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Malaysia: Domestic Corporate Taxation

Introduction

Malaysia is a reasonably tax friendly jurisdiction. There are no annual wealth taxes, no estate duties, no gift taxes, no accumulated earnings tax, no federal (as opposed to national) income tax, no controlled foreign company legislation, no thin capitalization rules (yet) and no transfer pricing rules (although the tax authorities will apply normal transfer pricing principles to related party transactions). Moreover capital gains tax when levied is only levied in very limited circumstances. In addition, Malaysia offers a number of attractive incentives and special regimes, linked from below.

In September, 2006, then Prime Minister Abdullah Ahmad Badawi announced a package of tax cuts, including a 2% corporate tax cut and tax breaks for businesses across a number of economic sectors, as the government attempts to boost the nation's competitiveness.

Tabling his third budget as Prime Minister and Minister of Finance, Abdullah announced that the corporate tax rate was to be cut to 27% in 2007, followed by an additional one-percentage-point cut in 2008 and 2009. The rate for 2010 is 25%.

"Although this measure will result in a significant reduction in revenue, the government is confident that it will have a positive overall effect on the economy," he stated. Although it is Asia's third largest economy, Malaysia's corporate tax rate compares unfavourably to other economic powers in the region, particularly Singapore and Hong Kong.

The 2008/9 budget concentrated on improving the tax system for Islamic finance, including substantial tax breaks for Islamic bonds, or Sukuk.

The Finance Act 2008 also contained further measures to expand tax incentives including for luxury hotels and environmetally-friendly and energy-saving projects.

The 2009 budget directed the Inland Revenue Department to formulate new rules on thin capitalization. The new rules were effective from January 1, 2009.

The March 2009 fiscal stimulus package contained measures that would enable companies in Malaysia to carry back losses, which was previously not permitted.

In August 2009, Prime Minister, Najib Razak, opened Malaysia’s first Special Economic Zone (SEZ) in the East Coast Economic Region (ECER). Through the SEZ’s special incentives, it is hoped to attract MYR90bn (USD26bn) in domestic and international investments by 2020, and to create more than 220,000 new job opportunities.

In September 2009, The Securities Commission Malaysia (SC) released new Venture Capital Tax Incentives Guidelines (VC Tax Incentives Guidelines), to incorporate the new tax incentives for the venture capital industry as stipulated in the Income Tax (Exemption)(Amendment) Order 2009 (Tax Order 2009).

Under the Tax Order 2009, venture capital companies (VCCs) registered with the SC are eligible for tax exemption for five years of assessment subject to them investing at least 30% of their invested funds in the form of seed capital, start-up and/or early stage financing in qualified investee companies. Application for this exemption must be submitted to the SC by December 31, 2013.

 

 

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