Updated: Jun 5
Summary: This article discusses the removal of tax exemption for foreign-sourced income received by Malaysian residents, effective January 1, 2022, as well as the new conditions for tax exemption on foreign dividend income received in Malaysia.
The article also covers the additional requirement for tax exemption announced by the Malaysian Inland Revenue Board on December 29, 2022, and the request from the Chartered Tax Institute of Malaysia for further guidance on practical scenarios.
The article provides a response from the IRBM regarding a specific scenario where dividends transferred exceeding one tier are not exempted according to the amended guidelines.
Effective 1 January 2022, the tax exemption for foreign-sourced income ("FSI") received by Malaysian residents provided for under Para 28 was removed following the Budget 2022 made on 29 October 2021.
Hence, Foreign Income received in Malaysia which is eligible for the tax exemptions are as follows:
Foreign dividend income received in Malaysia by a resident company, resident LLP and resident individual in relation to a partnership business in Malaysia [P.U.(A) 235/2022].
All foreign income excludes income from a partnership business received in Malaysia by a resident individual [P.U.(A) 234/2022].
The exemption in paragraph 1.4(a) does not apply to a resident carrying on the business of banking, insurance, or sea or air transport.
On December 29, 2022, the Malaysian Inland Revenue Board (IRB) issued a press release (available only in Bahasa Malaysia) announcing an additional requirement for tax exemption on eligible persons' foreign-source dividend income received in Malaysia.
By this additional requirement, amendments have been made to the Guidelines for tax treatment in relation to income received from abroad, which were uploaded to the official IRBM portal on December 29, 2022.
Foreign dividend income received in Malaysia by a resident company, resident LLP and resident individual in relation to partnership business in Malaysia from 1 January 2022 until 31 December 2026 is exempted from tax subject to the following conditions:
Dividend income has been subjected to tax in the country of origin in which the income arises;
The headline tax rate in the country of origin is not less than 15%; and
Comply with the economic substance requirements.
In determining whether dividends have been subjected to tax in the country of origin in which the income arises [(1) above], the conditions are as follows:
(i) Tax has been imposed in the country of origin on foreign dividend income received in Malaysia as follows:
(A) Tax paid or payable in the country of origin is either income tax or withholding tax; or
(B) Foreign dividend income received has been subjected to underlying tax;
Note: I. Underlying tax is an income tax paid or payable in the country of origin related to the underlying profit that arises from operating income in the country of origin where the income after tax is used to pay dividends. II. If the payer company (Company X) pays dividends out of dividends received from another company (Company Y) (either within the country which is the same as Company X or otherwise), the underlying tax paid by Company Y on the dividend cannot be considered as tax paid or payable by Company X for the purpose of this qualifying conditions (refer to the illustration in Appendix 1).
(ii) Tax is not imposed in the country of origin because foreign dividends are paid out of underlying profits arising from operating income in the country of origin which is not subjected to tax due to:
(A) Unabsorbed losses or capital allowances;
(B) Arising from capital gains;
(C) Enjoyed tax incentives in compliance with substantive requirements in the country; or
(D) Tax regulations under the tax consolidation regime in the country of origin (refer to the illustration in Appendix 2(a) and 2(b)).
CTIM request to cover practical scenarios in the Guideline.
CTIM Comment 1:
We request for further scenarios to be covered for the guidance of taxpayers.
As a reference point, the Inland Revenue Authority of Singapore (IRAS) has specified certain scenarios in its e-Tax Guide on Tax Exemption under Section 13(12) to provide for tax exemption on dividend income under Section 13(12)of the Singapore Income Tax Act.
The specified scenarios would cover, amongst others, the following scenarios.
he specified foreign income to be received in Singapore originates from substantive business activities carried out in a foreign tax jurisdiction (say country A) with a headline tax rate of at least 15%;
the tax was paid in that jurisdiction (i.e. country A);
the income was subsequently moved to or invested in other foreign tax jurisdiction(s) (say country B and then country C in that order); and
the latter tax jurisdictions (i.e. country B and country C) did not levy any tax on such income before or when the income is remitted back to Singapore from the last tax jurisdiction (i.e. country C).
Response from IRBM:
Dividends transferred exceeding one tier are not exempted according to the amended guidelines.
Therefore, based on scenario D, the dividends received from country C are not eligible for tax exemption.
CTIM Comment 2:
The foreign-sourced dividend to be received in Singapore originates from profits derived from substantive business activities carried out in a foreign tax jurisdiction;
That tax jurisdiction has a headline tax rate of at least 15%; and
Tax is paid on the originating profits in that jurisdiction.
This scenario covers the following situations:
where a dividend is paid out of profits derived from substantive business activities carried out in, say, country A and the dividend has then flowed through one or more levels of companies in country A before the dividend is paid to the Singapore resident company;
where a dividend is paid out of profits derived from substantive business activities carried out in, say, country to a company in a second jurisdiction (say, country D) and it in turn pays a dividend to a company in a third jurisdiction (say, country C) and so on (say, to a company in country B, then to a company in country A). The company in country A then pays a dividend to the Singapore resident company out of the dividend it receives from country B;
where substantive business activities are carried out in the foreign tax jurisdiction (say, country E) through a branch instead of a company in that jurisdiction, and the branch profits are flowed through one or more levels of companies in country E or elsewhere before the dividend is paid to the Singapore resident company.
Response from IRBM (Inland Revenue Board of Malaysia):
Dividends transferred beyond one tier are not exempted according to the guidelines.
Therefore, based on scenario E, dividends transferred beyond one tier are not exempted according to the guidelines.
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