on december 302022, a press statement was issued by the Ministry of Finance (MOF) indicating that there would be tax exemption on foreign sourced dividends.
An excerpt from the press statement:
“The government has agreed to provide relaxation in taxation on foreign source income (FSI) for resident taxpayers to ensure smooth implementation of the tax initiative….
“Subject to Inland Revenue Board (IRB) norms and guidelines, income tax exemption on dividends will be given to companies or limited liability partnerships, while individuals will be tax-exempt for all types of income.”
The intention here was clearly to exempt foreign-source dividend income received in Malaysia. However, later, when IRB guidelines came out, the original intention of exempting dividends overall became restrictive with the need to adhere to stringent conditions, going against the spirit of the intention behind the press statement.
What is the problem?
In case of resident companies, LLPs and individuals deriving income through partnerships, to benefit from the exemption, they are required to comply with three conditions:
1. Dividend income is subject to tax in the country of origin;
2. The highest tax rate in the origin country is not less than 15%; And
3. The recipient must have financial resources.
Condition 2 can be easily met as the top tax rate in most countries is more than 15%.
The first condition requires the dividend income to be subject to income tax or withholding tax in the country of origin. This condition can be met if the payment is a direct payment from a foreign company to a Malaysian resident.
However, in many cases, dividends are received through companies in intermediate countries such as Singapore or Hong Kong, China, where such income received may not be subject to taxation due to local law exempting such income. As the guidelines exist, they state that dividends received from such intermediary companies will be taxable in Malaysia. This is the problem.
The guidelines go further and state that if dividends are received by an intermediate company which is exempt from tax from another company in the same jurisdiction paying taxes, and then the distribution from the intermediate foreign company to the Malaysian resident company is as per Income tax will be levied. For guidelines.
However, when it comes to individuals receiving other types of income such as employment income from a country which exempts such income from tax, or does not tax such income, the income received from the foreign country is exempt from tax. Is free.
Here, the guidelines appear to apply different standards to individuals and companies. If one is to use the analogy in exempting individuals’ foreign-source income from non-dividend sources, the spirit of implementing this exemption appears contradictory.
The third condition of the need for financial material to be possessed by the recipient makes it equally difficult to benefit from this exemption. The economic substance here probably requires staff and operating expenses associated with business activities.
What happens to passive investment holding companies? Have they been debarred from availing this relaxation because they would not be able to fulfill this condition?
Has the original intention been lost?
The way the IRB guidelines have come out, it appears that the authorities have gone back from the original intention of exempting foreign sourced dividend income by imposing stringent conditions.
the changes that need to be made
Condition 1 in particular should be revisited to implement the original intention. Here, dividend income received in Malaysia which is exempted abroad should not be taxed in Malaysia. The rationale here is to bring such income on a level playing field with the treatment given to individuals who derive other income from foreign locations, who are not subject to tax on such income.
it Article contributed by Managing Director of Thane Tax Consulting Services Sdn Bhd
SM Thanniramalai (www.thannees.com).
