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Malaysia: Tax Exemption on Foreign Sourced Income

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published on 21 January 2022 | reading time approx. 2 minutes

    
Under the Budget 2022 proposal, the Malaysian Government proposed to remove the exemption of Foreign Sourced Income (FSI) received by any person (other than a resident company carrying on business in banking, insurance or sea/air transport), which has been provided under Paragraph 28, Schedule 6 of the Malaysian Income Tax Act. The proposal to remove the Foreign Sourced Income exemption was scheduled to take effect on 1 January 2022.

     

     

On 30 December 2021, the Ministry of Finance (MoF) announced via a press release that certain FSI received from 1 January 2022 to 31 December 2026 will continue to be exempt.

  

Tax Exemption on all FSI received by resident individuals

The MoF has agreed to exempt from tax all FSI derived by resident individual taxpayers, except for resident individuals carrying on business through a partnership. Non-resident taxpayers (i.e. individuals, corporates and others) will continue to be exempted from income tax under Paragraph 28, Schedule 6 of the Malaysian Income Tax Act.

  

The tax exemption would allow individual taxpayers to remit their income back to Malaysia tax-free, and encourage them to continue to do so. This exemption is particularly beneficial for Malaysians working in Singapore but residing in Malaysia, to continue to remit their income back to Malaysia without being subject to additional income tax.

  

Tax Exemption on Foreign Dividends

Income tax exemption on dividends will be granted to companies and Limited Liability Partnerships, while individuals will be tax-exempted for all types of income, including dividend income.

  

This will support Malaysia's competitiveness and attractiveness as a regional hub, and continue to encourage more multinational entities (MNEs) to establish their headquarters and investment holding company here.

    

Tax Exemption on all FSI for Cukai Makmur (Prosperity Tax)

The MoF also announced that FSI received in the Year of Assessment (YA) 2022 is excluded from the computation of tax for the purposes of the Prosperity Tax. This announcement addresses the concerns of MNEs regarding the applicability of the Prosperity Tax at 33 percent on FSI remitted to Malaysia in YA 2022.

The above exemptions announced by the MoF will be subject to conditions which will be set out in guidelines to be issued by the Malaysian Inland Revenue Board. We will keep you updated once the guidelines have been issued.

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