CHECKING THE BOXES

Malaysia 2016 | EXECUTIVE GUIDE | REVIEW: ACCOUNTANCY

Running a company is a challenging task at the best of times, but setting up shop in a different country raises a number of challenges. A firm grasp of the basics is key to success in Malaysia.

Malaysia welcomes and encourages FDI. Apart from a few strategic industries, the government has significantly liberalized ownership restrictions in various industries over the years. Furthermore, there are no restrictions on the repatriation of profits, dividends, capital, or interest from Malaysia.

BUSINESS VEHICLES

Private limited company
The most common business vehicle in Malaysia is the private limited company. The corporate income tax rate is 25% on assessable business profits (referred to as chargeable income). This applies to both resident and non-resident companies. It is important to note that Malaysia generally adopts a territorial system of taxation, meaning Malaysia only imposes tax on income that is sourced from Malaysia. This is with the exception of Malaysian resident companies that engage in banking, insurance, shipping, or air transport, which are assessable on their worldwide income. The Income Tax Act 1967 (ITA) states that a company is considered resident in Malaysia if at any time in the year its management and control are exercised in Malaysia; the place of incorporation is irrelevant. A concessionary tax rate is given to a resident company that has a paid-up ordinary capital of MYR2.5 million or less at the beginning of the tax basis period and which is not directly or indirectly related (by more than 50% in terms of ordinary share capital) to another company that has a paid-up ordinary capital of more than MYR2.5 million (SMEs). The concessionary tax rate is 20% on the first MYR500,000 of chargeable income, with the excess taxed at 25%. The top corporate tax rate will decrease to 24% from the year of assessment 2016. SMEs will be taxed at a rate of 19% on the first MYR500,000 of chargeable income, with the balance taxed at 24%.

Although Malaysia imposes withholding tax on certain types of payments to non-residents, such as interest (15%) and royalties (10%), it does not impose withholding tax on dividends. Dividends paid by a Malaysian resident company are also exempt from income tax in the hands of the shareholders.
The income tax system in Malaysia is a self-assessment system and the Inland Revenue Board (IRB) is the authority responsible for the implementation and administration of direct taxes in Malaysia. Companies are required to file their tax returns within seven months after the end of their accounting period. The tax return is deemed to be an assessment made on the date of filing the return. Companies are required to provide an estimate of tax payable before the beginning of the tax year and make monthly instalment payments based on the tax estimate. Any balance of tax payable must be settled when filing the tax return.

Branch

A foreign incorporated company may also choose to carry on a business in Malaysia by registering a branch. The foreign incorporated company that establishes a Malaysian branch would be subject to a 25% tax rate on the profits attributable to the branch (reduced to 24% from the year of assessment 2016). A branch would generally be treated as a non-resident for tax purposes and hence the impact of the Malaysian withholding tax laws on the branch would need to be considered.

Limited liability partnership (LLP)

A LLP is another business vehicle in Malaysia and combines the features of a company and a partnership. An LLP is taxed as a company at the rates applicable to SMEs mentioned earlier. Another relatively new business vehicle, which is taxed in a similar way to a company is a Business Trust.

Partnership/sole proprietorship

Individuals can also undertake business in Malaysia via a partnership or sole proprietorship. However, note that only Malaysian citizens and permanent residents can be registered as sole proprietors and as a matter of practice, foreign individuals are not permitted to be partners in a partnership. Each partner and the sole proprietor will be taxed at their respective individual tax rates on their share of profits accruing in or derived from Malaysia.

Tax Residence & Personal Income Tax

Residents are taxed at graduated rates ranging from 0% to 26% depending on the level of their taxable income after deducting personal tax reliefs; whilst a non-resident individual, for tax purposes, is not entitled to personal tax reliefs and is taxed at a flat rate of 26%. An individual is generally considered a resident if he is physically present in Malaysia for more than 182 days in a calendar year, though there are also other residency rules to consider. Effective from the year of assessment 2015, there will be a reduction in individual tax rates of between 1-3% points in most of the chargeable income bands with a reduction in the top individual tax rate to 25% and an increase in the maximum chargeable band from MYR100,000 to MYR400,000. For non-residents, the individual tax rate is reduced from 26% to 25%. However, the 2016 Budget has proposed increased rates for the higher income group effective from the year of assessment 2016. For those earning MYR600,001 to MYR1 million, the tax rate is increased from 25% to 26%, while the rate is increased to 28% for chargeable income above MYR1 million. The income tax rate for non-residents is also increased to 28%. Individuals in Malaysia are taxed on income for the calendar year and individuals must submit their tax returns in the year following the year of assessment. For individuals carrying on a business in Malaysia, the submission deadline is June 30th; while for employees, the submission deadline is April 30th. Similar to companies, monthly withholdings (in the case of employees) and monthly instalment payments (in the case of non-employees) are made to the IRB and the individual must settle the outstanding tax liability when filing the tax return.

Tax Incentives

If a foreign investor intends to apply for any tax incentives, it is important to note that these are usually only granted to a resident company incorporated under the Companies Act 1967. Malaysia offers many tax incentives under the ITA and the Promotion of Investments Act 1986, covering a variety of industries and activities. These range from manufacturing and related services to targeted services, such as environmental management, education, and medical tourism, as well as areas such as regional services, ICT, bio-technology, and Islamic products as well as customized incentives and incentives for specific economic focus areas. To further attract multinationals to locate their operational hubs in Malaysia, Malaysia launched a brand new incentive known as the Principal Hub incentive on April 6th, 2015. For investors that use Malaysia as a base for conducting, managing and supporting their regional and global businesses, a three-tiered corporate tax rate of 0%, 5%, and 10% for 10 years will be granted based on the extent of the activities and employment and spending commitments of the company. This new Principal Hub incentive replaces the International Procurement Center, Regional Distribution Center and Operational Headquarters incentives. Companies that have completed their tax exemption period under these incentives may apply for and be granted the Principal Hub incentive.

Real Property Gains Tax (RPGT)

Malaysia has a limited form of capital gains tax, known as RPGT, that taxes gains on disposal of real property or shares in closely controlled companies with substantial real property interests. There is a proposal to make the RPGT system a self-assessment system in 2016. The RPGT rate under the Real Property Gains Tax Act 1976 ranges from 0-30% for individuals who are citizens and Malaysian permanent residents, and 5-30% for companies and individuals who are not Malaysian citizens or permanent residents, depending on the period of ownership.

Stamp Duty

Malaysia also has a transaction tax known as stamp duty that is chargeable on certain instruments and documents. The rate of duty varies according to the nature of the instruments/documents and transacted values. The more common instruments and documents subject to stamp duties include those for conveyance, assignment or transfer of shares in an unlisted company (at 0.3% of the value) or property/assets (at a graduated scale of 1-3%). Stamp duty exemptions are available in certain cases.

Labuan IBFC

Unique to the Malaysian tax and commercial landscape is Labuan, an international business and financial center (Labuan IBFC) located in East Malaysia. Labuan has a separate income tax regime under the Labuan Business Activity Tax Act 1990 that provides preferential tax treatment for Labuan-incorporated companies carrying on prescribed Labuan business activities, with income taxes at either a fixed sum of MYR20,000 or 3% of net audited profits. Income derived from wholly “non-trading" activities, such as investment holding activities, is tax-exempt. Labuan companies may alternatively elect to be taxed under the ITA.

Goods and Services Tax (GST)

In terms of indirect taxes, Malaysia introduced a broad-based tax on consumption called the GST at the rate of 6% from April 1st, 2015. The GST is similar to the VAT in other countries. The GST is a multi-stage consumption tax applicable to the taxable supply of goods and services made in Malaysia, as well as the importation of goods and services into Malaysia. GST replaced the previous sales and services tax. Input tax credits can be claimed against output tax collected on supplies of goods and services which are standard rated or zero rated. Input tax credits will, however, not be available in respect of supplies that are exempt, such as public transportation, residential property, private education and healthcare. The Royal Customs of Malaysia is the authority responsible for the implementation and administration of GST.

Tax Treaty Network

Investors may also benefit from Malaysia's extensive tax treaty network comprising 73 countries that are in force to date.