Partial Tax Exemption on Foreign Sourced Income

The Income Tax (Exemption) Order 2022 [P.U.(A) 96/2022] (‘the Order’) was gazetted on 1 April 2022. The Order has effect for the year of assessment (‘YA 2022’) and applies to a company that has income received in Malaysia from outside Malaysia from 1 July 2022.
 
Background
 
Pursuant to the Finance Act 2021, amendments were made to paragraph 2 of Part I of Schedule 1 to the Income Tax Act 1967 (‘ITA’) so that company (other than a small and medium enterprise) that has chargeable income in excess of RM100,000,000 in the basis period for YA 2022 will be subject a two-tiered tax rate under subparagraph 2(2) of Part I of Schedule 1 to the ITA (‘subparagraph 2(2)’): 
  • the first RM100,000,000 of chargeable income will be subject to tax at the rate of 24%; and 

  • the chargeable income exceeding RM100,000,000 will be subject to tax at the rate of 33%. 
The special one-off tax under subparagraph 2(2) is described as Cukai Makmur (Prosperity Tax).
 
Key definitions
 
For the purposes of the Order: 
  • income received in Malaysia from outside Malaysia’ refers to income arising from outside Malaysia which is brought into Malaysia; and 

  • company’ refers to a company which is incorporated or registered under the Companies Act 2016 and resident in Malaysia. 
Exemption
 
Rule 4(1) of the Order exempts a company from the application of subparagraph 2(2) in respect of its chargeable income in relation to any income received in Malaysia from outside Malaysia in the basis period for YA 2022.
 
For the purposes of Rule 4(1) of the Order, a company’s chargeable income in relation to any income received in Malaysia from outside Malaysia in the basis period for YA 2022 is to be determined in accordance with the formula set out in Rule 4(2) of the Order which reads as follows:
 
  A  x  C
B
 
 
where A is the statutory income in relation to the income received in Malaysia from outside Malaysia in the basis period for YA 2022;
 
  B is the aggregate income in the basis period for YA 2022;
 
  C is the chargeable income of the company in the basis period for YA 2022.
 
Rule 4(3) of the Order states that any excess of the chargeable income as determined in accordance with the formula under Rule 4(2) of the Order is subject to tax for YA 2022 under subparagraph 2(1) or subparagraph 2(2), as the case may be, of Part I of Schedule 1 to the ITA.
 
Comment
 
From the above, it would appear that it is not the entire amount of foreign sourced income, but only the part thereof that is determined in accordance with the formula set out in Rule 4(2) of the Order that is exempted from income tax under subparagraph 2(2).
 
Alert prepared by Desmond Liew (Senior Associate) of the Tax Practice of Skrine.

This alert contains general information only. It does not constitute legal advice nor an expression of legal opinion and should not be relied upon as such. For further information, kindly contact skrine@skrine.com.