Foreign Source Income
Background
In Budget 2022 (29 October 2021), Government of Malaysia has announced tax imposition on income derived from sources outside Malaysia and received in Malaysia by resident person.
This announcement was implemented though Finance Act 2021, with effective 1 January 2022.
Tax Law and Regulations
- Paragraph 28, Schedule 6 of Income Tax Act 1967 (“the Act”), was amended:
“The income arising from sources outside Malaysia and received in Malaysia by any person who is not resident in Malaysia.” - Prior to that, the Act was read as:
28(1): “Income of any person, other than a resident company carrying on the business of banking, insurance or sea or air transport, for the basis year for a year of assessment derived from sources outside Malaysia and received in Malaysia.” - IRBM Guideline: Tax Treatment in relation to Income Received from Abroad (Amendment), 29 December 2022
- Income Tax (Exemption) Order 2022 [P.U. (A) 96/2022], 1 April 2022
- Income Tax (Exemption) (No.5) Order 2022 [P.U. (A) 234/2022], 18 July 2022
- Income Tax (Exemption) (No.6) Order 2022 [P.U. (A) 235/2022], 18 July 2022
Application
- With effective from 1 January 2022, generally all types of income which derived from sources outside Malaysia (hereinafter refers to as “foreign source income (“FSI”) and received in Malaysia by resident person is subject to tax.
- The foreign income is made reference to Section 4 of the Act, as below:
- Gains or profits from a business;
- Gains or profits from an employment;
- Dividend, interest or discounts;
- Rent, royalty or premium;
- Pension, annuity or periodic payments; and
- Other income other than (a) to (e) above.
This means, foreign income from any of above sources which is derived from outside Malaysia and received in Malaysia, is subject to tax.
- Foreign income received in Malaysia which has been taxed by other jurisdiction either through withholding tax or income tax, can claim bilateral or unilateral tax credit.
- The tax credit for a year of assessment must be claimed within two years after the end of that year of assessment.
- Any claim for bilateral credit for a year of assessment must be made in writing to Director General of Inland Revenue.
- Tax rate on FSI
Period Tax Rate Foreign Tax as a Relief 1 January 2022 to 30 June 2022 3% from gross income No 1 July 2022 onwards Prevailing tax rate Yes Following prevailing tax rate apply on FSI received on or after 1 July 2022:
Income tax rate Resident individual - Chargeable income ≤ RM 2 million
0% – 28% - Chargeable income > RM 2 million
30% Company & LLP - Paid up capital ≤ RM 2.5 million;
Gross business income ≤ RM 50 million
Chargeable income
First RM 600,000
Excess
17%
24%- Others
24% - Exemption
Tax exemption granted on FSI received in Malaysia from 1 January 2022 to 30 June 2026.Taxpayer’s Category Types of Tax-Exempt Income Qualifying Conditions Company incorporated or registered under the Companies Act 2016 Limited liability partnership (“LLP”) registered under the Limited Liability Partnerships Act 2012
Individual partner (in relation to a conventional partnership business in Malaysia)
Dividend i) The dividend income has been subjected to tax in the country of origin; ii) The highest tax rate (headline tax) in the country of origin is not less than 15%;
iii) Comply with the economic substance requirements.
Individual All types of income other than partnership income The income has been subjected to tax in the country of origin. - Tax Reporting
FSI received must be reported as prescribed below:Period of FSI received Form or Tax Return 1 January 2022 – 30 June 2022 Prescribed form, submit by 31 July 2022 1 July 2022 onwards Tax return for respective year of assessment
Contentious Tax Issue
Based on your understanding, are following transactions subject to tax under FSI?
| No. | Transactions | Yes / No |
| 1 | Payment by overseas trade debtors on payment for goods and/or services. | |
| 2 | Individual working in Singapore bring money back into Malaysia. | |
| 3 | Parents in Malaysia received money from children staying overseas. | |
| 4 | Interest income credited by overseas bank. | |
| 5 | Loan or advances from related companies outside Malaysia (non-resident) into Malaysia. | |
| 6 | Gains on realisation from disposal of overseas investment. |
Any questions, please feel free to reach us.
