Malaysia Taxation. 3.1 Taxation of funds. Dividend income. Unit trust

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1 Malaysia Taxation FUNDS AND FUND MANAGEMENT Taxation of funds Dividend income Unit trust For Malaysian taxation purposes, a unit trust (except for approved Real Estate Investment Trusts (REITs) or Property Trust Funds (PTFs)) is treated as an investment holding entity. With effect from the year of assessment 2008, a single tier income tax system has replaced the imputation system. There are transitional provisions that allow taxpayers to utilize their existing dividend franking credits up till the end of the year Under the imputation system, a Malaysian resident company is required to deduct tax at the prevailing corporate tax rate on taxable dividends paid to its shareholders. This tax is already accounted for through the tax paid by the company on its taxable profits which is accumulated as dividend franking credits (Section 108 credits). When shareholders receive taxable dividends, they are entitled to a tax credit for the tax already paid by the company in respect of the income. Those credits are then used to offset the shareholder s tax liability. Under the single tier system, profits are only taxed at the company level and dividends received by shareholders are exempt from tax. The following types of dividend income are also exempt from tax: Tax exempt dividends received from companies enjoying tax incentives (or which had previously enjoyed tax incentives) which are paid out of exempt income; or Dividend income received from sources outside Malaysia (foreign source) and remitted to Malaysia (except where the recipient is a resident company carrying on the business of banking, insurance or sea or air transport).

2 2 Malaysia Taxation Closed-end fund companies Under the single tier system, dividends received from resident companies are exempt from tax. In addition, tax exempt dividends received from companies enjoying/previously enjoyed tax incentives which are paid out of exempt income and foreign-sourced dividends received by closed end fund companies are also exempt from tax. Where the payer company pays franked dividends during the transitional period, such dividend income would be subject to tax at the prevailing corporate tax rate (unless exemption is granted to the closed-end fund company). The corresponding Section 108 credits attached to the dividends received may then be used to offset the closed-end fund company s tax liability. Approved unit trust Income of an approved unit trust would be exempted from tax pursuant to the Income Tax Exemption (No 12) Order An approved unit trust is one which is approved by the Minister of Finance where not less than 90 percent of the investments are in government securities and the remainder in commercial papers. Interest income Unit trust Interest income received is assessed and charged to tax (the prevailing rate is 25 percent) unless exemption is granted to the unit trust. The tax rate of 25 percent will also apply to, amongst others, a trust body. However, certain interest income earned from the following sources is exempt from tax: any savings certificates, issued by the government; securities or bonds issued or guaranteed by the government; debentures or Islamic securities, other than convertible loan stock, approved by the Securities Commission; Islamic securities originating from Malaysia, other than convertible loan stock issued in any currency other than Ringgit Malaysia and approved by the Securities Commission or the Labuan Financial Services Authority; Bon Simpanan Malaysia issued by Bank Negara Malaysia; interest income derived from Malaysia and paid or credited by any bank or financial institution licensed under the Banking and Financial Institutions Act 1989 or the Islamic Banking Act 1983; or

3 3 Malaysia Taxation bonds and securities issued by Pengurusan Danaharta Nasional Berhad. Foreign-sourced interest income received by the unit trust in Malaysia is also exempted from tax. Closed-end fund companies Interest income received is subject to the corporate tax rate (the prevailing rate is 25 percent) unless exemption is granted to the closed-end fund company. However, interest income received by a listed closed-end fund company from the following sources is exempt from tax: any savings certificates, issued by the government; securities or bonds issued or guaranteed by the government; debentures or Islamic securities, other than convertible loan stock, approved by the Securities Commission; Islamic securities originating from Malaysia, other than convertible loan stock issued in any currency other than Ringgit Malaysia and approved by the Securities Commission or the Labuan Financial Services Authority; Bon Simpanan Malaysia issued by Bank Negara Malaysia; bonds and securities issued by Pengurusan Danaharta Nasional Berhad. Foreign-sourced interest income received by the closed-end fund companies in Malaysia is also exempted from tax.

4 4 Malaysia Taxation Approved unit trust As highlighted in the section regarding dividend income, income (which would include interest income) received by an approved unit trust would be exempted from tax pursuant to the Income Tax Exemption (No12) Order REITs/PTFs Interest income received is assessed and charged to tax (the prevailing rate is 25 percent). However, interest income earned by the REIT/PTF from the following is exempt from tax: any savings certificates issued by the government; securities or bonds issued or guaranteed by the government; debentures or Islamic Sercurities other than convertible loan stock, approved by the Securities Commission; Islamic securities originating from Malaysia, other than convertible loan stock issued in any currency other than Ringgit Malaysia and approved by the Securities Commission or the Labuan Financial Services Authority; Bon Simpanan Malaysia issued by Bank Negara Malaysia; interest income derived from Malaysia and paid or credited by any bank or financial institution licensed under the Banking and Financial Institutions Act 1989 or Islamic Banking Act 1983; or bonds and securities issued by Pengurusan Danaharta Nasional Berhad. Foreign-sourced interest income received by the REIT/PTF in Malaysia is also exempted from tax. Rental income Unit trusts and closed end fund companies Both unit trusts and closed-end fund companies are taxed on rental income at the prevailing tax rate of 25 percent unless a specific exemption is granted to the unit trust and closed-end fund companies. However, as income of an approved unit trust is exempted from tax under Income Tax Exemption (No 12) Order 1985, rental income derived by such approved unit trust would be exempted from tax.

5 5 Malaysia Taxation REITs/PTFs Pursuant to Section 63C of the Income Tax Act, 1967 (ITA), which is the main operative section for the tax treatment on REITs/PTFs, any rental income received by the REIT/PTF would be treated as business income. Pursuant to Section 61A of the ITA, REITs/PTFs will be exempted from tax on income provided that at least 90 percent of the total income is distributed to the investors. Please see the section regarding the distribution of unitholders below. Gain from realization of investments Gains arising from the realization of investments which are capital in nature of a unit trust, closed-end fund companies, approved unit trusts and REITs/PTFs may not be subject to tax under the ITA. Effective from 1 January 2010, where chargeable assets comprising of real property or shares in a real property company are disposed of after five years from the date of the acquisition of such chargeable assets, the chargeable gains arising from the disposal of such chargeable assets will be exempt from tax. However, where the disposals of such chargeable assets are made within five years from the date of the acquisition of such chargeable assets, the gains will be subject to RPGT at an effective rate of 5 percent. Permitted expenses Unit trust Pursuant to Section 63B of the ITA, only a proportionate deduction is given for permitted expenses. The types of permitted expenses are: managers remuneration; maintenance of a register of unitholders; share registration expenses; and secretarial, audit, and accounting fees, telephone charges, printing and stationery costs, and postage. In the event that a unit trust derives rental income, a special deduction equal to 10 percent of the qualifying plant and machinery expenditure may be allowed.

6 6 Malaysia Taxation Closed-end fund companies A proportionate deduction on permitted expenses similar to that for unit trusts is extended to closed-end fund companies (Section 60H of the ITA). REITs/PTFs Pursuant to the Income Tax (Deduction for Establishment Expenditure of REIT/PTF) Rules 2006, effective from year of assessment 2006, a tax deduction is allowed on establishment expenditure incurred by the REIT/PTF in the basis period for a year of assessment. Establishment expenditure means legal, valuation, and consultancy fees for the purpose of establishing the REIT/PTF prior to approval by the Securities Commission. Where there is insufficient income to utilize the deductible expenses in the current year, any excess of expenses would not be allowed to be carried forward. Any unutilized losses of the REIT/PTF in respect of its business of rental will not be allowed to set off against any other income sources of the REIT/PTF. Distribution to unitholders/shareholders Unit trust Distributions to unitholders from exempt income are tax exempt in the hands of the unitholders. Closed-end fund companies Distributions of dividends to shareholders from exempt income comprising of gains from disposal of investments, certain interest income, and foreignsourced income of the closed-end fund are tax exempt in the hands of the shareholders. Approved unit trust Dividends received from approved unit trusts by an individual resident in Malaysia are tax-exempt.

7 7 Malaysia Taxation REITs/PTFs Pursuant to Sections 6(1)(i), 61A, 109D, and Schedule 1, Part X of the ITA: REITs/PTFs will be exempted from tax on all income provided that at least 90 percent of the total income is distributed to the investors; Non-corporate investors (such as, resident and non-resident individuals) that receive distributions from REITs/PTFs out of the above exempt income will be subject to a final withholding tax at the rate of 10 percent for the period from 1 January 2009 to 31 December 2011; Foreign institutional investors (especially pension funds and collective investment scheme funds) that receive distributions from REITs/PTFs out of the above exempt income will be subject to a final withholding tax at the rate of 10 percent for the period from 1 January 2009 to 31 December 2011; Local corporate investors will be subject to the existing tax treatment and tax rates; and Foreign corporate investors that receive distributions from REITs/PTFs out of the above exempt income will be subject to a final withholding tax at the rate of 25 percent from the year of assessment 2009 onwards. Where the 90-percent distribution is not complied with, the total chargeable income of the REITs/PTFs will be subject to income tax at the prevailing tax rate. Income of the REIT/PTF, which has been subjected to tax and not distributed in prior years to unitholders (both resident and non-resident), would be distributed to unitholders net of tax but with corresponding tax credits. The tax credits may be set off against the unitholders taxable income. No other withholding tax would be imposed on such income distribution of the REIT/PTF. Others There are registration fees imposed on the registration of a new prospectus and trust deed. There is no capital duty payable on the increase in the maximum unit size of the fund. Pursuant to the Real Property Gains Tax (Exemption) (No 4) Order 2003, chargeable gains accruing on the disposal of any chargeable assets to a REIT/PTF which is approved by the Securities Commission, are exempt from RPGT.

8 8 Malaysia Taxation There are no Malaysian transfer duties imposed on overseas securities transferred outside Malaysia. Stamp duty applies on the transfer of securities affected in Malaysia. For Malaysian securities transacted overseas, the transaction would only be deemed to take effect if the documents are properly stamped in Malaysia. Pursuant to the Stamp Duty (Exemption) (No 4) Order 2004, all instruments of transfer of real property to a REIT/PTF approved by the Securities Commission are exempted from stamp duty. In addition, all instruments of deed of assignment executed between a REIT/PTF approved by the Securities Commission and the disposer relating to the purchase of real property are also exempted from stamp duty under the Stamp Duty (Exemption) (No. 27) Order Taxation of resident unitholders/investors Unit trust A unitholder will be taxed on the amount equivalent to his/her share of the total taxable income of the unit trust, to the extent that this is distributed to him/her. A resident individual would be subject to tax in Malaysia at scale rates. The prevailing scale rates range from 1 percent to 26 percent. A corporate unitholder would be taxed at the corporate tax rate (the prevailing rate is 25 percent). Corporate unitholders with a paid-up capital of MYR 2.5 million and below will be subject to a tax rate of 20 percent on chargeable income of up to MYR 500,000. For chargeable income in excess of MYR 500,000, the prevailing rate of 25 percent is applicable. With effect from year of assessment 2009, changes have been effected to limit the applicability of the reduced tax rate even where a resident company s paid up ordinary share capital does not exceed MYR 2.5 million. Amongst other things, the reduced tax rate will not apply to a resident company with a related company whose share capital is more than MYR 2.5 million at the beginning of the relevant year of assessment. The income distribution from the unit trust will carry with it a tax credit in respect of the tax paid by the unit trust. A unitholder will be entitled to utilize the tax credit as a set off against the tax chargeable on the income distribution received by him/her. However, if the distribution is out of exempt income then such income received will also be tax exempt in the hands of the unitholder (both individual and corporate unitholders other than a company carrying on the business of banking, insurance, shipping, and air transport). A unitholder is not taxed on distributions out of gains from realization of investments by the fund. A resident unitholder is not taxed on the undistributed income or gains of the unit trust

9 9 Malaysia Taxation The taxation of gains on disposal of units in a unit trust depends on the status of the unitholder. A passive investment holder is not subject to income tax on such gains which are regarded as capital gains. There are no wealth, gift, or inheritance taxes in Malaysia. REITs/PTFs You would note that REITs/PTFs have two forms of distributions, namely that from income distributed in the same basis period and that from income that had not been distributed in prior years. The taxation of these two forms of distribution received by unitholders is outlined below. Pursuant to Sections 6(1)(i), 61A, 109D and Schedule 1 Part X of the ITA: Income of the REIT/PTF distributed in the same basis period Where 90 percent or more of the REIT/PTF s income is distributed to its investors, the total income of the REIT/PTF is exempt from tax at the REIT level pursuant to Section 61A of the ITA. Non-corporate investors (such as, individual unitholders) would be subject to a final withholding tax of 10 percent for the period from 1 January 2009 to 31 December 2011 on income received from a REIT/PTF distributed out of the above exempt income. Resident corporate unitholders would be subject to corporate tax (the prevailing rate is 25 percent) on distributions of income from the REIT/PTF to the extent of an amount equivalent to their share of the total taxable income of the REIT/PTF. Corporate unitholders with paid-up capital in the form of ordinary shares of MYR 2.5 million and below will be subject to a tax rate of 20 percent on chargeable income of up to MYR 500,000. For chargeable income in excess of MYR 500,000, the prevailing rate of 25 percent is applicable. With effect from year of assessment 2009, changes have been effected to limit the applicability of the reduced tax rate even where a resident company s paid up ordinary share capital does not exceed MYR 2.5 million. Amongst other things, the reduced tax rate will not apply to a resident company with a related company whose share capital is more than MYR 2.5 million at the beginning of the relevant year of assessment. Income of the REIT/PTF which was not distributed in the previous years Such income would have been subject to income tax at the REIT/PTF level. The income distribution from the REIT/PTF which has been subjected to tax at REIT/PTF level would carry with it a tax credit proportionate to each unitholder s (both resident and non-resident) share of the total taxable income in respect of the tax paid by the REIT/PTF.

10 10 Malaysia Taxation Both resident and non-resident unitholders would be entitled to utilize the tax credit as a set off against the tax payable by them. No other withholding tax would be imposed on the income distribution of the REIT/PTF. 3.3 Taxation of resident unitholders/investors in a foreign fund Foreign-source income (such as, dividend and interest income) received by a resident company (including closed-end fund companies but excluding companies involved in the business of banking,, insurance, or sea or air transport) or a unit trust or a resident individual is exempt from tax. Whether gains upon the disposal of units in a foreign fund are subject to tax depends on the status of the resident unitholder that is, whether he/she is regarded as trading in securities or a passive investor. A trader is taxed on all gains as the gains are viewed as income gains while for a passive investor, the gains are capital gains and not subject to Malaysian tax. The onus is on the unitholder to demonstrate that a gain is capital in nature. However, the resident unitholder may be exposed to tax in the foreign jurisdiction. There are no wealth, gift, or inheritance taxes in Malaysia. 3.4 Taxation of non-resident unit holders/investors in a resident fund Unit trust Pursuant to Section 61(1A) of the ITA, a unitholder shall be assessed and charged to tax on his/her share of the total income of the unit trust distributed to him/her by way of distributions in the basis year of that year of assessment. As mentioned in 3.1 above certain distributions are tax exempt. The unitholder receives the distributions net of tax and the attached tax credit will be allowed for set off against the tax payable on the income of the unitholder. As there is no capital gains tax in Malaysia, gains arising from the disposals of the units by non-resident unitholders are not charged to tax. REITs/PTFs Income of the REIT/PTF distributed in the same basis period Non-resident individual unitholders would be subject to a final Malaysian withholding tax of 10 percent for the period from 1 January 2009 to 31 December 2011 on income received from a REIT/PTF.

11 11 Malaysia Taxation Foreign institutional investors would be subject to a final withholding tax of 10 percent for the period from 1 January 2009 to 31 December 2011 on income received from a REIT/PTF. Foreign corporate investors would be subject to a final withholding tax at the prevailing corporate tax rate of 25 percent on distributions of income from a REIT/PTF. Non-resident unitholders may also be subject to tax in their respective jurisdictions and depending on the provisions of the relevant tax legislation and any double tax treaties with Malaysia, the Malaysian tax suffered may be creditable in the foreign tax jurisdictions. Income of the REIT/PTF which was not distributed in the previous years In relation to the distribution of income not previously exempted at the REIT/PTF level, unitholders who are not resident in Malaysia, for tax purposes, would be subject to Malaysian income tax (the prevailing rate is 25 percent for companies and 26 percent for non-resident individuals) Where the income has been subjected to tax at the REIT/PTF level, both resident and non-resident unitholders would be entitled to utilize the tax credit as a set off against the tax payable by them. No other withholding tax would be imposed on the income distribution of the REIT/PTF. There are no gift taxes, inheritance taxes, or wealth taxes in Malaysia. Malaysia does not impose taxes on undistributed income or gains at the unitholders level. Taxation of fund management/custodian companies Fund management companies and trustees are subject to corporate income tax (the prevailing rate is 25 percent) as any other resident company in Malaysia. As such, the basic principles of taxation would apply in assessing the income of fund management companies and trustees. Where a foreign fund management company carries on business in Malaysia of providing fund management services to foreign and local investors, the income derived from the provision of fund management services to foreign investors is treated as a separate and distinct business source from that source of income derived from the provision of fund management services to local investors. The chargeable income in relation to the source consisting of the provision of fund management services to foreign investors is the statutory income from that source reduced by any unabsorbed losses brought forward relating to that source. This source of income is subject to a concessionary tax rate of 10

12 12 Malaysia Taxation percent. The source of income derived from the provision of fund management services to local investors is taxed at the normal corporate tax (the prevailing rate is 25 percent). In the basis year for a year of assessment in which the foreign fund management company is a tax resident, the source of the chargeable income in relation to the provision of fund management services to foreign investors, after the deduction of the tax thereon, is credited to a tax exempt account, which can be used to pay tax exempt dividend. The Income Tax (Exemption)(No15) Order 2007 exempts from income tax, the statutory income derived by a resident company from the business of providing fund management services to foreign investors in Malaysia in respect of an Islamic fund. 3.5 Entitlement to income A unitholder in a fund is regarded as being in receipt of income only when a distribution of income is made by the fund to the unitholder. 3.6 Double tax agreements Malaysia has concluded double taxation agreements with the following countries. The number of effective double tax agreements is as follows: Albania, Republic Mongolia Argentina (2) Morocco Australia Myanmar Austria Namibia Bahrain Netherlands Bangladesh New Zealand Belgium Norway Bosnia Herzegovina (3) Pakistan Canada Papua New Guinea Chile Philippines China, People s Republic Poland Croatia Qatar Czech Republic Romania Denmark Russia Egypt Saudi Arabia Fiji Seychelles Finland Singapore France South Africa Germany Spain Hungary Sri Lanka India Sudan Indonesia Sweden Ireland Switzerland Islamic Republic of Iran (4) Syrian Arab Republic Italy Taiwan (1)

13 13 Malaysia Taxation Japan Thailand Jordan Turkey Kazakhstan (3) United Arab Emirates Korea, Republic United Kingdom Kuwait United States of America ( 2) Kyrgyz, Republic Uzbekistan Lebanese Republic Venezuela Luxembourg Vietnam Malta Zimbabwe (3) Mauritius Notes (1) Double tax relief has been given to the Taipei Economic and Cultural Office in Malaysia by way of an exemption order. Malaysia has also signed the Agreement for the Avoidance of Double Taxation with the Malaysian Friendship and Trade Centre in Taipei (MFTC). (2) Limited double tax treaty. (3) Not effective Double tax agreements under negotiation: Brazil Canada (New Agreement) Cyprus Finland (New Agreement) India (New Agreement) Laos Mexico Norway (New Agreement) Portugal Russia (New Agreement) South Korea (New Agreement) Tunisia Uruguay Ukraine 3.7 Other tax-favored vehicles Investing via Labuan The Labuan Financial Services and Securities Act 2010, which was gazetted on 11 February 2010, now governs the licensing and regulation of financial services and securities in Labuan, the establishment of an exchange and other matters relating thereto. An enactment entitled Labuan Islamic Financial Services and Securities Act 2010, also gazetted on 11 February 2010, governs the licensing and regulation of Islamic financial services and securities in Labuan and other matters related thereto. These legislation set out the regulations pertaining to amongst others, the establishment of mutual funds and fund managers.

14 14 Malaysia Taxation Tax Regime in Labuan The Labuan Business Activity Tax Act 1990 stipulates that Labuan companies involved in trading activities such as banking, insurance, trading, management, licensing, shipping operations, and any other activity which is not a Labuan nontrading activity, are given a choice of either paying tax at the rate of 3 percent on net audited profits or a lump sum of MYR 20,000 for each year of assessment. Labuan companies are provided with an irrevocable election for their income from their Labuan business activities to be taxed under the ITA, as an alternative to the existing option under the Labuan Business Activity Tax Act A Labuan company must be one incorporated or registered under the Labuan Companies Act, Subject to certain limited exceptions, the activities of the company must be carried on with non-residents or other offshore companies and in a currency other than the Malaysian Ringgit. A Labuan company carrying on a Labuan non-trading activity is not chargeable to tax. A Labuan non-trading activity means an activity relating to the holding of investments in securities, stock, shares, loans, deposits, and any other properties by a Labuan entity on its own behalf. Where a Labuan company carries on both a Labuan trading activity and a Labuan non-trading activity it will be deemed to be carrying on a Labuan trading activity. Income derived by a Labuan company from an activity which is not a Labuan business activity will be taxed under the ITA. A Labuan business activity means a Labuan trading or a Labuan non-trading activity carried on in, from or through Labuan in a currency other than the Malaysian Ringgit by a Labuan entity. 3.8 Transfer taxes, stamp duty, and capital duty Generally, there are no transfer taxes in Malaysia. Additionally, there is also no capital gains tax presently imposed in Malaysia except for capital gains arising from the disposal of real properties or shares in real property companies. A fund would be subject to stamp duty on the purchases and sales of securities in Malaysia. The stamp duty chargeable on transactions effected via contract notes on the Bursa Malaysia (the Malaysian Stock Exchange) is at the rate of MYR 1 for MYR 1,000 or fractional part of the contract value (payable by either buyer or seller), subject to a maximum of MYR 200 per contract (effective 17 March 2003). Whereas, for stocks not quoted on Bursa Malaysia, the stamp duty payable will be based on 0.3 percent of the value of the securities involved and this is normally borne by the acquirer. The basis for determining the value of those shares is as set out below:

15 15 Malaysia Taxation For cases where the sale of shares requires the approval of the Securities Commission, the price/value per share as approved by Securities Commission may be accepted for the purpose of valuation of such shares. A copy of the letter from the Securities Commission must be submitted as evidence; For cases of companies incurring losses, the par value or net tangible assets (NTA) or sale consideration whichever is the highest is to be used for the purpose of computation of the stamp duty payable. The formula for computing the value per share based on NTA is as follows: NTA per share = Total Assets-Total Liabilities Issued Share Capital For cases other than those mentioned above, a comparison is to be made between NTA, price earning multiple/price earning ratio (PER), and sale consideration, whichever is the highest. The tax implications on the purchase or sale of securities by a fund outside Malaysia would depend on the tax system of each country in which the securities are being traded. Capital duties There are no capital duties payable on the increase in the maximum unit size of the fund. In the case of a closed-end fund company which is governed by the Companies Act, the increase in authorized share capital would not attract additional capital duties. This is due to the fact that it would have already incurred the maximum capital duties payable of MYR 70,000 as a closed-end fund company is required to have a minimum issued and paid up capital of MYR 100 million (which attracts the maximum rate of duties) upon its incorporation. 3.9 Miscellaneous None KPMG in Malaysia Nicholas A. Crist KPMG Tax Services Sdn Bhd KPMG Level 10, KPMG Tower, 8, First Avenue, Bandar Utama Petaling Jaya Malaysia Tel Fax nac@kpmg.com.my

16 16 Malaysia Taxation The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.