Updated: Sep 12, 2022
Taxation Techie Series 1
With the latest announcement from MOF, tax residents are now being exempted from tax on Foreign source income until Dec 31, 2026.
On 31st December 2021, Ministry of Finance has made an announcement on tax exemption on foreign source income for resident taxpayer in Malaysia to ensure smooth implementation of the tax initiative. The tax exemption has been effective form 1st January 2022 to 31st December 2026.
The removal of the foreign source of income exemption for residents was unexpectedly revealed by the Ministry of Finance when they announced the Budget 2022, shocking Malaysia who had been expecting special assistance and recovery measure from the government during the COVID-19 crisis.
What is foreign sourced income in Malaysia?
Foreign sourced income refers to any income which is originated from outside of Malaysia, including employment income and income from other sources such as dividend payments.
Foreign source income budget 2022 announcement
It was stated in the 2022 budget, which was announced in October 2021, that FSI would be subject to tax in Malaysia if it was sent back to the country. That would imply, for instance, that income earned by Malaysian citizens in Germany counts in Malaysia and in some cases, is taxable. The new FSI standards would also spell adjustments for the numerous Malaysians who work in Singapore but continue to reside in Malaysia.
The new FSI tax rules were due to come into effect from January 2022. However, right at the end of December 2021, the Ministry of Finance announced that some tax exemptions on FSI would remain in place until the end of 2026. That gives 5 years transition period that will give Malaysian citizen remitting FSI home to prepare themselves for the changes, before the new tax initiative to be properly implemented.
Who are qualified for Tax exemption?
The order exempts a “qualifying person” from the payment of income tax in respect of dividend income which is received in Malaysia from outside Malaysia.
An “qualifying person” in this context means a person resident in Malaysia who is:
1. A person with dividend income from sources outside Malaysia that was obtained in Malaysia.
2. An LLP which is register under the Limited Liability Partnerships Act 2012.
3. A company which is incorporated or registered under the Companies Act 2016.
Exclusion of Foreign Sourced Income form computation of Cukai Makmur
Moreover, the Malaysian government announced the Cukai Makmur during the tabling of Budget 2022. Cukai Makmur is to be imposed on companies that generate high income during the Covid-19 pandemic period and was legislated under the paragraph 2(2) of part I of schedule to the ITA, through the Finance Act 2021. Good news for the companies making extra profit from outside of Malaysia, FSI is excluded from the calculation.