(Tax Update) Foreign Capital Assets CGT Guidelines

(Tax Update) Foreign Capital Assets CGT Guidelines

The Inland Revenue Board of Malaysia (“IRB”) has issued the Guidelines on Tax Treatment on Disposal of Foreign Capital Assets Received From Outside Malaysia (“Foreign Capital Assets CGT Guidelines”) dated 27 March 2024 on its website.

The Foreign Capital Assets CGT Guidelines explain the CGT treatment on the gains or profits from the disposal of foreign capital assets situated outside Malaysia that occur on or after 1 January 2024 that are received in Malaysia by a resident that is a company, limited liability partnership, trust body or co-operative society.

Key Summary of the Guideline

Here's a summary of the guidelines for the tax treatment on gains from the disposal of foreign capital assets received in Malaysia, as outlined by the IRB:

Introduction

Capital Gains Tax (CGT) applies to gains from the disposal of capital assets in Malaysia, including foreign capital assets received in Malaysia, effective from 1 January 2024.

Objective

To explain the tax treatment on gains from the disposal of foreign capital assets received by a resident in Malaysia.

Provisions of The Law

Includes specific sections of the Income Tax Act 1967 and the Income Tax (Exemption) Order (No. 3) 2024 [P.U.(A) 75/2024].

Chargeable Person

From 1 January 2024, companies, LLPs, Trust Bodies, and Co-operative Societies receiving gains from the disposal of foreign capital assets in Malaysia are subject to tax.

Chargeable Gains from the Disposal

Definition and Scope

Gains from the disposal of foreign capital assets situated outside Malaysia are considered taxable income under paragraph 4(aa) of the Income Tax Act 1967 (ITA), subject to the prevailing tax rate.

This includes assets such as immovable property (e.g., buildings, land), movable property (e.g., machinery, vehicles), intellectual property rights, and shares issued by companies incorporated outside Malaysia.

Deductible Expenses

In determining taxable gains, expenses wholly and exclusively incurred for the acquisition and disposal of the capital assets can be deducted. This includes legal fees, appraisal fees, advertising costs, and expenses to increase or maintain the capital value of the asset.

Foreign Tax Credit

Purpose

To avoid double taxation of gains from the disposal of foreign capital assets that are also taxed outside Malaysia. Taxpayers can claim a tax credit for foreign taxes paid, which is either bilateral (if the country has a Double Taxation Avoidance Agreement with Malaysia) or unilateral (if there's no such agreement).

Conditions for Claiming

Taxpayers must keep records proving that foreign tax has been imposed on the income. The claim for tax credit must be supported by adequate documentation.

Limitations

If the foreign tax credit claimed for a year of assessment exceeds the Malaysian tax payable on the same gains, the excess amount cannot be carried forward or refunded; it is simply disregarded.

Tax Exemption

Eligibility Period: Gains from the disposal of foreign capital assets received in Malaysia are exempt from tax from 1 January 2024 until 31 December 2026, provided they meet specific economic substance requirements.

Economic Substance Requirements

To qualify for the exemption, entities must employ an adequate number of qualified employees and incur a sufficient amount of operating expenditures in Malaysia for carrying out specified economic activities.

The determination of adequacy is based on the facts of each case, considering factors like the industry type, whether the business is capital or labor-intensive, and the nature of the employment (full-time or part-time).

Specified Economic Activities

For investment holding entities, this involves holding/managing equity participation in other entities and making strategic decisions regarding assets. For other entities, it refers to the operations of the business carried out in Malaysia.

Outsourcing of Activities

Entities can outsource specified economic activities if these are carried out in Malaysia, there's sufficient monitoring and control, and the outsourcing does not result in double counting of employees or expenditures.

Tax Reporting

Requirements for reporting gains from the disposal of foreign capital assets in the Income Tax Return Form (ITRF).

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