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Tax Update: Statutory Income Exemption on Shipping Profits

The Income Tax Act of 1957 (ITA) was changed on 9th February 2012 by the Finance Act of 2012, which reduced Section 54A’s 100% income tax exemption on statutory income earned from the operation of Malaysia ships to 70%. Regarding the taxes on Malaysia Ships, additional regulations were also made such as the necessity of treating each ship as a separate business source. The Ministry of Finance (MoF) decided to postpone the elimination of the tax exemption and the implementation of the new regulations after consulting with numerous stakeholders.


In exercise of the powers conferred by paragraph 127(3)(b) of the Income Tax Act 1967, the Minister makes Income Tax (Exemption)(No.7) Order 2022 which was gazette on 6th Oct 2022.


From the year of assessment 2021 to the year of assessment 2023, the exemption from income tax on statutory income received by the person on a Malaysian ship has been extended for an additional three years.


Under Section 54A(1) of the ITA 1967, where a person who is resident in Malaysia for a basic year for a year of the assessment carries on the qualifying business of:-

  1. Transporting passengers or cargo by sea on a Malaysian Ship.

  2. Letting out on charter a Malaysian Ship owned by him on a voyage or time charter basis.

According to the Order, a resident of Malaysia who engages in the business of conveying goods or passengers by sea aboard a Malaysia ship or who charters a Malaysian ship that belongs to him on a voyage or time charter basis is exempt during the basis period for one year of assessment from:

  • The provisions of subsections 54A(1) and (2) of the Act; and

  • The Payment of income tax in respect of the statutory income derived from a source of business consisting of Malaysian ships

The qualified person is required to acquire annual verification from the Ministry of Transport Malaysia that the following conditions have been satisfied to be eligible for the exemption:

a. Engage in annual running expenses for each Malaysian ship of at least RM 250,000.

b. Has several full-time employees in Malaysia for each Malaysian ship

  • In the case of shore employees, a minimum of 4 Malaysian citizens should have the majority of these qualifications:

- A chief executive officer

- An administrative and finance officer

- An operating officer

- And the officer in charge of health, protection, safety, and environmental affairs.

  • The minimum requirement as stipulated in the Safe-Manning Certificate issued by the Marine Department Malaysia shall apply to employees who are ship personnel as defined in Part III of the Merchant Shipping Ordinance 1952 [Ord.70/1952].


From the year of assessment 2021 through the year of assessment 2023, the statutory income from a person’s business that involves transporting people or goods by sea on a Malaysian ship or engaging in the qualifying business of chartering a Malaysian ship that belongs to him on a voyage or time charter basis shall be exempt from taxation for the person’s resident base year.


Nothing in this Order is intended to relieve the qualified person of their obligation to comply with the Income Tax Act of 1967’s requirements to file returns, provide statements of accounts, or provide other information.


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REFERENCES:


PWC: TaXavvy

https://www.pwc.com/my/en/assets/publications/Taxavvy/2022/pwc-taxavvy-21-2022.pdf


EY

https://www.ey.com/en_my/tax-alerts/100-percentage-statutory-income-exemption-on-shipping-profits-yas-2021-to-2023


Skrine

https://www.skrine.com/insights/alerts/october-2022/tax-exemption-for-malaysian-shipping-business-exte


CCS & Co.

https://www.ccs-co.com/post/income-tax-exemption-no-7-order-2022


#accounting #tax #malaysia #incometax