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A Guide To Business Taxation In Malaysia For Foreign Investors

Introduction

Foreign investment in Malaysia has been on the rise in recent years, thanks to the country’s strategic location, stable economy, and business-friendly policies. However, like any other country, Malaysia has its own taxation system that foreign investors must navigate. In this comprehensive guide, we will delve into the intricacies of taxation for foreign investors in Malaysia, covering key aspects such as types of taxes, tax rates, incentives, and compliance requirements.

To effectively invest in Malaysia, foreign investors need to understand the country’s taxation system. Malaysia employs a territorial taxation system, which means that only income earned within Malaysia’s borders is subject to taxation. Income generated outside of Malaysia is typically not taxed in the country. This principle helps create an attractive investment environment for foreign businesses.

Business Taxation in Malaysia: Types of Taxes

Determining tax resident status for companies involves several criteria that vary from one jurisdiction to another. The key factors commonly considered include the registered office, place of management and control, incorporation, and the duration of presence in a particular jurisdiction. 

Malaysia imposes various taxes, and foreign investors should be aware of the following key tax types:

  • Income Tax: Malaysia levies income tax on both individuals and corporations. For individuals, tax rates are progressive, ranging from 0% to 30%. Corporations are subject to a flat rate of 24% on chargeable income. However, certain industries or entities may enjoy preferential tax rates.
  • Sales and Services Tax (SST): Malaysia previously had a Goods and Services Tax (GST) system, but it was replaced by the Sales and Services Tax (SST) in 2018. SST is a consumption tax, and it applies to specific goods and services.
  • Withholding Tax: Foreign individuals or entities that derive income from Malaysia may be subject to withholding tax. The rates vary depending on the type of income and the country of residence of the recipient.
  • Real Property Gains Tax (RPGT): RPGT is a tax on the gains from the disposal of real property in Malaysia. The rates are progressive, with lower rates for properties held for longer periods.
  • Stamp Duty: Stamp duty is imposed on various instruments, including agreements and documents related to property transactions, loans, and securities.
  • Customs Duties: Import and export duties are applied to certain goods, and rates may vary based on trade agreements and the type of goods.

Tax Incentives for Foreign Investors

To attract foreign investment, Malaysia offers a range of tax incentives and exemptions, including:

  • Pioneer Status: Foreign-owned companies in specific industries may be granted pioneer status, which provides substantial tax exemptions for a specified period.
  • Investment Tax Allowance (ITA): Companies engaged in promoted activities can enjoy ITA, which allows for the deduction of a percentage of qualifying capital expenditure against taxable income.
  • Reinvestment Allowance: A resident company in operation for at least 36 months that incurs capital expenditure to expand, modernise, automate, or diversify its existing manufacturing business or approved agricultural project is entitled to reinvestment allowance.
  • Double Taxation Agreements (DTAs): Malaysia has signed DTAs with numerous countries to prevent double taxation. These agreements often provide reduced withholding tax rates on various types of income.
  • Special Economic Zones: Certain zones in Malaysia, such as the Iskandar Malaysia (Johor) region, offer tax incentives to attract foreign investments.

Compliance Requirements For Business Taxation in Malaysia

Complying with Malaysian tax regulations is essential for foreign investors to avoid legal issues and penalties. Here are some compliance requirements to keep in mind:

  1. Registration: Foreign investors must register their businesses with the relevant authorities, such as the Companies Commission of Malaysia (SSM) or the Inland Revenue Board of Malaysia (IRB).
  2. Filing Tax Returns: Individuals and corporations must file annual tax returns by the stipulated deadlines. Failure to comply can result in penalties.
  3. Record Keeping: Maintain thorough and accurate records of financial transactions and documents. These records will be necessary for auditing purposes.
  4. SST Compliance: If applicable, ensure compliance with SST regulations, including timely filing of returns and payments.
  5. Seek Professional Advice: Given the complexity of Malaysian tax laws, it is advisable for foreign investors to seek the services of tax professionals or consultants who are well-versed in Malaysian taxation.

Criteria

Residents

If any foreigner has stayed and worked in Malaysia for more than 182 days during the calendar year, he/she has a resident status and will fall under the normal Malaysian tax laws that are also applicable to the native population.

Non-Resident

Foreigners are regarded as non-residents under Malaysian tax law if they stay less than 182 days in Malaysia in a year, regardless of their citizenship or nationality.

Foreigners Income will not be taxable for the following reasons: –

  • Employed in Malaysia for less than 60 days
  • Employed on board a Malaysian ship
  • Age 55 years old and receiving pension from Malaysian employment
  • Receiving interest from banks
  • Receiving tax-exempt dividends

Conclusion 

Navigating Malaysia’s taxation system as a foreign investor may seem daunting, but with a clear understanding of the types of taxes, available incentives, and compliance requirements, you can successfully establish and grow your business in this thriving Southeast Asian nation. Keep in mind that tax regulations can change, so staying informed and seeking professional guidance is crucial for long-term success in Malaysia’s business landscape. By adhering to the tax laws and taking advantage of available incentives, you can make the most of your investment in this dynamic and welcoming country.