The Inland Revenue Board (LHDN) has announced additional eligibility requirements for the exemption of tax payment on foreign dividend income received in Malaysia. Specifically, it noted that the income must now also comply with substantive economic conditions in order to qualify for the exemption.

For context, the government had originally proposed to begin taxing foreign-sourced income received in Malaysia during the tabling of Budget 2022; prior to that, such gains were exempted from tax. However, this proposal was eventually reversed, and the government agreed to continue exempting foreign-sourced income from tax for eligible taxpayers between 1 January 2022 to 31 December 2026. This includes foreign dividend income received in Malaysia by resident taxpayers, provided that the eligible entities meet the following qualifying conditions:

Qualifying persons/entities	Qualifying conditions
– Companies registered under Companies Act 2016 – Limited liability partnerships (LLP) registered under Limited Liability Partnerships Act 2012 – Individual partners (in relation to a conventional partnership business in Malaysia)	– Foreign source dividend income has been subjected to tax in the country of origin – The highest tax rate (headline tax) in the country of origin is not less than 15%

With LHDN’s latest update, however, qualifying entities who receive foreign source dividend income are now required to abide by the following set of conditions to enjoy tax exemption:

Qualifying persons/entities	Qualifying conditions
– Companies registered under Companies Act 2016 – Limited liability partnerships (LLP) registered under Limited Liability Partnerships Act 2012 – Individual partners (in relation to a conventional partnership business in Malaysia)	– Foreign source dividend income has been subjected to tax in the country of origin – The highest tax rate (headline tax) in the country of origin is not less than 15% – Comply with substantive economic conditions

LHDN further explained that resident companies, LLPs, and individuals in a partnership business are considered to comply with substantive economic conditions if they meet these requirements:

• Employ a sufficient number of workers with qualifications required to carry out certain economic activities in Malaysia, and
• Make sufficient operating expenses to run certain economic activities in Malaysia

As such, LHDN requires affected taxpayers who have submitted their income tax return forms (BNCP) prior to this update to now submit a BNCP amendment if they are not in compliance with the new qualifying conditions. No penalty will be imposed. Meanwhile, the guideline for the tax treatment of foreign-sourced income has also been updated (dated 29 December 2022) and can be downloaded from here.

In its statement, LHDN further stressed that these additional requirements were introduced to ensure that a clear link can be established between taxpayers’ foreign source dividend income with actual activities within Malaysia. Additionally, it highlights Malaysia’s commitment towards compliance with international tax best practices, thereby minimising the occurrence of tax evasion and double non-taxation.

Meanwhile, there are no changes to the tax treatment of individual taxpayers who earn all other types of foreign-sourced income (except partnership income). Their income will continue to be exempted from tax within Malaysia, provided their income has already been subjected to tax in the country of origin.

If you have any questions regarding the latest update from LHDN, you can reach out to the board via its HASiL Care Line at 03-8911 1000 or 603-8911 1100 (overseas). Alternatively, you can use the HASiL Live Chat or the feedback form on LHDN’s official portal.

(Sources: LHDN, The Edge Markets)

• TAGS:
• Foreign Income
• Foreign-Sourced Income
• Income Tax
• Inland Revenue Board
• Lembaga Hasil Dalam Negeri
• LHDN