The Malaysian 2022 Budget announced on 29 October 2021 was passed into law as the Finance Act 2021 on December 31, 2021. There were a few major changes to the original budget proposals. A significant exception related to the budget proposal to tax Foreign Source Income.
In what may be regarded as a last-minute “stay of execution”, the Ministry of Finance (MOF) issued a press release suspending the full impact of taxing Foreign Source Income received in Malaysia by Malaysian residents.
MOF responds to concerns
The late change of heart was in response to concerns raised inter alia by economists, the wealth planning industry, as well as corporate and individual taxpayers on the potentially detrimental and far-reaching effects on the economy of taxing Foreign Source Income receipts.
One of the most worrying effects, even ignoring the difficulties involved in collecting the tax, would be to slow down foreign monies flowing into the economy at a much-needed time.
It is clear the budget proposal had not been fully thought through and the press release was greeted with a collective sigh of relief by Malaysian residents and quite possibly the international community which, when pushing for the change, may not have expected such a clumsy approach.
The MOF listened and introduced changes representing a significant watering-down from the original proposal:
| Taxpayer Type | Exempted Foreign Source Income received in Malaysia | Effective Dates |
|---|---|---|
| Tax Resident Individuals not carrying on a business through a partnership | All categories of Foreign Source Income | From 1 January 2022 to 31 December 2026 |
| Tax Resident Individuals carrying on a business through a partnership | Unclear | Unclear |
| Tax Resident Companies | Foreign Source Dividend Income only All other types of Foreign Source Income remain taxable | From 1 January 2022 to 31 December 2026 |
| Tax Resident Limited Liability Partnerships | Foreign Source Dividend Income All other types of Foreign Source Income remain taxable | From 1 January 2022 to 31 December 2026 |
Exceptions to the rules
For clarity, the new rules do not apply to
- Resident companies carrying on the business of Banking, Insurance, Air and Sea Transportation. Such companies will continue to be taxed on Foreign Source Income whether received or not.
- Non-residents of Malaysia will also continue to be exempt from tax on Foreign Source Income received in Malaysia.
There remain areas for clarification and the MOF will announce the conditions to be complied with to enjoy the exemptions. But deferring the budget proposal to 2026 allows the MOF time to formulate a more cogent and considered response to meeting its international commitments.
Notes of caution
Tax Resident Companies and Limited Liability Companies may explore the feasibility of re-characterising non-dividend income into dividend income by interposing a foreign subsidiary in a low-tax financial centre. But it will come as no surprise if the conditions require a headline tax of 15% in the location of the company paying the dividend.
A further note of caution to resident individuals is to expect claims to exempt Foreign Source Income will be heavily scrutinized. So, keep excellent records. As the saying goes “the sun may be shining but don’t forget to take your umbrella.”
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The above article first appeared on EPPL’s The Custodian, Issue 21.
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Mike Grover
Former Head of Tax at International Accounting Firm