Exemption Orders for Applications Received in 2019 and 2020 for Principal Hub Tax Incentives Gazetted
25 August 2023
The following subsidiary legislation were gazetted on 23 August 2023:
- Income Tax (Exemption) (No. 2) Order 2023 [P.U.(A) 251/2023] (“EO No. 2”); and
- Income Tax (Exemption) (No. 3) Order 2023 [P.U.(A) 252/2023] (“EO No. 3”),
collectively (the “EOs”).
The EOs are deemed to have effect from year of assessment 2019.
In essence, the EOs set out the conditions that have to be fulfilled by a principal hub to be exempted from payment of income tax on the statutory income derived from core income generating activities as follows:
- in the case of EO No. 2, the statutory income derived by a principal hub from its core income generating activities will be subject to income tax at a concessionary rate of 10% for five consecutive years of assessment; and
- in the case of EO No. 3, the statutory income derived by a principal hub from its core income generating activities will be subject to in income tax at a concessionary rate of 0% and 5% if the principal hub falls under Category 1 and Category 2 respectively of Schedule 2 of EO No. 3, for five consecutive years of assessment. The exemption can be extended for a further five years of assessment, subject to the principal hub fulfilling the conditions set out in paragraph 7 of EO No. 3.
For the purposes of EO No. 2, a “principal hub” is an existing company incorporated under the Companies Act 2016 whereas for EO No. 3, it is a newly incorporated company under the Companies Act 2016. In each case, the company has to fulfil the conditions set out in the respective EOs in order to qualify as a principal hub.
The “core income generating activities” of a principal hub are:
- “qualifying trading activities”, namely procurement and sale of raw materials, components and finished products from the principal hub to a network company within or outside Malaysia; or
- “qualifying services”, as specified the third column of Schedule 1 of the respective EOs under three clusters, namely strategic services, business services, and shared services.
As the period for submitting applications for exemption under the EOs expired on 31 December 2020, it is no longer possible to apply for tax exemption under the EOs. Hence, the EOs merely formalise the conditions applicable to companies that have already applied for and obtained an exemption or whose applications submitted within the aforesaid deadline are pending approval.
Notwithstanding the foregoing, the Minister of Finance announced at the 2021 Malaysian Budget that the tax incentives for qualifying principal hubs will be extended (with a relaxation of some of the conditions in EO No. 3) for two years and will apply to qualifying applications received by the Minister of Finance through the Malaysian Investment Development Authority (MIDA) from 1 January 2021 to 31 January 2022. The
Income Tax (The Principal Hub Incentive Scheme) Rules 2022 [P.U.(A) 164/2022] were gazetted on 24 May 2022 to give effect to this extension. Our write-up on these Rules can be accessed
here.
1
Alert by Faith Chan (Associate) of the Corporate Practice of Skrine.
1 A proposal to further extend the tax incentives for principal hubs for three years was announced by the then Minister of Finance during his 2023 Malaysian Budget on 7 October 2022 but the proposed Budget was not tabled due to a dissolution of the Malaysian Parliament on 10 October 2022. The 2023 Malaysian Budget passed in 2023 did not include an extension of the principal hub incentives.
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.