Income tax exemption and income tax deduction Orders and or Rules

Income tax exemption and income tax deduction Orders and/or Rules

In Budget 2020, it was proposed that a 50% income tax exemption be given on the statutory income of companies that organize:

(a) Arts and cultural activities approved by the Ministry of Tourism, Arts and Culture (MOTAC), and
(b) International sports and recreational competitions approved by the Ministry of Youth and Sports (KBS)

The incentive was to apply from the year of assessment (YA) 2020 to YA 2022 (see Special Tax Alert: Highlights of Budget 2020).

In Budget 2022, it was proposed that the income tax exemption be extended for another three years, until YA 2025. 

To legislate the above proposals, the Income Tax (Exemption) (No. 12) Order 2021 [P.U.(A) 478] was gazetted on 27 December 2021. The Order provides that a promoter of any arts or cultural activities, or sports or recreational competitions of international standard, is given an income tax exemption of 50% on statutory income derived from the organization of such activities.

The exemption is given on condition that:

(a) An arts or cultural activity is held in Malaysia at the Istana Budaya, National Visual Arts Gallery or Petronas Philharmonic Hall, or
(b) A sports or recreational competition of international standard is held in Malaysia

The following terms have been defined in the Order:

i.    Arts or cultural activities

A stage performance approved by MOTAC and organized with the participation of foreign nationals who have performed at least three performances in any country other than their own

ii.   Promoter

A company incorporated under the Companies Act 2016, or a society or organization registered under the Societies Act 1966

iii.  Sports or recreational competition of international standard

Any sporting event or recreational activity approved by KBS and organized in any form with the participation of foreign nationals from a number of countries

The Order stipulates that the exemption granted does not absolve the company from any requirement to submit any return, statement of accounts or any other information as required under the Income Tax Act 1967 (ITA). The company is also required to maintain a separate account for the income exempted under the Order.

In addition, the Order provides that Paragraphs 5 and 6 of Schedule 7A of the ITA will apply to the amount of exempted income.

The Order is effective from YA 2020 to YA 2025.

In Budget 2022, it was proposed that the special deduction given to property owners who provide rental reductions of at least 30% to their tenants be extended for another six months, until June 2022 (see Take 5: Malaysia Budget 2022).

To legislate the above proposal, the following Amendment Orders were gazetted on 27 December 2021:

• Income Tax (Special Deduction for Reduction of Rental to a Small and Medium Enterprise) (Amendment) Rules 2021 [P.U.(A) 479]
• Income Tax (Special Deduction for Reduction of Rental to a Tenant other than a Small and Medium Enterprise) (Amendment) Rules 2021 [P.U.(A) 480]

The Amendment Orders came into operation on 1 January 2022.

In Budget 2022, it was proposed that the tax deduction of up to RM300,000 on the costs of renovation and refurbishment of business premises be extended for another year, until 31 December 2022 (see Take 5: Malaysia Budget 2022).

To legislate the above proposal, the Income Tax (Costs of Renovation and Refurbishment of Business Premise) (Amendment) Rules 2021 [P.U.(A) 481] were gazetted on 27 December 2021.

The Amendment Rules are effective from YA 2022.

Taxpayers providing private healthcare services are eligible for a tax exemption on income derived from the export of healthcare services to foreign clients (as defined). The income tax exemption is equivalent to 100% of the value of the increased exports of services, to be set-off against 70% of statutory income. The exemption is subject to conditions and was available from YA 2018 to YA 2020 (see Tax Alert No. 16/2020).

In Budget 2021, it was proposed that the tax exemption be extended to YA 2022 (see Take 5: Malaysia Budget 2021).

To legislate the above proposal, the following Amendment Order and Order were gazetted on 31 December 2021.

A.   Income Tax (Exemption) (No. 9) 2002 (Amendment) Order 2021 [P.U.(A) 499/2021]

Income Tax (Exemption) (No. 9) Order 2002 [P.U.(A) 57/2002] provides an income tax exemption on income from specified services, such as legal, accounting, architecture, marketing, education and private healthcare.

P.U.(A) 499/2021 was gazetted to remove “private healthcare” from the scope of services covered under the Order. A separate Order (refer below) was gazetted to legislate the above-mentioned income tax exemption for private healthcare services.

The Amendment Order is deemed to be effective from YA 2021.

B.   Income Tax (Exemption) (No. 13) Order 2021 [P.U.(A) 501/2021]

The Order provides that a person, who is a Malaysian resident, is exempted from the payment of income tax in respect of income derived from the export of private healthcare services, provided either in Malaysia or from Malaysia, to foreign clients. The income tax exemption is equivalent to 100% of the value of the increased exports of services, to be set-off against 70% of statutory income, on condition that:

(a)   At least 10% of the person’s total number of patients consist of foreign clients who have obtained private healthcare services in each YA, and

(b)  At least 10% of the person’s gross income is derived from foreign clients who have obtained private healthcare services in each YA

The following terms have been defined in the Order:

i.    Foreign client

Company, partnership, organization or co-operative society which is incorporated or registered outside Malaysia, or a non-Malaysian citizen individual or a non-resident Malaysian citizen living abroad and his dependents

ii.   Non-Malaysian citizen individual

A non-Malaysian citizen individual other than a:

(a) Participant of the Malaysia My Second Home programme and his dependents
(b) Holder of a Malaysian student pass and his dependents, and
(c) Holder of a Malaysian work permit and his dependents

iii.  Value of increased exports

Difference between the value of private healthcare services exported in the basis period and that of the immediate-preceding basis period

The Order stipulates that the exemption granted does not absolve the company from any requirement to submit any return, statement of accounts or any other information as required under the ITA. The company is also required to maintain a separate account for the income exempted under the Order.

In addition, the Order provides that Paragraphs 5 and 6 of Schedule 7A of the ITA will apply to the amount of exempted income. 

The non-application provisos stipulate that the Order shall not apply where the person has been granted:

• Any incentives (except for deductions on the promotion of exports) under the Promotion of Investments Act 1986
• Investment allowance under Schedule 7B of the ITA
• An exemption under Sections 127(3)(b) or 127(3A) of the ITA
• An exemption under P.U.(A) 57/2002

The Order is effective from YA 2021 to YA 2022.

In Budget 2015, to encourage companies to provide scholarships to full-time students in the vocational and technical fields, it was proposed that the following expenses in relation to such scholarships be given a double deduction (see Special Tax Alert: Highlights of the 2015 Budget):

• Fee on course of study, and
• Educational aid and cost of living expenses throughout the student’s period of study at Government-recognized institutions

To legislate the above proposal, the Income Tax (Deduction for the Sponsorship of Scholarship to Malaysian Students Pursuing Studies at the Technical and Vocational Certificate Levels) Rules 2021 [P.U.(A) 503] were gazetted on 31 December 2021. The Rules provide that in ascertaining a company’s adjusted income from its business for a YA, a double deduction shall be allowed for the expenses incurred and paid by the company in that basis period, for sponsoring a scholarship for a student according to the period of the relevant sponsorship agreement.

The double deduction is given for the following expenses incurred for sponsoring the scholarship:

(a) Payment required by the relevant institution in relation to the course of study, and
(b) Educational aid and reasonable cost of living expenses throughout the student’s period of study at the relevant institution

Any amount refunded by the student to the company shall, when received, be treated as gross business income of the company derived from Malaysia in the basis period for that YA.

The Rules shall apply to a company which:

(a) Is a Malaysian resident company incorporated under the Companies Act 2016
(b) Sponsors a scholarship for a student pursuing a full-time course of study at a technical and vocational certificate level in an institution, and
(c) Executes a scholarship agreement with a student between 11 October 2014 and 31 December 2016

The following terms have been defined in the Order:

i.      Institution

Any institution recognized by the Malaysian Qualifications Agency or the Skills Development Department

ii.      Student

Means an individual:

- Who is a Malaysian citizen and a Malaysian resident
- Who receives a full-time course of study at a technical or vocational certificate level in an institution
- Who has no means of his own, and
- Whose parents’ or guardians’ total monthly income do not exceed RM5,000

The Rules are deemed to be effective from YA 2015.

In Budget 2022, it was proposed that the double deduction for anchor companies under the VDP be extended for another five years, to 31 December 2025 (see Take 5: Malaysia Budget 2022). The double deduction on qualifying expenses will also be increased from RM300,000 to RM500,000 per YA, for three consecutive YAs.

To legislate the above proposals, the Income Tax (Deduction for Expenditure in relation to Vendor Development Programme) Rules 2022 [P.U.(A) 2] were gazetted on 6 January 2022. The Rules provide that in ascertaining the adjusted income of an anchor company from its business for a YA, a double deduction shall be allowed for expenditure* incurred by the anchor company to carry out, in the basis period for that YA, the activities in relation to the VDP as follows:

(a) Activities in relation to product development, namely product quality development, product innovation or research and development (R&D)
(b) Activities in relation to capability improvements, namely certification programmes, assessment programmes or business process re-engineering, or
(c) Activities in relation to human capital, namely hard-skills training, lean management, financial management systems or capacity building

*Excludes capital expenditure incurred on plant, machinery, fixtures, land, premises, buildings, structures or works of a permanent nature or on alterations, additions or extensions thereof, or in the acquisition of any rights in or over any property.

The double deduction is given for a period of three consecutive YAs, commencing from the YA in which the expenditure is first incurred. The amount of expenditure is capped at RM500,000 for each YA, and is to be verified by the Minister of Entrepreneur Development and Cooperatives (MEDAC).

The Rules shall apply to an anchor company which:

(a) Is incorporated or deemed to be registered under the Companies Act 2016
(b) Is a Malaysian resident
(c) Participates in the VDP, and
(d) Signs a memorandum of understanding with MEDAC under the VDP between 1 January 2021 and 31 December 2025

The Rules also provide that the VDP is a programme approved by MEDAC, to be implemented by an anchor company to develop a new vendor company or strengthen the development of an existing vendor company, at the domestic and/or international level. 

The vendor company shall be a company which is:

(a) Incorporated or deemed to be registered under the Companies Act 2016
(b) A Malaysian resident, and
(c) A manufacturer or supplier of components, or service provider of the anchor company under the VDP

The Rules are effective from YA 2021.

In Budget 2021, it was proposed that investor companies be given a deduction for the amount of investment made in a subsidiary company that commercializes the R&D findings of public research institutions, including public or private higher learning institutions (see Take 5: Malaysia Budget 2021).

To legislate the above proposal, the Income Tax (Deduction for Investment in a Project of Commercialisation of Research and Development Findings) Rules 2022 were gazetted on 6 January 2022. The Rules provide that in ascertaining a company’s adjusted income from its business for a YA, a deduction equivalent to the value of investment made in a related company for the sole purpose of financing a project on commercialization of R&D findings in the basis period for that YA, shall be allowed.

The investment shall:

(a) Be equivalent to the expenditure incurred by the related company in the basis period for the same YA for the operation of its commercialization activity and the asset used for that activity, and
(b) Not be disposed of within five years from the date of the last investment made, if such investment is in the form of paid-up ordinary share capital

Where a company that has made an investment in the form of paid-up ordinary share capital and claimed a deduction in respect of the investment receives an amount as consideration for the disposal of shares, the amount received by that company shall be included in ascertaining its adjusted income for the YA in which that amount was received (capped at the total deductions allowed in relation to that investment). This however does not apply if the disposal of shares take place after five years from the date of the last investment in the form of paid-up ordinary share capital made in the related company.

The deduction shall cease in the basis period for the YA in which the tax exemption period of the related company commences, as determined by the Minister or Minister of International Trade and Industry, as the case may be.

To qualify for the deduction, the company must comply with the following conditions:

(a) It is a Malaysian resident company incorporated in Malaysia under the Companies Act 2016
(b) The application for approval for the project of commercialization must be received by the Malaysian Investment Development Authority (MIDA) between 7 November 2020 and 31 December 2025
(c) The project of commercialization must commence within one year from the date of approval issued by MIDA

The following terms have been defined in the Order:

i.    R&D findings

R&D findings in non-resource-based activities or products listed below and wholly owned by a public research institute or a public or private institute of higher learning in Malaysia:

• Electrical and electronics
• Medical devices
• Technical or functional textiles
• Machinery and equipment
• Metals
• Transport equipment

ii.   Investment

• Investment in the form of cash in a related company for which the related company has no obligation to repay, or
• Paid-up ordinary share capital in cash in a related company

iii.   Commercialization

Process of transforming R&D findings into a product or process that has an industrial application or that is marketable

iv.  Related company

Company incorporated under the Companies Act 2016, where at least 70% of its paid-up ordinary share capital is directly owned by a company that has invested in a commercialization project

The Rules are deemed to have come into operation on 7 November 2020.