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Tax Strategies for Businesses in Malaysia: Deciphering Malaysia's Tax Regime


Introduction:

Malaysia's tax landscape is undergoing significant changes, and businesses operating here must adapt to these developments.


Whether you're an established business or considering entering the Malaysian market, understanding these tax intricacies is crucial for optimising your financial strategy.


Key Highlights of Tax Planning in Malaysia


1. Entity Selection and Business Operations:

Choosing the right business entity is a critical decision that can significantly impact your tax obligations and financial flexibility in Malaysia.


Here, we delve deeper into the critical considerations for entity selection and explore the tax implications for different business structures:


a. Business Entity Types in Malaysia:

  • Companies (Private or Public):

    • Companies are a popular choice for businesses due to their separate legal status from their owners.

    • Private companies are often preferred for small and medium-sized enterprises (SMEs), while public companies are listed on the stock exchange.

    • Both private and public companies are subject to corporate tax rates.

  • Partnerships:

    • It involves two or more individuals or entities coming together to conduct a business.

    • Profits and losses typically flow through to the partners, who are taxed on their income.

    • There is no legal distinction between the business and its owners in partnerships.

  • Sole Proprietorships:

    • Sole proprietorships are owned and operated by a single individual.

    • Similar to partnerships, there is no legal separation between the business and the owner.

    • Business income is treated as personal income, and the owner is taxed accordingly.

  • Limited Liability Partnerships (LLPs):

    • LLPs combine elements of partnerships and companies, offering limited liability protection to partners.

    • LLPs are considered taxable entities and are subject to corporate tax rates.

  • Local branches of non-resident entities:

    • It refers to foreign companies or organisations establishing a presence in Malaysia to conduct business operations. These branches are considered extensions of the foreign entity in Malaysia.

    • Local branches do not have a separate legal identity from the foreign parent company. Instead, they are treated as an integral part of the parent company.

  • Labuan Companies:

    • Labuan companies are business entities incorporated in the Federal Territory of Labuan, Malaysia. They are commonly used for offshore business activities and financial services.

b. Tax Implications Based on Entity Type:

  • Companies:

    • In Malaysia, companies are generally taxed at a corporate rate of 24%.

    • However, variations depend on factors such as paid-up capital and gross income.

    • Small companies with paid-up capital of 2.5 million ringgit or less and gross income not exceeding 50 million ringgit may qualify for a reduced corporate tax rate.

      • Income tax is chargeable at 15% for the first 150,000 ringgit, 17% 0n the next 450,000 and 24% for every ringgit thereafter.

  • Partnerships:

    • Partnerships are not recognised as separate taxable entities.

    • Profits and losses from the partnership flow through to the individual partners, who report this income on their personal tax returns.

  • Sole Proprietorships:

    • Like partnerships, sole proprietorships are not separate taxable entities.

    • The owner reports business income as personal income, subject to individual income tax rates.

  • LLPs:

    • LLPs are treated as taxable entities subject to corporate tax rates.

    • However, specific provisions may reduce tax rates for LLPs meeting certain criteria.

    • Small LLPs with contributed capital of 2.5 million ringgit or less and gross income not exceeding 50 million ringgit may qualify for a reduced corporate tax rate.

      • Income tax is chargeable at 15% for the first 150,000 ringgit, 17% 0n the next 450,000 and 24% for every ringgit thereafter.

  • Local branches of non-resident entities:

    • Local branches of non-resident entities are generally treated as non-residents for income tax purposes, taxed at 24% on income accruing in or derived from Malaysia.

  • Labuan Companies:

    • Labuan companies undertaking Labuan trading activities are subject to preferential tax rates under the Labuan Business Activity Tax Act 1990 (LBATA).

    • They could choose between paying tax at 3% or a flat rate before 1 January 2019.

      • Before January 1, 2019, they could choose between paying tax at 3% of net audited profits or a flat rate of 20,000 Malaysian Ringgit per year.

      • Legislative amendments have now removed the tax ceiling of RM20,000.

    • Labuan companies that engage in non-trading activities, including the holding of investments in securities, shares, or properties in Labuan on their own behalf, are usually exempt from Malaysian income tax.

  • Real Estate Investment Trusts (REITs):

    • REITs enjoy tax exemption on their income where 90% or more of their total income for the assessment year is distributed to unit holders.

    • REITs must be approved by the Securities Commission as a real estate investment trust or property trust fund and listed on Bursa Malaysia, the Malaysian stock exchange.

  • Real Estate Investment Trusts (REITs):

    • REITs are specialised investment vehicles that primarily invest in income-generating real estate assets, such as commercial properties, residential complexes, and infrastructure projects.

c. Recent Developments and Tax Incentives:


The Malaysian government has been actively reviewing and revising its tax incentive framework to attract investment and promote specific industries.


Notably, the government strongly emphasises the electric vehicle (EV) industry, offering various incentives to attract investors in this sector.


Additionally, the government has extended existing tax deductions and introduced new incentives, such as expanding tax deductions for technology-based companies listed on the ACE and LEAP Markets.


A new carbon capture and storage tax incentive is also designed to encourage environmentally responsible practices.


Understanding these tax incentives and aligning your business operations with Malaysia's evolving tax landscape can lead to significant cost savings and opportunities for growth.


In summary, selecting the right business entity in Malaysia involves considering factors like liability protection, tax obligations, and eligibility for tax incentives.


2 Transfer Pricing in Malaysia

Transfer pricing refers to the pricing of goods, services, or intellectual property transferred between entities within the same multinational group. It is a critical aspect of international trade, especially when dealing with related entities. The objective is to ensure that transactions between these entities are conducted at fair market prices, just as they would be in transactions with unrelated parties.


In Malaysia, the legal framework for transfer pricing is primarily governed by the Income Tax Act 1967. Under this act, Section 140A empowers the Director-General of Inland Revenue (DGIR) to make transfer pricing adjustments if transactions between related entities are not conducted at arm's length.


Malaysian transfer pricing regulations also require companies to document their transfer pricing policies and transactions properly. This documentation should include details on the pricing method used, comparability analysis, and financial information.


Effective tax planning for transfer pricing involves a combination of compliance with regulations, documentation, and strategic decision-making. Multinational businesses must balance minimising tax liabilities and maintaining transparency and compliance with tax authorities.


3. Earning stripping rules in Malaysia

Earning stripping rules is a crucial component of Malaysia's tax framework. They are designed to prevent profit shifting and ensure that the country's multinational enterprises (MNEs) pay their fair share of taxes. These rules aim to limit the deductibility of interest expenses on loans and financial arrangements to combat base erosion and profit shifting (BEPS) practices.


In Malaysia, earning stripping rules were introduced as part of the Finance Act 2019 and came into effect on January 1, 2020. The rules are governed by Section 140C of the Income Tax Act 1967.


Under these rules, a company can deduct interest expenses up to 20% of its Tax EBITDA (earnings before interest, taxes, depreciation, and amortisation (EBITDA). Any interest expenses exceeding this threshold are not deductible for tax purposes.


However, ESR does not apply where the total interest expenses do not exceed RM500,000 in a year.


Earning stripping rules in Malaysia is vital in combating tax avoidance and ensuring a fair distribution of tax burdens among multinational enterprises. These rules align with international efforts to prevent BEPS practices and create a level playing field for all taxpayers. Companies operating in Malaysia must stay informed about these rules, maintain proper documentation, and consider their impact on their financial arrangements to navigate the regulatory landscape effectively.


Earning stripping rules in Malaysia are designed to strike a balance between facilitating legitimate business financing and preventing abusive tax practices, ultimately contributing to the country's fiscal stability and fairness in taxation.


4. Real Property Gains Tax (RPGT) in Malaysia

Real Property Gains Tax (RPGT) is a tax imposed on the gains derived from the disposal of chargeable assets in Malaysia. Whether you're a property investor or a businessman, understanding RPGT is essential, as it can significantly impact your real estate financial transactions.


RPGT is generally payable by individuals, companies, and organisations that dispose of real property in Malaysia. This includes residential, commercial, and industrial properties. However, certain exemptions and thresholds may apply depending on the property type and ownership duration.


Foreign property investors are subject to higher RPGT rates, with a fixed rate of 30% regardless of the holding period.


Real Property Gains Tax (RPGT) is a crucial consideration for anyone involved in property transactions in Malaysia. Understanding RPGT rates, exemptions, and compliance requirements can help property owners and investors optimise their financial strategies and ensure compliance with the law.


5. Stamp Duty in Malaysia

Stamp duty is a form of tax levied on various legal and financial documents in Malaysia. It is a crucial source of revenue for the government and plays a significant role in facilitating and regulating legal transactions.


Malaysia's Stamp Act 1949 governs stamp duty and applies to a wide range of documents and instruments.


The stamp duty payable depends on the document type and its value. Stamp duty rates are typically determined as a percentage of the transaction value or a fixed fee. For property transactions, the stamp duty rates vary depending on the property value, location, and the type of document involved.


Understanding the types of documents subject to stamp duty, the applicable rates, and any exemptions or reliefs available is crucial for individuals and businesses alike.

6. Goods and Services Tax (GST) in Malaysia

Goods and Services Tax (GST) was a value-added tax system in Malaysia that applied to the supply of goods and services at various stages of the production and distribution chain. Although GST was implemented in Malaysia, it was replaced by the Sales and Service Tax (SST) in 2018.


Understanding the former GST system is still relevant for historical purposes, but current businesses operating in Malaysia need to comply with the SST regulations. SST is a single-stage tax, and its rates and exemptions differ from those of GST.

7. Service Tax in Malaysia

Service tax is a consumption tax levied on specific services provided in Malaysia. It is an essential source of revenue for the government and plays a significant role in regulating the services sector.


Service tax in Malaysia primarily applies to specific services categorised under the Service Tax Act 2018.


Businesses that provide taxable services must register for service tax with the Royal Malaysian Customs Department. They must collect service tax from their customers, maintain proper records, and submit regular returns.


The service tax rate in Malaysia can vary depending on the type of service. The standard rate for service tax was 6%, but there were exceptions and different rates for specific services.


Understanding the types of services subject to tax, applicable rates, exemptions, and compliance requirements is essential for businesses and individuals involved in service-related activities.


8. Sales Tax in Malaysia

Sales tax is a consumption tax imposed on the sale of goods in Malaysia. It is a significant source of revenue for the government and is instrumental in regulating the sale of goods.


Sales tax in Malaysia applies to a wide range of goods, including manufactured and imported products. These goods are categorised under the Sales Tax Act 2018, which specifies the types of goods subject to tax.


Businesses involved in manufacturing taxable goods must register for sales tax with the Royal Malaysian Customs Department. They must then charge, collect, and remit sales tax to the government. Compliance involves maintaining proper records, submitting regular returns, and ensuring accurate calculations of sales tax liabilities.


The sales tax rate can vary depending on the type of goods and whether they are imported or locally manufactured. Malaysia's standard sales tax rate is 10%, but different rates are applied to specific categories of goods.


Understanding which goods are subject to tax, the applicable rates, exemptions, and compliance requirements is essential for businesses and individuals involved in selling, importing, or manufacturing goods.


9. Withholding Tax in Malaysia

Withholding tax is deducted at the source on certain types of payments made to non-residents in Malaysia. It is a crucial element of the country's tax system, ensuring the government receives tax revenue from various cross-border transactions.


Withholding tax in Malaysia applies to specific types of payments made to non-residents. Common categories of payments subject to withholding tax include Interest, Royalties, Technical and Management Fees, etc.


The withholding tax rates in Malaysia can vary depending on the type of payment, the residency status of the recipient, and any applicable tax treaties between Malaysia and the recipient's home country.


Understanding which payments are subject to withholding tax, the applicable rates, tax treaty provisions, compliance requirements, and recent developments is crucial for businesses involved in cross-border transactions.


Conclusion

In conclusion, navigating Malaysia's tax landscape requires a deep understanding of its intricacies and regulations. Whether you are an established business or looking to enter the Malaysian market, here are some key takeaways from the various aspects of tax planning in Malaysia:

  1. Entity Selection and Business Operations: Choosing the right business entity is a critical decision that impacts your tax obligations. Malaysia offers several options, each with its own tax implications. Consider factors such as liability protection, tax rates, and eligibility for incentives when making your choice.

  2. Transfer Pricing: Managing transfer pricing is essential for multinational businesses operating in Malaysia. Compliance with regulations, documentation, and strategic decision-making are crucial for balancing tax efficiency and transparency.

  3. Earning Stripping Rules: Understanding earning stripping rules is vital to prevent profit shifting and ensure fair taxation. These rules limit the deductibility of interest expenses and contribute to fiscal stability.

  4. Real Property Gains Tax (RPGT): Property transactions in Malaysia are subject to RPGT, which can significantly impact your financial outcomes. Be aware of the rates, exemptions, and compliance requirements when dealing with real estate.

  5. Stamp Duty: Stamp duty applies to various legal and financial documents. Familiarise yourself with the types of documents subject to stamp duty, the applicable rates, and any available exemptions or reliefs.

  6. Goods and Services Tax (GST): While GST was once in place, it has been replaced by the Sales and Service Tax (SST). Businesses must now adhere to SST regulations, which differ from those of GST.

  7. Service Tax: Service tax is levied on specific services in Malaysia. If your business provides taxable services, register for service tax, understand the applicable rates, and comply with reporting requirements.

  8. Sales Tax: Sales tax applies to the sale of goods in Malaysia. Manufacturers and businesses involved in the sale or import of goods must register for sales tax, calculate their liabilities correctly, and maintain compliance.

  9. Withholding Tax: Withholding tax is deducted from certain payments to non-residents. It is a critical aspect of cross-border transactions. Familiarize yourself with the types of payments subject to withholding tax, applicable rates, tax treaty provisions, and compliance requirements.

Lastly, staying updated with recent developments and tax incentives is essential. The Malaysian government continuously reviews and revises its tax laws and incentives to attract investment and promote specific industries. Aligning your business operations with these developments can lead to cost savings and growth opportunities in the ever-evolving Malaysian tax landscape.

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