Jurisdictional factfile: Malaysia

  • Date : January 2009

Malaysia is an independent federation consisting of two geographical regions separated from each other by the South China Sea: Peninsula Malaysia (or West Malaysia) and East Malaysia, comprising Sabah, Sararwak and the Federal Territory of Labuan. The currency is the Malaysian ringgit (MYR).

Malaysia has three parallel systems of law, each with its own hierarchy of courts:

  • Malaysia’s constitutional, administrative, criminal and commercial laws are based on common law. Common law courts consist of subordinate courts, two High Courts, the Court of Appeal and the Federal Court. The Federal Court is the final court of appeal.
  • The second of Malaysia’s three legal systems is the Islamic law system. The primary source of Islamic law is the Quran. Islamic law is applied only to Muslims and administered by the Syariah Courts. Each state has its own Syariah Courts.
  • Malaysia’s legal system also includes a native law system, applied in the states of Sabah and Sarawak and applicable only to natives (a legally defined status).

Malaysian law consists of both statute and case law. Malaysian legislation comprises the Federal Constitution, Federal Acts of Parliament, subsidiary legislation, ordinances and delegated legislation of the various states.

The general law is based on judicial precedent. Where there is no written law in force in Malaysia, the court will apply the common law of England and rules of equity as administered in England by virtue of the Civil Law Act 1956. Trust creation and administration

The primary sources of Malaysian trust law are the Federal Constitution, local legislation, local cases and local customs, and to the extent that the law is similar, cases from Singapore and other common law jurisdictions.

The principal statute governing trustees of domestic trusts is the Trustee Act 1949. The Trust Companies Act 1949 provides for registration and regulation of trust companies in domestic Malaysia

Trusts created offshore in Labuan are governed by the Labuan Offshore Trusts Act 1996. Labuan trust companies are governed by the Labuan Trust Companies Act 1990, as amended 2003. Trusts made by Muslims follow rules of the English law of trusts. Although Muslims can dispose of all of their estate under inter vivos trusts, they cannot dispose of more than one third of their estate by will.

Wills and probate

The Wills Act 1959 applies to wills made by non-Muslims domiciled in Malaysia (except Sabah). The Wills Ordinance 1953 applies to wills made by non-Muslims domiciled in Sabah.

The principal statutes governing intestate succession of non-Muslims are the Distribution Act 1958 (applying to West Malaysia and Sarawak) and the Intestate Succession Ordinance 1960 (applying to Sabah).

The principal act governing probate and administration in Peninsula Malaysia is the Probate and Administration Act 1959 and in Sabah and Sarawak, the Probate and Administration Ordinance (Sabah) and the Probate and Administration of Estates Ordinance 1948, respectively.

The Inheritance (Family Provision) Act 1951 is the principal statute setting out the basis of an application to court for reasonable provision to be made for maintenance of a deceased’s spouse or children.Taxation

Two broad types of taxes, namely direct and indirect taxation, are imposed in Malaysia. The governing legislation of Malaysian income tax is the Income Tax Act 1967 and the Labuan Offshore Business Activity Tax Act, 1990.

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 after 31 March 2007 of either real property situated in Malaysia or shares in closely controlled companies with substantial real property interests are also exempted from tax.

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 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 a flat rate of tax of 27 per cent. However, distribution made by an offshore trust is not subject to income tax in the hands of the beneficiary.

The Labuan Offshore Business Activity Tax Act, 1990 governs tax of offshore income derived by an offshore trust. Offshore non-trading income of an offshore trust is not subject to tax provided that the offshore trust does not have any offshore trading income. Offshore income from offshore business activities that include offshore trading will be subject to tax at either three per cent of the audited profit or a sum of MYR20,000.

Malaysia has signed double taxation treaties with 68 countries.

Awaited reform in Labuan

A major consolidation and reform of the financial services legislation in Labuan has been proposed for enactment in March 2009. Among the proposals are amendments to the Labuan Trusts Act. Suggested changes would provide for managed trust companies and exemption for private trust companies; allow reservation by a settlor of certain powers; permit purpose trusts; allow for the duration of trusts to be unlimited and for trustees to subsequently fix a limit or shorten a fixed limit; allow Malaysians to be settlors and beneficiaries of Labuan trusts so long as the Labuan trust assets are foreign assets; and permit Malaysian properties to constitute Labuan trust assets where the settlors are foreign. There is also a proposed new Labuan Foundations Act.


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