Additional condition for FSIE and use of “bill number” as reference

Additional condition for the FSI exemption on dividend income and the use of a “bill number” as mandatory reference for tax payments

Additional condition for the FSI exemption on dividend income

Key takeaway: Qualifying taxpayers must now also comply with economic substance requirements in Malaysia, in order to qualify for tax exemption on foreign-sourced dividend income. This requirement is retrospective to 1 January 2022. This does not apply to individuals, other than individuals earning dividend income through a partnership business carried on in Malaysia.

The income tax exemption on FSI received by any person (other than a resident company carrying on the business of banking, insurance or sea or air transport) was removed for all Malaysian-resident taxpayers from 1 January 2022. However, as highlighted in earlier alerts, the following Orders were gazetted on 19 July 2022 to provide that certain types of FSI of resident taxpayers will continue to be exempt from tax, from 1 January 2022 to 31 December 2026 (see Special Tax Alerts No. 4/2022 and 6/2022):

• Income Tax (Exemption) (No. 5) 2022 [P.U.(A) 234], which applies to all sources of income of individuals, except for income from a partnership business in Malaysia
  
  
• Income Tax (Exemption) (No. 6) 2022 [P.U.(A) 235], which applies to the dividend income of companies, limited liability partnerships (LLPs) and individuals earning dividend income in relation to a partnership business in Malaysia.

One of the key points provided in both Orders is that to qualify for the exemption, the relevant taxpayers are required to comply with conditions imposed by the Ministry of Finance as set out in the guidelines issued by the Inland Revenue Board (IRB). The said guidelines were issued on 29 September 2022 (see Special Tax Alert No. 6/2022).

Following the above, the IRB has published on its website the “Guidelines on Tax Treatment in relation to Income Received from Abroad (Amendment)” (Amended Guidelines) dated 29 December 2022. The Amended Guidelines can be accessed at the following link. These Amended Guidelines supersede the earlier Guidelines.

Similar to the earlier Guidelines, the Amended Guidelines specify the conditions which must be complied with by taxpayers to qualify for the FSI exemption, and also provide examples and annexes to explain and illustrate the tax treatment of FSI under various scenarios. The Amended Guidelines were updated mainly to include an additional condition for the FSI exemption on the dividend income of companies, LLPs and individuals earning dividend income in relation to a partnership business in Malaysia. 

In a media release dated 29 December 2022, the IRB indicated that this additional condition has been imposed to ensure compliance with current international tax standards, and that taxpayers must demonstrate a clear link between the foreign-sourced dividend income and the activities undertaken in Malaysia in order to qualify for the FSI exemption. This condition is also in line with Malaysia’s commitment to avoid double non-taxation of income, in line with the requirements of the European Union (EU). Hong Kong, which was also added to the EU’s “grey list” of non-cooperative jurisdictions for tax purposes, has also refined its FSI exemption regime by introducing conditions for tax exemptions on FSI, including additional economic substance requirements (see EY Global Tax Alert, Hong Kong passes bill on refined foreign-sourced income exemption regime).

This is discussed below.

Existing conditions in Income Tax (Exemption) (No. 6) 2022

Pursuant to the Order, the exemption on dividend income available to a qualifying person[1] is on condition that:

(a)   The dividend income has been subjected to tax “of a similar character to income tax” under the laws of the foreign jurisdiction (“subject to tax” condition), and

(b)  The “headline tax rate” (i.e., highest rate of tax “of a similar character to income tax” charged under the laws of the foreign jurisdiction) is at least 15%.

For the purpose of the Order, the earlier Guidelines provide guidance and examples on circumstances where the “subject to tax” and “headline tax rate” conditions are considered to have been met (see Special Tax Alert No. 6/2022).

Additional condition now imposed

The Amended Guidelines stipulate that in addition to the above-mentioned conditions, the qualifying person will also be required to comply with “economic substance requirements” in order to qualify for the exemption on foreign-sourced dividend income received in Malaysia. The qualifying person shall be regarded as having economic substance if it has:

(a)   Employed an “adequate number” of employees with the necessary qualifications to carry out the specific economic activities in Malaysia, and

(b)  Incurred an “adequate” amount of operating expenditure to carry out the specific economic activities in Malaysia

The Amended Guidelines go on to state that since different industries operate in different ways, it is neither feasible nor appropriate to specify the minimum thresholds for the economic substance requirements, as they would depend on the facts of each case. Factors that will be taken into account include:

(a)    The number of employees having regard to the nature of the relevant activities, e.g., whether it is a capital or labor-intensive industry,

(b)    Whether the employees are employed on a full-time or part-time basis, and

(c)     Whether office premises have been used to undertake the relevant activities and whether the premises are adequate for such activities.

The IRB stated in their 29 December 2022 media release that taxpayers who have submitted their relevant income tax return forms (ITRF) on or before 29 December 2022, but have not complied with the economic substance requirements, will be required to submit an amended ITRF. No penalties will be imposed.

Relevant taxpayers who have claimed or who are seeking to claim the FSI exemption on foreign-sourced dividend income must consider this important new development.

“Bill number” to be used as mandatory reference for most types of tax payments

Key takeaway: A “bill number” must be obtained from the IRB and used as a mandatory reference for most types of tax payments. This applies from 1 January 2023, though taxpayers can continue using their existing tax reference numbers as a reference for tax payments up until 30 June 2023.

On 31 December 2022, the IRB issued a media release stating that effective 1 January 2023, a “bill number” will be used as a mandatory reference for direct tax-related payments, except for payments in relation to monthly tax deductions and stamp duty.

Details of the “bill number” can be obtained via the following methods:

• Visit the IRB’s MyTax portal (https://mytax.hasil.gov.my) --> ezHASiL Services --> e-Billing
  
  
• The “bill number” will be stated on the notice of assessments / estimates, and letters of demand issued by the IRB

Tax payments can be remitted via the following methods:

(a)   Online, or

(b)  At the counters of the IRB’s payment centres or banks appointed as collection agents.

For option (b), taxpayers are required to print the payment slip or download the “bill number” by scanning the QR code on the payment slip.

Notwithstanding the above, the media release also clarifies that during the transition phase, taxpayers may continue to use their existing tax identification number or tax reference number for tax payment purposes until 30 June 2023.