ON DEC 30, 2022, there was a press assertion issued by the Ministry of Finance (MoF) which indicated that foreign-sourced dividends might be tax exempt.
An excerpt from the press assertion:
“The federal government has agreed to exempt taxation on foreign-source revenue (FSI) for resident taxpayers to make sure the graceful implementation of the tax initiative ….
“Topic to Inland Income Board (IRB) standards and tips, revenue tax exemption on dividends might be given to firms or restricted legal responsibility partnerships whereas people might be tax-exempted for all sorts of revenue.”
The intention right here was clearly to exempt foreign-sourced dividend revenue obtained in Malaysia. Nonetheless, subsequently, when the IRB tips got here out, the unique intention of exempting dividends in totality seems to have been restricted with the requirement to adjust to the stringent circumstances which appears to be going in opposition to the spirit of the intention behind the press assertion.
What’s the drawback?
Within the case of resident firms, LLPs and people receiving revenue by means of partnerships, to profit from the exemption, they’re required to adjust to three circumstances:
1. The dividend revenue has been subjected to tax within the nation of origin;
2. The very best tax charge within the nation of origin is just not lower than 15%; and
3. The recipient has to have financial substance.
Situation 2 can simply be met as a result of the very best tax charge in most international locations is greater than 15%.
The primary situation requires dividend revenue to be topic to revenue tax or withholding tax within the nation of origin. This situation may be glad if the fee is a direct fee from the international firm to the Malaysian resident.
Nonetheless, in lots of circumstances, dividends are obtained by means of firms in intermediate international locations, equivalent to Singapore or Hong Kong, China, the place such revenue obtained will not be topic to taxation resulting from native laws exempting such revenue. As the rules stand, they state that dividends obtained in Malaysia from such intermediate firms might be taxed. That is the issue.
The rules go additional and state that if the dividends are obtained by an intermediate firm which is exempt from tax from one other firm in the identical jurisdiction paying taxes, and thereafter the distribution from the intermediate international firm to the Malaysian resident firm will appeal to revenue tax in response to the rules.
Nonetheless, with regards to people receiving different forms of revenue equivalent to employment revenue, from a rustic which exempts such revenue from tax, or doesn’t impose tax on such revenue, the revenue obtained from the international nation is exempt.
Right here, the rules seem like making use of totally different requirements to people and corporations. If one is to make use of an analogy in exempting people’ foreign-sourced revenue from non-dividend sources, the spirit of making use of this exemption appears to be contradictory.
The third situation of requiring the recipient to have financial substance makes equally tough to profit from this exemption. Financial substance right here requires having staff and working expenditure with probably enterprise actions.
What occurs to passive funding holding firms? Are they excluded from benefiting from this exemption as a result of they received’t have the ability to meet this situation.
Is the unique intention misplaced?
From the way in which the IRB tips have come out, it seems that the authorities have backtracked from the unique intention of exempting foreign-sourced dividend revenue by imposing stringent circumstances.
Modifications that have to be made
Situation 1 specifically ought to be relooked to implement the unique intention. Right here, such dividend revenue obtained in Malaysia which has been exempted within the international nation shouldn’t be taxed in Malaysia. The rationale right here is to carry such revenue into the extent enjoying subject with the therapy accorded to people who obtain different revenue from international areas which don’t topic such revenue to tax.
This article is contributed by Thannees Tax Consulting Companies Sdn Bhd managing director
SM Thanneermalai (www.thannees.com).