BDO Corporate Tax News

On 12 June 2024, the Malaysian government amended the rules for the foreign dividend income tax exemption by expanding the list of persons qualifying for the exemption and restructuring the relevant conditions, and the tax authorities issued guidance on the new rules on 20 June. The tax exemption period remains unchanged from 1 January 2022 to 31 December 2026.

Before the amendment, a qualifying person is a Malaysian tax resident that is:

• A company incorporated or registered under the Companies Act 2016;
• A limited liability partnership registered under the Limited Liability Partnerships Act 2012; and
• An individual who receives foreign dividend income through a partnership business in Malaysia.

This list has been expanded to include a company incorporated under the Labuan Companies Act 1990 that has made an election to be charged to income tax on its Labuan business activities. This change applies retroactively as from year of assessment 2022.

The conditions to qualify for the tax exemption are restructured as follows:

• The taxpayer must comply with the participation exemption requirements (i.e., the dividend income has been subject to income tax in the territory which the income arises and the headline corporate tax rate in that territory is not less than 15%); or
• The taxpayer must comply with the economic substance requirements.

Previously, both the participation exemption and the economic substance requirements had to be met for a qualifying person to be given the tax exemption. The restructuring of the qualifying conditions is effective retroactively as from 1 January 2022.

It has also been clarified that the foreign headline corporate tax rate refers to the highest corporate tax rate of the territory in which the income arises in the year the dividends are subject to withholding tax or received in Malaysia.

Further clarification is provided on the economic substance requirements. A qualifying person is regarded as having economic substance if, to carry out the specified economic activities in Malaysia, it employs an adequate number of employees with the necessary qualifications and incurred an adequate amount of operating expenditure. No minimum threshold is specified – this will depend on the facts of the case. “Specified economic activities” refers to:

Other clarifications relating to the economic substance requirements are that a director who is employed under a contract of service can be considered an employee and outsourcing of specified economic activities by a qualifying person to another entity is permitted subject to the following conditions:

• The specified economic activities are carried out by the other entity in Malaysia;
• The qualifying person exercises adequate monitoring and control of the other entity’s carrying out of the specified economic activities;
• The other entity is generally expected to charge the qualifying person a fee for the specified economic activities performed, subject to the application of the transfer pricing rules;
• The number of qualified employees employed and the amount of operating expenditure incurred by the other entity in Malaysia are in line with the level of specified economic activities carried out by that entity; and
• If the other entity provides services to more than one qualifying person, the expenditure is apportioned accordingly.

David Lai
BDO in Malaysia