Tax exemption for unit trusts on gains on disposal of capital assets and foreign-sourced income

Tax exemption for unit trusts on gains on disposal of capital assets and foreign-sourced income

On 16 January 2024, the Honorable Finance Minister II announced that unit trusts will be exempted from tax on the gains on disposal of capital assets. It was also announced that unit trusts will be exempted from tax on foreign-sourced income.

To legislate the above, the following exemption orders were gazetted on 20 September 2024:

Income Tax (Unit Trust) (Exemption) Order 2024 [P.U.(A) 249]

The Order provides that a qualifying unit trust resident in Malaysia (excluding a Real Estate Investment Trust or Property Trust Fund listed

on Bursa Malaysia) is given an income tax exemption

in respect of the gains or profits from the disposal of:

a)    Shares of a Malaysian-incorporated company not listed on the stock exchange

b)    Shares of a foreign controlled company with a nexus to Malaysian real property (pursuant to Section 15C of the ITA)

The Order is applicable to disposal of shares made from 1 January 2024 to 31 December 2028.

Other salient points from the Order are:

•       Any losses from the disposal of shares above can be used to reduce the adjusted income on a subsequent disposal of capital assets, either in the same year as the loss-making disposal or in the next 10 consecutive years of assessment.

•       An exempted unit trust is still required to file the Capital Gains Tax Return Form within 60 days from the date of disposal of the capital asset.

•       The Order is not applicable to gains or profits from the disposals of capital asset that fall under Section 4(a) of the ITA, as business source income.

Income Tax (Unit Trust in relation to Income Received in Malaysia from Outside Malaysia) (Exemption) Order 2024 [P.U.(A) 250]

The Order provides that a qualifying unit trust resident in Malaysia managed by a management company (as defined) is given an income tax exemption on all foreign-sourced income received in Malaysia, from 1 January 2024 to 31 December 2026. The qualifying unit trust excludes a Real Estate Investment Trust or Property Trust Fund listed

on Bursa Malaysia.

To qualify for the exemption, the qualifying unit trust or the management company is required to comply with the following conditions:

Option A

•       The gross income of the qualifying unit trust 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%.

OR

Option B

The management company of the qualifying unit trust is required to comply with the following economic substance requirements:

•       employ an adequate number of employees in Malaysia; and

•       incur an adequate amount of operating expenditure in Malaysia.

The qualifying unit trust or the management company is also expected to comply with the conditions specified in the guidelines issued by HASiL under Section 134A of the ITA. It is anticipated that the current Guidelines On Tax Treatment In Relation To Income Received From Abroad (Amendment) dated 20 June 2024, will be revised to reflect the above exemption orders.