Below, comments by Farah Rosley, Malaysia Tax Leader, Ernst & Young Tax Consultants on the conditional Foreign Source Income (FSI) tax exemption outlined by the Ministry of Finance (MoF).
For many years, FSI was not subject to Malaysian income tax even if it was remitted into the country, unless such FSI was earned by Malaysian resident companies undertaking the business of banking, insurance or sea or air transport. This blanket exemption was removed for all Malaysian-resident taxpayers from 1 January 2022, pursuant to the Finance Act 2021.
Following an extensive consultation process, on 30 December 2021 MoF announced that certain types of FSI of resident taxpayers will continue to be exempt from tax. This exemption will apply to the foreign-sourced dividend income of companies and limited liability partnerships, and all foreign sourced income of individuals (except individuals carrying out business in Malaysia through a partnership). The tax exemption is effective for 5 years from 1 January 2022 to 31 December 2026 and will be subject to conditions which will be outlined in the guidelines issued by the Inland Revenue Board.
The MOF also stated that FSI received in the year of assessment 2022 will be excluded from the tax calculation for the purpose of the one-off Cukai Makmur of 33% on chargeable income above RM100 million.
This is a welcome move, as the FSI exemption will support Malaysia’s competitiveness and attractiveness as a regional hub and encourage more groups to establish their headquarters and investment holding companies in the country. In addition, the tax exemption for resident individuals will allow individual taxpayers to remit their income back to Malaysia tax-free. The tax exemption will encourage taxpayers to continue remitting funds back to Malaysia.
This announcement demonstrates the Government’s responsiveness to industry feedback and its commitment to an equitable and competitive tax system. This is in line with international tax best practices and will support sustainable economic growth, which in turn will contribute to the country’s tax revenue collections.
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