ahktar Aziz,
Bank Negara Governor and Lofsa chairman, said that new tax
initiatives would be included in the 2008 budget, due to be
announced in September 2007, along with new company forms
to better cater for the requirements of offshore investors.
"With
the new incentives, LOFSA will be able to compete with other
offshore centres in the Asia-Pacific region and the world,"
Zeti told reporters.
“We
want to be competitive and relative to other offshores as
the environment is changing very significantly," she
added.
In
September 2007, the measures were unveiled by the Prime Minister.
Abdullah
stated in his 2008 budget speech that in future, companies
registering in the Labuan offshore sector would have the option
of having their offshore business income taxed under the Income
Tax Act 1967, in addition to under the Labuan Offshore Business
Activity Tax Act 1990.
"In
the light of greater global competition, we need to ensure
that Labuan remains competitive as an international offshore
financial centre. Given that investors in Labuan undertake
a wide range of financial services, a flexible tax regime
is necessary," the Prime Minister explained.
The
Labuan Offshore Business Activity Tax Act 1990 (as amended
2004) provides for the reduction or complete exemption of
income tax in respect of certain business activities carried
on by offshore companies in Labuan. Chargeable profits derived
by an offshore company from an offshore trading activity are
subject to tax at a rate of 3%. An offshore company which
carries on an offshore non-trading activity is exempt from
income tax altogether.
The
Income Tax Act 1967 applies to any activity other than offshore
business activity carried on by an offshore company, meaning
that they pay normal taxes.
Development Tax
Development
tax has traditionally been payable at the rate of 4% on net
income from business or property rental sources, defined as
a source consisting of a business or the letting of property
situated in Malaysia, including royalties from patents and
copyrights registered in Malaysia.
The Government
plans to abolish this tax in stages.
Calculation of Taxable Base
Expenses which
are incurred wholly and exclusively in the production of income
are deductible for the purposes of determining chargeable
income.
Allowable deductions
include the following:
- interest
on loans, rental payments, expenses for repairs of premises,
plant and equipment or fixtures or for the renewal, repair
or alteration of equipment employed in the production of
income;
- irrecoverable
trade debts which are specifically identified;
- a justifiable
share of regional or head office revenue expenses for non-resident
companies;
- legal expenses
incurred in debt collection and renewal of lease of premises;
and
- capital allowances
for fixed assets at pre-determined rates.
Business losses
may be set off against income derived in the year in which
the loss is incurred and may be carried forward, but not back.
Filing Requirements and Payment of Tax
The
year of assessment is the calendar year. Income tax is chargeable
on income earned in the year of assessment.
Tax returns are
issued to companies at the end of February. Companies must
complete and file the returns with the Inland Revenue Board
within 30 days of receipt.
A self-assessment
system was introduced in 2001. Companies have to file their
tax returns within six months after the end of their accounting
period. A tax return will be deemed to be an assessment made
on the date of filing the return.
Under the old
rules, estimated tax was generally payable in five equal installments,
with the first payment due in January or February of the year
of assessment.
From 2001, companies
have been obliged to provide an estimate of their tax payable
no later than 30 days before the beginning of their accounting
period. The estimated tax is payable in equal monthly installments
by the 10th day of each month beginning in the second month
of the accounting period. Any balance of tax due must be paid
by the end of the sixth month following the end of their accounting
period.
Real Property Gains Tax
Capital gains
are generally not subject to tax in Malaysia. Real property
gains tax is charged at varying rates on gains arising from
the disposal of landed property or of interests in or over
such property, as well as the disposal of shares in a property
company as defined in the Act.
BACK TO TOP
Withholding Tax
A
resident company paying dividends must deduct income tax
at the current rate; however, a full imputation system is
in operation. If the company has paid sufficient income
tax on its own income, past or present, it may retain the
tax deducted. Otherwise, the tax deducted must be paid to
the government.
A
non-resident company may distribute after-tax profits without
incurring any additional liability. The tax deducted by
the company satisfies the Malaysian tax liability of a nonresident
shareholder; in the case of a resident shareholder, the
credit is applied toward the shareholder's tax liability.
Dividends
paid out of tax-exempt foreign income may be paid without
deduction of tax.
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