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100% statutory income exemption on shipping profits - YAs 2021 to 2023

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EY Malaysia Tax
25 Oct 2022
Subject Tax alert
Categories Corporate Tax
Jurisdictions Malaysia

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100% statutory income exemption on shipping profits for the years of assessment (YAs) 2021 to 2023: Gazette Order released

The Finance Act 2012, gazetted on 9 February 2012, amended Section 54A of the Income Tax Act 1967 (ITA) to reduce the 100% income tax exemption on statutory income derived from the operation of Malaysian ships, to 70%. Other rules were also introduced with respect to the taxation of Malaysian ships, such as the requirement to treat each ship as a separate business source. Following discussions with various stakeholders, the Ministry of Finance (MoF) agreed to defer the reduction in tax exemption and the introduction of the new rules.

Accordingly, the following Orders were gazetted to exempt any person resident in Malaysia from the provisions of Sections 54A(1) and (2) of the ITA and from the payment of income tax in respect of 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 him on a voyage or time charter basis:

  • Income Tax (Exemption) (No. 2) Order 2012, for YAs 2012 and 2013 (see Tax Alert No. 13/2012)
  • Income Tax (Exemption) Order 2018, for YAs 2014 and 2015 (see Tax Alert No. 5/2018)
  • Income Tax (Exemption) (No. 2) Order 2018, for YAs 2016 to 2020 (see Tax Alert No. 5/2018)

Following the above, the Income Tax (Exemption) (No. 7) Order 2022 [P.U.(A) 312] was gazetted on 6 October 2022 to maintain the 100% exemption on statutory income derived from the operation of Malaysian ships, for YAs 2021 to 2023. However, to qualify for the exemption, the taxpayer must now obtain an annual verification from the Ministry of Transport Malaysia (MOT) confirming that the person has:

  • Incurred annual operating expenditure of at least RM250,000 for each Malaysian ship, and
  • Has full-time employees in Malaysia for each Malaysian ship, as follows:

-  In respect of shore employees, at least four of the following employees and the majority of the employees shall be Malaysian citizensNote:

(i) A chief executive officer,
(ii) An administrative and finance officer,
(iii) An operating officer, and
(iv) An officer in charge of the health, protection, safety and environmental affairs

and

- In respect of employees who are ship personnel as provided under Part III of the Merchant Shipping Ordinance 1952, the taxpayer is subject to the minimum requirement as specified in the Safe-Manning Certificate issued by the Marine Department Malaysia.

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    It is not clear how the authorities would approach a position where a ship is owned by a company which does not, for example, have an administrative or finance officer, operating officer or health, protection, safety and environmental affairs officer, because these functions are outsourced to other companies.

    Taxpayers operating Malaysian ships and enjoying the Section 54A tax exemption should immediately assess whether they have met and will continue to meet the above conditions, and should ensure that they obtain the relevant verifications from the MOT.

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