Tax Exemptions for Shariah-based Fund Management Services provided to Certain Clients
02 July 2021
Key Contacts:
The following orders (“Exemption Orders”) were gazetted on 29 June 2021:
The Exemption Orders have effect for years of assessment 2021 to 2023.
In essence, the Exemption Orders exempt a qualifying company from the payment of income tax in a basis period for a year of assessment in respect of the statutory income derived by the company from the business of providing fund management services in accordance with Shariah principles to certain categories of clients.
Qualifying company
To qualify for income tax exemption under the Exemption Orders, a company (“Qualifying Company”) must:
- be incorporated under the Companies Act 2016;
- be resident in Malaysia; and
- hold a Capital Markets Services Licence under the Capital Markets and Services Act 2007 (“CMSA”) to carry on the business of providing fund management services:
- in the case of Exemption Order No. 6, to a business trust or real estate investment trust in Malaysia;1
- in the case of Exemption Order No. 7, to local investors in Malaysia;2 and
- in the case of Exemption Order No. 8, to foreign investors in Malaysia.3
Exemption Order No. 6
Exemption Order No. 6 exempts a Qualifying Company from the payment of income tax in a basis period for a year of assessment in respect of the statutory income derived from a business of providing fund management services to a business trust or real estate investment trust in Malaysia.
This exemption is subject to the Qualifying Company obtaining annual certification from the Securities Commission Malaysia (“SC”) that the following conditions have been fulfilled, namely that the Qualifying Company:
- provides fund management services to a business trust or real estate investment trust in Malaysia in accordance with Shariah principles;
- has at least two full-time employees in Malaysia of whom one holds a Capital Markets Services Representative’s Licence under the CMSA (“CMSRL”); and
- incurs annual operating expenditure of at least RM250,000 in Malaysia.
Exemption Order No. 7
Exemption Order No. 7 exempts a Qualifying Company from the payment of income tax in a basis period for a year of assessment in respect of the statutory income derived from a business of providing fund management services to local investors in Malaysia.
This exemption is subject to the Qualifying Company obtaining annual certification from the SC that the following conditions have been fulfilled, namely that the Qualifying Company:
- provides fund management services to foreign investors in Malaysia in accordance with Shariah principles;
- has at least two full-time employees in Malaysia of whom one holds a CMSRL; and
- incurs annual operating expenditure of at least RM250,000 in Malaysia.
Paragraphs 5 and 6 of Schedule 7A
4 to the Income Tax Act 1967 (“
the Act”) apply to the amount of statutory income exempted under Exemption Order No. 7, but Section 60G
5 of the Act will not apply to such income that is exempted under this exemption order.
Exemption Order No. 8
Exemption Order No. 8 exempts a Qualifying Company from the payment of income tax in a basis period for a year of assessment in respect of the statutory income derived from a business of providing fund management services to
foreign investors in Malaysia.
This exemption is subject to the Qualifying Company obtaining annual certification from the SC that the following conditions have been fulfilled, namely that the Qualifying Company:
- provides fund management services to foreign investors in Malaysia in accordance with Shariah principles;
- has at least two full-time employees in Malaysia of whom one holds a CMSRL; and
- incurs annual operating expenditure of at least RM250,000 in Malaysia.
As in the case of Exemption Order No. 7, paragraphs 5 and 6 of Schedule 7A to the Act apply to the amount of statutory income exempted under this exemption order, but section 60G of the Act will not apply.
Common provisions
The following are common provisions in the Exemption Orders:
- The Exemption Orders do not absolve a Qualifying Company from complying with any requirement to submit any return or statement of accounts or to furnish any other information under the Act; and
- The Qualifying Company is to maintain a separate account for the income derived from the business referred to in the applicable Exemption Orders in the basis period for each year of assessment and that income is to be treated as a separate and distinct source of business for the Qualifying Company.
Comment
The Exemption Orders will promote the fund management industry in Malaysia that is based on Shariah principles.
Alert by Phua Pao Yii (Partner) of the Corporate Practice of Skrine and Dickson Chia Chung Ming (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.
1 For the purposes of Exemption Order No. 6, a “
business trust” has the same meaning assigned to it in the CMSA and a “
real estate investment trust” has the same meaning as provided in the guidelines relating to real estate investment trust issued by the SC under the CMSA.
2 For the purposes of Exemption Order No. 7, “
local investors” refer to (a) individuals who are citizens of Malaysia and resident in Malaysia; (b) companies where the entire issued share capital is beneficially owned, directly or indirectly, by persons who are citizens of Malaysia and resident in Malaysia; and (c) trust funds where the entire interest in the fund is beneficially held, directly or indirectly, by persons who are citizens of Malaysia and resident in Malaysia and such fund is created in Malaysia and the trustees of the fund are citizens of Malaysia and resident in Malaysia.
3 For the purposes of Exemption Order No. 8, “
foreign investors” refer to (a) individuals who are not resident in Malaysia or not citizens of Malaysia; (b) companies where the entire issued share capital is beneficially owned, directly or indirectly, by persons who are not resident in Malaysia and not citizens of Malaysia; and (c) trust funds where the entire interest in the fund is beneficially held, directly or indirectly, by foreign investors and such fund is created in Malaysia or outside Malaysia and the trustees of the fund are not resident in Malaysia and not citizens of Malaysia.
4 Paragraph 5 of Schedule 7A,
inter alia, provides that tax exempt income is to be maintained in an exempt account and payments of dividends from that account are tax exempt in the hands of the shareholder(s) whereas Paragraph 6 of Schedule 7A,
inter alia, confers a right on the Director General of Inland Revenue to assess tax on dividend paid from the exempt account if the same should not have been exempt from tax.
5 Section 60G,
inter alia, provides for the treatment of income derived by a foreign fund management company incorporated in Malaysia from fund management services provided to local and foreign investors.