Foreign sourced income FSI exemption orders gazetted

Foreign-sourced income (FSI) exemption orders gazetted

Pursuant to the Finance Act 2021, the income tax exemption on FSI received by any person (other than a resident company carrying on the business of banking, insurance or sea or air transport) was removed for all Malaysian-resident taxpayers from 1 January 2022. A flat income tax rate of 3% would apply on the gross amount of FSI received in Malaysia from 1 January 2022 to 30 June 2022. From 1 July 2022 onwards, the prevailing tax rate of the taxpayer would apply.

As highlighted in an earlier alert, on 30 December 2021, the Ministry of Finance (MoF) issued a press release stating that certain types of FSI of resident taxpayers will continue to be exempt from tax, subject to conditions (see Special Tax Alert No. 1/2022). To legislate the above, the following Orders were gazetted on 19 July 2022 and are effective from 1 January 2022 to 31 December 2026:

• Income Tax (Exemption) (No. 5) Order 2022 [P.U.(A) 234]
• Income Tax (Exemption) (No. 6) Order 2022 [P.U.(A) 235]

Both Orders provide that:

• “Income received in Malaysia from outside Malaysia” means income arising from outside Malaysia which is brought into Malaysia.
• Any deduction in relation to the exempted FSI shall be disregarded for the purpose of ascertaining the chargeable income of the qualifying individual / person
• The exemption granted does not absolve the qualifying individual / person from any requirement to submit any return, statement of accounts or any other information as required under the Income Tax Act 1967 (ITA)

Key points of Income Tax (Exemption) (No. 5) Order 2022, which applies to all sources of income of individuals

The Order exempts a qualifying Individual1 from the payment of income tax in respect of gross income from all sources of income under Section 42 of the ITA (excluding income from a partnership business in Malaysia) which is received in Malaysia from outside Malaysia.

The exemption is on condition that the FSI has been subjected to tax “of a similar character to income tax” under the laws of the foreign jurisdiction where the income arose. To satisfy this condition, the qualifying individual is required to comply with conditions imposed by the MoF, which will be specified in guidelines to be issued in due course by the Inland Revenue Board (IRB).

Key points of Income Tax (Exemption) (No. 6) Order 2022, which applies to the dividend income of companies, limited liability partnerships (LLPs) and individuals earning dividend income in relation to a partnership business

The Order exempts a “qualifying person” from the payment of income tax in respect of dividend income which is received in Malaysia from outside Malaysia.

“Qualifying person” in this context means a person resident in Malaysia who is:

(a)   An individual who has dividend income received in Malaysia from outside Malaysia in relation to a partnership business in Malaysia,

(b)  An LLP which is registered under the Limited Liability Partnerships Act 2012, or

(c)   A company which is incorporated or registered under the Companies Act 2016

The exemption available to the “qualifying person” is subject to the following conditions:

• The dividend income has been subjected to tax “of a similar character to income tax” under the laws of the foreign jurisdiction where the income arose, and
• The highest rate of tax “of a similar character to income tax” charged under the laws of the foreign jurisdiction where the income arose was not less than 15%.

Similarly, to satisfy the above conditions, the qualifying person is required to comply with the conditions imposed by the MoF which will be specified in guidelines to be issued by the IRB. Further guidance is also expected on whether the 15% tax rate mentioned above refers to the prevailing tax rate in the foreign jurisdiction at the time the dividend was declared, at the time the dividend is received in Malaysia or at some other date.

It is noted that the above definition of “qualifying person” does not appear to include, for example, a unit trust or a company which is incorporated under the Labuan Companies Act 1990 which has elected to be taxed under the ITA, which means that such taxpayers would technically not qualify for the exemption. Further clarification will be sought from the authorities in this regard. It is also possible that further details will be made available in the IRB’s guidelines.

The Order also stipulates that the exemption will not apply to a person carrying on the business of banking, insurance or sea or air transport.