Double Dividend of Taxation Malaysia

On 5 October 2021, the Council of the European Union (EU) noted that Malaysia enjoys a «detrimental» exemption for foreign sources of income. Subsequently, Malaysia was included in Annex II to the EU schedule (grey list). This may have led the government to consider lifting this exemption in order to reconcile Malaysia with «best practices in international taxation» («selaras dengan komitmen Malaysia terhadap pematuhan amalan terbaik percukaian di peringkat antarabangsa»). Some questioned whether this proposal was an «impulsive» response that might need to be reconsidered.2 For companies, this means that dividends received by Malaysia-based companies from foreign subsidiaries would be taxed in Malaysia from January 1, 2022, according to Deloitte Malaysia. This provision does not apply if the beneficiary has an MOU in the Contracting State where the company paying the dividends resides and if the dividend received is effectively linked to that MOU. This dividend income related to an EP is treated as business profit and taxed accordingly. A company resident in a Contracting State which receives income of the other Contracting State shall not be taxed by the other State on retained earnings, even if the retained profits consist in whole or in part of income or profits made in that other State. The other State may not levy tax on dividends distributed by the company to persons who are not resident in that other State. Singapore does not levy taxes on dividends in the hands of the beneficiary due to its single-tier tax system.

Malaysia also follows taxation at one level, so dividends in the hands of beneficiaries are exempt from tax. Malaysia adopts a territorial tax zone where a tax resident is taxed on Malaysian income and foreign income transferred to Malaysia. However, the income of a resident company from air/sea transport, banking or insurance is taxed worldwide. Resident taxpayers must determine whether their income falls into the income or capital category, based on all the circumstances and factors surrounding the receipt. Certain types of income, such as dividends, royalties and interest, generally fall into the category of income. «However, given that the EU is only affected if such rules create situations of double non-taxation, income such as dividends would not be a problem as it would not apply to a deduction. That being said, the 2021 Finance Act appears to cover all types of ISPs, including foreign dividends received in Malaysia,» he said. Dividends distributed by a company resident in a Contracting State to a resident of the other Contracting State may be taxed in that other State. However, it may be taxed in the Contracting State in which the company distributing the dividends is resident.

However, if the recipient of the dividend is the beneficial owner and resident of the other Contracting State, the tax thus levied must not exceed – Indonesia has recently introduced the Omnibus Act, one of the most important changes being the introduction of a tax exemption for dividends received by Indonesian tax residents from offshore companies, subject to the reinvestment of income in Indonesia for a certain period of time and enforcement. others qualified investments. Requirements. The withholding tax on foreign dividends suffered would be attributable to Malaysian tax payable, he said. However, some tax treaties allow foreign taxes paid by subsidiaries based on their income from which dividends are paid to be part of the loan, she added. KUALA LUMPUR (13. Deloitte Malaysia hopes that certain income such as dividends from abroad, profits from foreign branches and foreign services will continue to be exempt from tax in Malaysia after Putrajaya proposed to tax income received in Malaysia (FSI) from January 1 next year. Many countries do not tax incoming dividends in accordance with their participation exemption rules, Deloitte Malaysia said.

Malaysia`s immediate neighbour, Singapore, which was not on the grey list, levies taxes on ISPs while maintaining certain exemptions for income categories (e.g. B, dividends from abroad, profits from branches or income from professional, advisory and other services), subject to compliance with certain conditions. Non-residents of Singapore are generally exempt from tax on their ISP. «In this case, both countries are entitled to taxes. To avoid double taxation of the same rent, Malaysia, as the country of residence, would grant foreign tax credits based on a prescribed formula that takes into account the taxes paid in Singapore in relation to the Malaysian tax payable. Although the Malaysian government needed to change the existing tax system to address EU concerns, many did not expect the general lifting of the ISP exemption for Malaysian residents. This is all the more true given that the EU has made it clear in its guidelines that the ISP exemption rules are not problematic in themselves and that there is concern about the «double non-taxation» circumstances that may arise with regard to the passive income of a company that has no substance in the country. Hong Kong, which applies a similar tax system to Malaysia, announced on the same day that the Grey List was published that, despite its inclusion in the Grey List, it would continue to adopt the principle of territorial source of taxation.

However, to address the EU`s concerns, it will amend its legislation by the end of 2022, and the proposed legislative changes will only target companies (not individuals) that earn passive income, especially those that do not engage in significant economic activity in Hong Kong. Malaysia is subject to the single-tier tax system. Dividends are exempt in the hands of shareholders. Corporations are not required to deduct taxes from dividends paid to shareholders, and there are no tax credits available that can be deducted from the recipient`s tax liability. Shareholders of corporations that receive dividends at an exempt tier may in turn distribute them to their own shareholders, who are also exempt from this income. The DTA provided for relief from double taxation if the income was subject to tax in both Contracting States. In the case of Malaysia, Singapore tax due on Singapore`s income is granted in the form of a credit to Malaysian tax due on that income. Malaysian tax due on income from Malaysia is granted in the form of a Singapore tax credit payable on such income. The credit thus granted may not exceed the tax of the respective country calculated before the credit.

For the purpose of calculating the credit, the tax payable does not take into account special exemptions, exemptions or subsidies granted by the respective jurisdictions and takes into account the tax due in the absence of such exemptions and reductions. In the case of dividend income paid by a Singaporean company to a Malaysian company or resident who holds at least 10% of the voting rights in the paying company, Malaysia shall take into account the Singapore tax payable by that company on its income from which the dividend is paid, but the credit shall not exceed the Malaysian tax portion: as calculated before the credit. Accordingly, in the case of a beneficiary in Singapore, a credit note equal to the Malaysian tax due by the Company on its income from which the dividend is paid will be taken into account. TFRs obtained in Malaysia may have already been taxed elsewhere. In order to counteract the double taxation of the same income, the ITA provides for facilitation in the form of (i) bilateral tax credits if the foreign country in question where the taxes were paid has concluded a double taxation agreement (DTA) with Malaysia; or (ii) unilateral tax credits if the foreign country in question where the taxes were paid does not have a permanent contract with Malaysia. Another complication of removing this tax exemption is the possibility of double taxation. If the income from abroad has already been taxed in another country, these funds must be taxed when they are transferred to Malaysia. This is possible in the form of bilateral tax credits (under double taxation avoidance agreements) or unilateral tax credits (for income from a country with which Malaysia has not signed a DTA). The repeal of the FSI exemption for Malaysian residents means that ISPs, such as dividends distributed by foreign companies, interest on foreign loans granted outside Malaysia or foreign bonds, rental income from real estate outside Malaysia and even income earned by Malaysian tax residents outside Malaysia, are subject to Malaysian income tax if they are in Malaysia on or after 1 January. shrink. 2022.

Learn more about taxes in Singapore, including tax rates, income tax system, types of taxes, and Singapore taxation in general. It is imperative that our tax reforms are in line with the country`s overall economic and financial objectives, especially at a time when the international economy is being hit hard by the pandemic. Malaysia`s tax system should be simple, easy to comply with and remain competitive in order to maintain its attractiveness for foreign investment and taxpayer confidence. These objectives must go hand in hand with our commitment to adhere to international best practices in tax matters * Applicable if the beneficiary is a company that directly owns at least 25% of the capital of the company distributing the dividends. Currently, Malaysia has a territorial tax system under which only income from Malaysia or from Malaysia would be subject to Malaysian income tax. while income from sources outside Malaysia earned in Malaysia is exempt from tax. .