Overview of Malaysia Taxation
Among the key issues in corporate tax law that your company will be concerned with is that, in Malaysia, a company pays income tax on the financial year ending in the year preceding that YA. For example, the basis period of a company with a financial year end of 30 June for YA 2013 is from 1 July 2011 to 30 June 2012— therefore all timelines and deadlines will have to be complied with, as well as the proper upkeep of accounts. Also, income is taxable only if it is sourced in Malaysia, i.e. accruing in or derived from Malaysia, or received in Malaysia from outside Malaysia, subject to variations. Revenue receipts are taxable, but capital receipts are not.
Taxes for Malaysia Sole Trader, Proprietor and Partnership
For all partnerships, income is to be taxed in the hands of all the partners of that partnership on such share of the partnership profit to which each of those partners are entitled, as though it were income of a trade, business, profession or vocation carried on or exercised by that partner. Therefore, the share of partnership income of each partner is subject to tax at the marginal individual tax rate of that person (or company tax rate where that partner is a company). This treatment similarly applies to Limited Liability Partnerships (LLPs) and Limited Partnerships (LPs), therefore each partner in an LLP or LP will also be taxed on his share of partnership profits at his marginal individual tax rate or at the prevailing company tax rate, as the case may be. All the above entities fall under personal tax.
Taxes for Malaysia Corporate Entities
For companies that are or have engaged in certain incentivised / desirable activities as gazetted by the Malaysia government, there are numerous concessionary tax rates, rebates and exemptions of certain types of income and expenses arising from them. Qualifying start-up companies are also exempt from tax for the first $100,000 of their chargeable income and taxed on only 50% of the next $200,000 of its chargeable income.
Malaysia Resident Companies vs. Non-Resident Companies
The Malaysia “resident” status of a company means that the control and management of the business is exercised in Malaysia, i.e. where the body holding the paramount authority on major questions of policy can really keep house and do business in. This is generally the board of directors, and because Malaysia adopts a territorial basis of taxation, income tax is levied only on income “accruing in or derived from Malaysia or received in Malaysia from outside Malaysia”, in other words, the source of the income must be in Malaysia before it can be subject to Malaysia income tax. However, if the parent country you are in has a double taxation agreement (DTAs) with Malaysia, certain types of income that has already been taxed in one state may be exempted by the other state from payment.
Thus, since the tax residence status of a company depends on where the control and management of its business is exercised, a Malaysia branch of a foreign company is not treated as a Malaysia tax resident since the control and management is vested with an overseas parent company.
The basis of taxation for a resident company and non-resident company is generally the same. However, there are some benefits that a resident company can enjoy that a non-resident would not. These include:
- benefits conferred under the Avoidance of Double Taxation Agreements (DTA) that Malaysia has concluded with treaty countries.
- tax exemption on foreign-sourced dividends, foreign branch profits, and foreign-sourced service income.
- tax exemption scheme for new Malaysia start-up companies.
Foreign Employees Working in Malaysia
If you have any foreign employees in your company, the withholding tax mechanism applies. It is basically a mechanism for the Malaysia government to collect taxes on taxable income from non-residents in a more convenient manner. For instance, a certain percentage of the final tax payable by the non-resident director remuneration must be withheld by your company before the individual is assessed and subsequently released from liability— this is especially important for your company to comply with in the event the non-resident director is being repatriated permanently to his/her country of origin and/or residency.
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