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Direct Corporate Taxation

The Ministry of Finance coordinates the Malaysian Government's tax system through the Inland Revenue Department and the Customs and Excise Department. The main taxes are income taxes on companies and individuals; indirect taxes such as sales tax, service tax, and customs and excise duties; estate and stamp duties; and real property gains tax. The Malaysian tax year is the calendar year. There is no tax on capital gains, with the exception of a tax on the gain from real property held for less than five years.

There are stamp duties and some excise duties. Sales tax at rates varying from 5% to 15% were levied on goods imported for local consumption and on locally-manufactured goods. There was also a service tax of 5% on restaurants, hotels etc.

In the 2005 budget, it was announced that the sales and service taxes would be replaced with a single consumption tax, the goods and services tax (GST). This was scheduled to take place in January 2007, but as at January 2009, the GST had not been introduced.

In September 2007, as expected, Malaysian Prime Minister Abdullah Ahmad Badawi announced another 1% cut in the rate of corporate tax in the budget. In addition, he announced a slew of other tax measures designed to boost investment, notably in the area of Islamic finance.

In July of that year, Second Finance Minister Nor Mohamed Yakcop revealed that the government would press ahead with its corporate tax cutting programme, shaving an additional percentage point off of the rate in 2009 to 25%, a pledge that Abdullah duly delivered on in his budget speech.

This continued a rolling programme of corporate tax cuts announced the previous year by the Prime Minister.

Abdullah also announced a generous package of tax breaks for the investment industry in an attempt to consolidate and build upon Malaysia's position as one of the leading centres for Islamic finance.

As a result of the budget measures, fund management companies were to be given income tax exemption on all fees received for Islamic fund management activities until the 2016 year of assessment.

Special rules apply to Labuan offshore entities

Although Malaysia itself is not regarded as a low-tax jurisdiction, in addition to Labuan it does have a number of tax-friendly incentive regimes.

Labuan Scope of Income Tax

A company, regardless of its place of incorporation, is a tax resident if it is at any time during a tax year managed and controlled in Malaysia. Generally, a company is deemed to be managed and controlled in the place where its directors' meetings are held. Malaysian residents are taxed on Malayasian-source income and on foreign income remitted to Malaysia, ie it is a territorial basis of taxation. For nonresidents, only Malaysian-source income is taxable.

Income taxable in Malaysia includes:

  • gains and profits from employment;
  • gains and profits from trade, profession and business;
  • dividends, interest or discounts;
  • rents, royalties or premiums;
  • pensions, annuities or other periodic payments; and
  • other gains or profits of an income which nature is not mentioned above.

Income from the exploration and discovery of petroleum is subject to 38% petroleum income tax instead of regular income tax.

Malaysia generally does not tax foreign-source income; thus no foreign tax relief is available. However, banking, insurance, shipping and air transport are taxed on their world-wide income, and they may claim foreign tax credits.

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Labuan Rates of Income Tax

Prior to the introduction of the rolloing tax reduction programme, income tax was imposed at the rate of 28% on chargeable income for resident companies.

A non-resident company paid 28% on chargeable income from Malaysian sources other than:

  • Interest: 15%
  • Royalties 10%
  • Technical fees 10%
  • Payments for use of movable property 10%
  • Payments to Nonresident Contractors 20%
  • Branch Remittance Tax nil

In September 2006, Malaysia's Prime Minister Abdullah Ahmad Badawi unveiled the aforementioned package of tax cuts, including a corporate tax cut and tax breaks for businesses across a number of economic sectors.

The corporate tax rate has subsequently been reduced year-on-year, to 27% in 2007, 26% in 2008, and 25% in 2009.

Additionally, in May 2007, it emerged that the Malaysian Finance Ministry was working with the financial authorities of Labuan to establish a new tax structure aimed at attracting more companies to the Labuan International Offshore Financial Centre (IOFC).

Speaking at the release of the Labuan Offshore Financial Services Authority (Lofsa) annual report for 2006, Tan Sri Dr Zeti Ahktar Aziz, Bank Negara Governor and Lofsa chairman, said that new tax initiatives would be included in the 2008 budget, due to be announced in September 2007, along with new company forms to better cater for the requirements of offshore investors.

"With the new incentives, LOFSA will be able to compete with other offshore centres in the Asia-Pacific region and the world," Zeti told reporters.

“We want to be competitive and relative to other offshores as the environment is changing very significantly," she added.

In September 2007, the measures were unveiled by the Prime Minister.

Abdullah stated in his 2008 budget speech that in future, companies registering in the Labuan offshore sector would have the option of having their offshore business income taxed under the Income Tax Act 1967, in addition to under the Labuan Offshore Business Activity Tax Act 1990.

"In the light of greater global competition, we need to ensure that Labuan remains competitive as an international offshore financial centre. Given that investors in Labuan undertake a wide range of financial services, a flexible tax regime is necessary," the Prime Minister explained.

The Labuan Offshore Business Activity Tax Act 1990 (as amended 2004) provides for the reduction or complete exemption of income tax in respect of certain business activities carried on by offshore companies in Labuan. Chargeable profits derived by an offshore company from an offshore trading activity are subject to tax at a rate of 3%. An offshore company which carries on an offshore non-trading activity is exempt from income tax altogether.

The Income Tax Act 1967 applies to any activity other than offshore business activity carried on by an offshore company, meaning that they pay normal taxes.

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Labuan Development Tax

Development tax has traditionally been payable at the rate of 4% on net income from business or property rental sources, defined as a source consisting of a business or the letting of property situated in Malaysia, including royalties from patents and copyrights registered in Malaysia.

The Government will abolish this tax in stages.

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Labuan Calculation of Taxable Base

Expenses which are incurred wholly and exclusively in the production of income are deductible for the purposes of determining chargeable income.

Allowable deductions include the following:

  • interest on loans, rental payments, expenses for repairs of premises, plant and equipment or fixtures or for the renewal, repair or alteration of equipment employed in the production of income;
  • irrecoverable trade debts which are specifically identified;
  • a justifiable share of regional or head office revenue expenses for non-resident companies;
  • legal expenses incurred in debt collection and renewal of lease of premises; and
  • capital allowances for fixed assets at pre-determined rates.

Business losses may be set off against income derived in the year in which the loss is incurred and may be carried forward, but not back.

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Labuan Filing Requirements and Payment of Tax

The year of assessment is the calendar year. Income tax is chargeable on income earned in the year of assessment.

A self-assessment system was introduced in 2001. Companies have to file their tax returns within six months after the end of their accounting period. A tax return will be deemed to be an assessment made on the date of filing the return.

Under the old rules, estimated tax was generally payable in five equal installments, with the first payment due in January or February of the year of assessment.

From 2001, companies have been obliged to provide an estimate of their tax payable no later than 30 days before the beginning of their accounting period. The estimated tax is payable in equal monthly installments by the 10th day of each month beginning in the second month of the accounting period. Any balance of tax due must be paid by the end of the sixth month following the end of their accounting period.

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Labuan Real Property Gains Tax

Capital gains are generally not subject to tax in Malaysia. Real property gains tax is charged at varying rates on gains arising from the disposal of landed property or of interests in or over such property, as well as the disposal of shares in a property company as defined in the Act.

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Labuan Withholding Tax

A resident company paying dividends must deduct income tax at the current rate; however, a full imputation system is in operation. If the company has paid sufficient income tax on its own income, past or present, it may retain the tax deducted. Otherwise, the tax deducted must be paid to the government.

A non-resident company may distribute after-tax profits without incurring any additional liability. The tax deducted by the company satisfies the Malaysian tax liability of a nonresident shareholder; in the case of a resident shareholder, the credit is applied toward the shareholder's tax liability.

Dividends paid out of tax-exempt foreign income may be paid without deduction of tax.

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