| 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.
Labuan 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.
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Labuan Rates of Income Tax
Prior to the introduction of the rolloing 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.
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Labuan 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 will abolish this tax in stages.
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Labuan 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.
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Labuan 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.
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.
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Labuan 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.
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Labuan 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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