5. Taxation

A. Introduction

Two broad types of taxes, namely direct and indirect taxation, are imposed in Malaysia. Responsibility for administering direct taxation lies with the Director General of Inland Revenue Board, while indirect taxation is administered by the Director General of the Royal Customs and Excise Department.

Tax revenue is a main source of income for the government of Malaysia. The governing legislation of Malaysian income tax is the Income Tax Act 1967 and the Labuan Business Activity Tax Act 1990 (LBATA).

B. Tax System

In addition to income tax, stamp duty and indirect taxes such as sales tax, service tax, excise duty, import duty, and export duty are also collected. There are no gift, inheritance or estate taxes in Malaysia. There is no capital gains tax, and gains from disposal between 1 April 2007 and 31 December 2009 of either real property situated in Malaysia or shares in closely controlled companies with substantial real property interests are also exempted from tax. From 1 January 2010 onwards, however, an effective tax rate of 5 per cent applies to gains made from the disposal of Malaysian real property.

Income of a trust estate is taxed only once, in the hands of the beneficiary or in the hands of a trustee, but not both. Trusts are deemed resident in Malaysia for a basis year if any trustee of the trust is resident in that basis year. If no trustee is resident in Malaysia, the trust is a non-resident. Trusts are also deemed non-resident if created outside Malaysia by an individual who at the time of the creation of the trust was not a citizen of Malaysia, if trust income for the relevant basis year was derived entirely from sources outside Malaysia, if administration for the whole basis year was outside Malaysia, and if at least half of the trustees were not resident in Malaysia in the relevant basis year. A trust is deemed not to be created in Malaysia if it is drawn up in accordance with a foreign law and is administered outside Malaysia.

Income derived by a trust from sources in Malaysia is subject to tax under the Income Tax Act 1967.

With effect from 11 February 2010, the Labuan Offshore Business Activity Tax Act 1990 was amended to change its title to the LBATA. The LBATA governs the taxation of income derived by a Labuan trust from carrying on Labuan business activities in or from Labuan. Subject to conditions, a Labuan business activity includes a Labuan trading or a Labuan non-trading activity carried on in, from or through Labuan in foreign currency, by a Labuan entity with non-resident or with another Labuan entity.

Non-trading income derived by a Labuan trust from carrying on a Labuan business activity is not subject to tax. On the other hand, income derived from carrying on Labuan business activities that include Labuan trading activities will be subject to tax at either 3 per cent of the audited profits or a sum of MYR20,000.

One of the significant changes introduced by the LBATA include allowing Labuan foundations and Islamic trusts to enjoy similar attractive tax rates (see above paragraph) for trading activities conducted in or from Labuan. Another notable change is the introduction of an advance tax ruling system which allows any person to apply to the Director General of Inland Revenue Board for a ruling on the tax treatment of a particular arrangement that involves a Labuan entity.

C. International

As of June 2010, Malaysia has signed double taxation treaties with 69 countries. As Labuan is part of Malaysia it is entitled to utilise the DTA network, although sometimes countries have sought to exclude Labuan from certain of the benefits of DTAs. Practitioners should check the situation in each case to verify the particular scope of treaty access through Labuan.


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