Businesses generally adopt a corporate form in Malaysia, with the exception of individuals, who may operate as sole proprietors or in a partnership. Under the Companies Act 2016, companies are allowed to be formed with a sole shareholder (whether individual or corporate) and a sole director. There are seven different forms of business organisations available in Malaysia: (i) limited liability partnership, (ii) partnership, (iii) sole proprietorship, (iv) company limited by shares/private limited company, (v) company limited by guarantee, (vi) unlimited company and (vii) branch of a foreign company.
The key difference between a sole proprietorship and a company limited by shares (Sendirian Berhad or Berhad) is that, unlike a sole proprietorship, a company limited by shares operates as a separate legal entity. In other words, the sole proprietor is entitled to all profits of the business and is personally liable, without limit, for all debts and obligations of the business. This unlimited liability of the sole proprietor can extend to his or her personal assets. On the other hand, the personal liability of the members of a company limited by shares is limited to the amount unpaid on their shares only (if any).
The key difference between a partnership and a limited liability partnership is that all the partners are personally liable, without limit, for the debts and obligations in a partnership, extending even to the personal assets of the partners. On the other hand, a limited liability partnership is a body corporate and has a legal personality separate from its partners. The liabilities in a limited liability partnership are borne by the partners jointly and severally with the partnership to the extent of their respective contribution only.
The entities are taxed as separate legal entities, with the exception of sole proprietorships and partnerships in which the individuals are personally liable to be taxed.
Real estate investment trusts (REITs) or property trust funds (PTFs) are commonly used as transparent entities, as they are efficient vehicles to pass profits to unit-holders. REITs and PTFs enjoy certain tax incentives. For instance, provided that at least 90% of its total income is distributed to its unit-holders, the REIT will not be subject to income tax (at the REIT level). Additionally, REITs are also exempted from payment of stamp duties for the acquisition of properties.
A corporation is resident in Malaysia if its management and control are exercised in Malaysia; management and control are considered to be exercised at the place where directors’ meetings concerning management and control of the company are held, irrespective of where the company might be incorporated.
Double taxation treaties generally provide for relief from double taxation on all types of income, limit the taxation by one country of a company resident in the other, and protect companies resident in one country from discriminatory taxation in the other.
Ordinarily, resident companies are taxed at a rate of 24%, while those with paid-up capital of MYR2.5 million or less are taxed at 17% for the first MYR500,000 and 24% in excess of MYR500,000.
Taxable profits are calculated by deducting allowable expenses incurred in gaining taxable receipts from said receipts. Taxable profits are different from accounting profits, and do not include exempt or non-taxable income, whether by virtue of the provisions in the Income Tax Act 1967 (ITA) or any Gazette Order by the Minister of Finance. Taxable profits also do not include allowances such as Capital Allowance and Reinvestment Allowance, but will include non-deductible expenses under the ITA. Profits are taxed on an accrual basis.
Broadly, tax incentives are available in both the ITA and the Promotion of Investments Act 1986 (PIA). The PIA is the more important legislation, as it covers the major incentives available. Such incentives are only available to companies resident in Malaysia. Companies undertaking research and development (R&D) activities may qualify for pioneer status, investment tax allowance or double deduction on revenue expenditure for R&D under the ITA, depending on the nature of their activities. Additionally, various tax incentives for R&D initiatives are granted by the Minister of Finance on a case-by-case basis under the ITA.
Companies that export vehicles and components/parts will be given an enhanced allowance for increased exports at the following rates:
Companies that manufacture hybrid and electric vehicles are eligible for the following tax incentives:
Companies that manufacture value-added and highly critical components are eligible for the following tax incentives:
Companies that are engaged in biotechnology-related activities and have the necessary approval are eligible for the following:
If any green technology equipment has to be purchased, an investment tax allowance can be claimed, and an income tax exemption is given for income generated from the usage of green technology and services.
Healthcare and Wellness
An exemption is provided if any new or existing company plans to expand, modernise or refurbish to provide private healthcare facilities that benefit a minimum of 5% of healthcare travellers out of all the patients.
An exemption of 100% of QCE incurred can be claimed on the statutory income for a period of up to five years.
Hotels and Tourism
Companies undertaking investments in medium and low-cost hotels, holiday camps and recreational projects, convention centres or tourism projects are eligible for the following tax incentives:
Companies undertaking new investments in four-star and five-star hotels in Sabah and Sarawak are eligible for the following tax incentives:
Companies undertaking new investments in four-star and five-star hotels in Peninsular Malaysia are eligible for the following tax incentives:
Companies that are engaged in the reinvestment in hotels are eligible for the following tax incentives:
Companies that are engaged in the reinvestment in tourism projects are eligible for the following tax incentives:
Companies undertaking the sponsorship of any approved arts, cultural or heritage activities are eligible for the following tax incentive:
Tour operators are eligible for the following tax incentives:
Multimedia Super Corridor (MSC)
MSC status is awarded to local and foreign companies that develop or utilise multimedia technologies to produce or enhance their products, as well as for process development.
MSC status companies located at (i) designated premises within the Cybercity or Cybercentre, or (ii) within the Cybercity or Cybercentre are eligible for a 100% exemption on statutory income for a period of five years (extendable for another five years) and import duty exemption for multimedia equipment.
If companies have MSC status but are located outside the designated areas, an exemption of 70% on statutory income is given for a period of five years (extendable for another five years) and import duty exemption for multimedia equipment.
Owners of a building in the Cyberjaya Flagship Zone that is used for business or rented out to an approved MSC status company are eligible for industrial building allowance at a rate of 10% on the qualifying building expenditure incurred for approved MSC activities for a period of ten years.
Further, non-resident companies receiving income from an MSC status company engaging in selected activities and located in designated areas are eligible for withholding tax exemption on income from technical advice or technical services fees, licensing fees in relation to technology development and interest on loans for technology development.
Logistics and Shipping
Shipping companies or partnerships are given 100% exemption on statutory income derived from the business of transporting passengers or cargo by sea on a Malaysian ship, or letting out on charter a Malaysian ship owned by them on a voyage or time charter basis.
Non-resident persons who receive income from a Malaysian shipping company are eligible for withholding tax exemption on income from the rental of a ship on a voyage, time charter or bare boat basis, or the rental of International Standard Organisation containers.
Companies providing chartering services of luxury yachts are also given an exemption on statutory income for a period of five years.
Further, companies undertaking or intending to expand or diversify into integrated logistics services are eligible for the following tax incentives:
Where the adjusted loss exceeds the aggregate income for any year of assessment, the excess is carried forward or set-off against the total of the statutory income from all business sources in the following year of assessment and so on until the adjusted loss has been fully utilised. There is a time limit of seven years on the carrying forward of unabsorbed business losses.
Another important point to note is that the statutory income from business sources does not need to be from the same source as that of the adjusted loss brought forward from a previous year of assessment. From year of assessment 2006, restrictions apply to the carrying forward of unabsorbed business losses where there has been a substantial change in shareholdings; among other measures, this was intended to prevent the acquisition of dormant companies with substantial unutilised losses.
Where a borrowing made for business purposes is partly used to finance non-business operations, only the interest on the portion used for the business is eligible for deduction against gross business income. The proportion of interest applicable to the non-business operations would be allowed against gross income from the relevant non-business source.
The Malaysian Parliament has also introduced Section 140C of the ITA, which governs earnings stripping rules (ESR) in Malaysia. The ESR took effect from 1 January 2019 and is intended to restrict the deduction of interest expenses and other payments by entities. The introduction of the ESR shows Malaysia’s commitment to implement the recommendations in the OECD’s BEPS Action 4.
Further to the introduction of Section 140C of the ITA, the Malaysian Parliament introduced the Income Tax (Restriction on Deductibility of Interest) Rules 2019 (the Rules) on 28 June 2019. The Rules came into operation on 1 July 2019 and introduced the maximum amount of interest deductible under Section 140C of the ITA. This amount is equal to 20% of the amount of tax-EBITDA of the person from each of the person’s sources consisting of a business for the basis period for a year of assessment.
There is no consolidated tax grouping rule in Malaysia. However, group relief is available to all locally incorporated resident companies subject to the terms and conditions as provided under Section 44A of the ITA effective from the year of assessment 2006. The provision of group relief allows a company in a group to surrender no more than 70% of its adjusted loss in a basis year to one or more related companies, provided that both companies are resident in the basis year for the year of assessment and incorporated in Malaysia.
There is no specific act for capital gains in Malaysia. However, corporations and individuals will be taxed under the Real Property Gains Tax Act 1976 (RPGT Act) for any gains obtained from selling real property or shares in a real property company (RPC). An RPC is a company holding real property or shares in another RPC with value of more than 75% of the company’s total tangible assets.
Other taxes include stamp duty, sales and services tax, real property gains tax (RPGT) and income tax.
Certain businesses related to the importation or manufacture of tobacco, liquor, motor vehicles, playing cards and mahjong tiles are subject to excise duty.
In addition, individual states in Malaysia levy quit rent and assessments at varying rates.
In Malaysia, closely held local businesses generally operate in a corporate form.
Presently, the corporate tax rate is lower than the top tax bracket for individual taxpayers.
There are no special rules relating to the taxation of accumulated earnings of closely held corporations in Malaysia.
Capital gains are not taxed in Malaysia, except for gains derived from the disposal of shares in an RPC. An RPC is a company holding real property or shares in another RPC with value of more than 75% of the company’s total tangible assets.
With effect from 1 January 2014, all companies are on the single-tier system and all dividends received are exempted from tax in the hands of the shareholders. The imputation system has been replaced by the single-tier system since assessment year 2008. This would mean that the tax payable on the chargeable income by a resident company would constitute a final tax. Under the single-tier system, dividends received by individuals are exempted from tax and the expenses incurred in earning the dividends are not deductible.
Unless otherwise mentioned within a double taxation agreement (DTA), withholding tax for interest is set at 15%, royalties are set at 10% and dividends are subject to no withholding taxes. Payment for certain services and contract payment made to a non-resident are also subject to withholding tax at 10% under the special classes of income provision.
A reduced rate may be provided if there is an existing DTA between the treaty partners.
Singapore and the Netherlands are the primary tax treaty countries used by foreign investors to make investments in local corporate stock or debt.
Local tax authorities do not ordinarily challenge the use of treaty country entities by non-treaty country entities, unless there are instances of tax avoidance.
Although domestic law does not include a transfer pricing restriction that departs from the usual Organisation for Economic Co-operation and Development (OECD) norms, the Inland Revenue Board of Malaysia (IRB) prefers local comparables, and examining the average results of the benchmarking analysis, rather than the lower interquartile range results. Any benchmarking analysis provided by the assessing officers is largely based on the arbitrary selection of comparables provided by the taxpayer.
As a matter of practice, all transfer pricing adjustments attract penalties despite the fact that it is not mandatory to impose a penalty.
In most cases, the IRB ignores loss-making comparables and arbitrarily selects only profit-making comparables for its benchmarking analysis.
Malaysian tax assessing officers are not familiar with the OECD’s transfer pricing policies, and there is a lack of understanding that transfer pricing is not an exact science.
Local tax authorities challenge the use of related-party limited risk distribution arrangements for the sale of goods or the provision of services locally.
Although Malaysia is not a member of the OECD, it has implemented Action 13 (Country-by-Country Reporting) of the OECD Action Plan on base erosion and profit shifting (BEPS). Although Malaysia’s Transfer Pricing Rules 2012 only specifically address the method and manner in which compliance with the arm’s-length principle should be demonstrated, Malaysia largely follows the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2010 and 2017.
Under the Income Tax (Transfer Pricing) Rules 2012, any adjustment under the Rules in respect of an assessment made on one of the persons in a controlled transaction may be reflected by an offsetting adjustment on the assessment of the other person in that transaction upon request by that other person.
Local branches of non-local corporations are not taxed differently to local subsidiaries of non-local corporations.
Capital gains are not taxed in Malaysia, except for gains derived from the disposal of real property or shares in an RPC. Under the RPGT Act, every person shall be chargeable to RPGT, whether resident in Malaysia or not, so the sale of stock in an RPC by non-residents will be subject to tax.
Whether the gains from the sale of shares in the non-local holding company that owns the stock of a local RPC directly would be subject to RPGT depends on whether the non-local holding company itself is considered an RPC. Under the RPGT Act, an RPC is a controlled company that owns real property or shares in another RPC, or that has a defined value of not less than 75% of the value of its total tangible assets.
The elimination of double capital gains tax varies from treaty to treaty.
There are no change of control provisions.
Formulas are not used to determine the income of foreign-owned local affiliates selling goods or providing services. It is likely that any income accruing in Malaysia or derived from Malaysia will be subjected to income tax as Malaysia uses the territorial scope.
The expenses must be at arm’s length and the services must be rendered. Additionally, there should be no duplicity of services. The local affiliates, when challenged by the IRB, are required to demonstrate that the services have conferred an economic benefit or commercial benefit to its business.
Local affiliates must comply with Malaysia’s transfer pricing rules as per the Income Tax (Transfer Pricing) Rules 2012. In particular, the foreign-owned local affiliate providing the loan/financing should charge the non-local affiliate interest at a rate that is consistent with the rate that would have been charged in a similar transaction between independent persons dealing at arm’s length.
When determining the arm’s length interest rate, appropriate indices such as the Kuala Lumpur Interbank Offered Rate (KLIBOR), prime rates offered by banks and/or specific rates quoted by banks for comparable loans can be used as reference points.
The foreign-sourced income of local corporations is exempt from corporate tax unless the local corporation is carrying on business in banking, insurance, air transport or shipping.
Under the ITA, expenses wholly and exclusively incurred during the period in the production of gross income are only allowed to be deducted from that particular source for purposes of determining adjusted income.
Dividends from foreign subsidiaries of local corporations would be considered income from a foreign source and are thus exempt from tax, unless the local corporation is carrying on business in banking, insurance, air transport or shipping.
There is no specific tax, although the local corporation is permitted to collect royalties from the non-local subsidiaries, pursuant to the transfer pricing rules, failing which the IRB may deem royalty income.
There are no controlled foreign corporation (CFC) rules in Malaysia.
There are no specific local substance requirements for non-local affiliates/foreign holding companies.
Such gains are not taxable as there is no capital gains tax in Malaysia. There is RPGT but it only covers real property in Malaysia, including shares in RPCs in Malaysia.
Section 140 of the ITA is the general anti-avoidance provision. Section 140(1) confers powers to the Director General of Inland Revenue (DGIR) to disregard or vary transactions that he or she has reason to believe will alter the incidence of tax payable, relieve a person from tax liability, evade or avoid any duty or tax liability, or hinder or prevent the operation of the ITA. The DGIR is also conferred power under the provision to make any adjustments he or she thinks fit.
The audit cycle is relatively routine as cases for audit are generally selected through a computerised system based on risk analysis criteria. Having said that, the basis and selection are wide-ranging, including through risk analysis/manual checking of return forms, based on specific industries, etc.
Two types of tax audits are carried out by the IRB: the "desk audit" and the "field audit".
A desk audit is held at the IRB’s office and is conducted through correspondence of letters and/or emails between the IRB officer and the taxpayer. In this scenario, a taxpayer may be called for an interview at the IRB’s office if further information is required, or may have to present relevant documents at the IRB’s office.
A field audit takes place at the taxpayers’ premises and it generally involves the examination of the taxpayer’s business records. Generally, a taxpayer will be given prior notice of a field audit.
Malaysia has implemented various regulations in line with the BEPS Action Plan, especially on the following:
Recently, the introduction of ESR to restrict the deductibility of interest expense shows Malaysia’s commitment to implement the recommendations in Action 4: Limiting Base Erosion Involving Interest Deductions and Other Financial Payments.
With the introduction of various provisions in line with BEPS, the commitment of the government to bring about heightened transparency and increased exchange of information is commendable. Nonetheless, since the implementation of the BEPS Action Plan is still at a nascent stage, notwithstanding that legislation has been enacted in line with the Action Plan, the efficacy of enforcement remains to be seen. There are no observations of BEPs-centred audits and investigations conducted by the Malaysian tax authorities.
Malaysia is not a member of the OECD. However, as an Associate Member to the OECD Inclusive Framework on BEPS Package, Malaysia participated in the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI). Among others, in line with BEPS Action 4, it was announced during the 2018 Budget that ESR to restrict deduction of interest expenses and other payments by entities is expected to be introduced. The ESR took effect from 1 January 2019.
Malaysia is also a signatory to the Multilateral Competent Authority Agreement (MCAA) on Common Reporting Standards (CRS) and Country-by-Country Reporting (CbCR). Further, under the Convention on Mutual Administrative Assistance in Tax Matters, Malaysia joined over 100 other countries in agreeing to automatic exchange of information relating to financial accounts and has committed to exchange the CRS information from 2018.
Malaysia has started reviewing the statutes of corporations to ensure alignment to international standards.
Nonetheless, in light of action taken by other jurisdictions in the region within the short implementation timeline – for example, in Singapore, which in May 2018 gazetted its legislation to remove intellectual property income entirely from the scope of its pioneer incentives – subject to the same grandfathering period allowed by the Forum of Harmful Tax Practices until 30 June 2021, it is anticipated that the overall pressures brought about by BEPS would be eased as its effects would be felt across many other jurisdictions.
One of the main areas that Malaysia has reviewed are intellectual property regimes, including incentives for MSC Malaysia and pioneer status. These regimes are being examined to ensure that the R&D expenditure has sufficient nexus to the intellectual property assets in question.
For non-intellectual property regimes, Malaysia has also reviewed existing legislation and guidelines to ensure that such regimes engage in substantial core income-generating activities.
The proposals for co-ordination rules in respect of hybrid instruments, whilst aimed at neutralising mismatch arrangements, may bring about mismatch in terms of accounting and tax principles as well as the domestic legislation.
The 2018 Budget announcement proposed to introduce the ESR to replace the thin capitalisation rules. The ESR took effect from 1 January 2019.
Implementation of CFC rules, especially the sweeper rule as suggested, may bring about a risk of double taxation in certain situations and the standardisation of the definition of CFC income, threshold requirements and the measure of control may be beset by practical difficulties.
Presently, taking into account the nation’s progress to align itself with international standards, the compliance and administrative costs may outweigh the opportunities for taxing foreign income and maintaining competitiveness that CFC rules may offer.
Domestically, Malaysia has in place Section 140 of the ITA, the general anti-avoidance provision that confers wide powers to the DGIR to disregard or vary transactions.
In respect of transfer pricing matters, Section 140A further provides that should the DGIR have reason to believe that property or services are acquired or supplied at a price that is either less than or greater than the price that it might have been expected to fetch if the parties to the transaction had been independent persons dealing at arm’s length, he or she has the power to substitute the price in respect of the transaction to reflect an arm’s-length price for the transaction.
In line with BEPS Action 5 and pursuant to the Forum on Harmful Tax Practices, several intellectual property and non-intellectual property preferential tax incentives have been identified for evaluation and amendments.
Nonetheless, since the Malaysian authorities generally impose the nexus test that requires the creation of intellectual property in Malaysia prior to granting of tax incentives, the changes are not likely to be considered as radical.
Pursuant to BEPS Action Plan 13, Malaysia has introduced the Country-by-Country Reporting Rules 2016 (CbCR Rules) to enhance tax transparency by facilitating the exchange of information between different jurisdictions.
The Digital Services Tax will be implemented with effect from 1 January 2020. Foreign service providers can commence registration with the Royal Malaysian Customs Department (RMCD) as of 1 October 2019.
The tax challenges arising from the digitalisation of the economy were identified as one of the main areas of focus of the BEPS Action Plan, leading to the release of the Final BEPS Action 1 Report in 2015.
Although it is not mandatory for Malaysia as a BEPS Associate to implement the recommendations under Action 1, the Malaysian government has shown its interest in the taxation issues affecting the digital economy. For instance, the Malaysian Transfer Pricing Guidelines have been amended to largely reflect the recommendations under Actions 8 to 10 relating to intangibles.
Further, from 1 January 2020, a foreign service provider who provides digital services to a consumer is required to register for service tax if the taxable turnover of the foreign service provider is more than the registered threshold of MYR500,000.
A withholding tax for royalties paid to a non-resident is set at 10%, unless the rate is reduced under a DTA. Payments for certain services made to a non-resident are also subject to withholding tax at 10%, unless the rate is reduced under a DTA.
However, withholding tax exemption is granted on service fees paid to a non-resident in respect of offshore services, such that intellectual property services rendered from 6 September 2017 by a foreign intellectual property agent outside of Malaysia will be exempt from withholding tax.
Participation in the BEPS Framework has propelled Malaysia’s drive to adhere to the global commitment to improve global transparency, identify the movement of global wealth flows and eliminate tax avoidance.