Experts at Wong & Partners, member firm of Baker McKenzie in Malaysia, take a detailed walk through latest regulatory and tax developments in the Southeast Asian country, touching on the kind of fine details that wealth managers dealing with the jurisdiction must understand.

There have been a number of tax and regulatory developments relevant for wealth management practitioners in Malaysia, and those who deal with affairs in that country. This commentary is by Istee Cheah, partner, Wong & Partners, member firm of Baker McKenzie in Malaysia, and Lisa Yeoh, Associate, Wong & Partners. 

The editors are pleased to share this guidance and of course, the usual editorial disclaimers apply to guest material. To contact the editors, email tom.burroughes@wealthbriefing.com and jackie.bennion@clearviewpublishing.com

1. Malaysian Budget 2020
The Malaysian Budget 2020 was unveiled on 11 October 2019 by the then Finance Minister, YB Tuan Lim Guan Eng and was later legislated into the Finance Act 2019 (gazetted on 31 December 2019) ("Finance Act"). We have set out below the key legal and tax updates arising from the Budget and other developments that are pertinent to the wealth management industry.

a. Changes in relation to income tax
Increase in personal income tax rates for resident and non- resident individuals
The Finance Act introduced a new chargeable income band for resident individuals, such that the chargeable income exceeding RM2,000,000 is taxed at a higher rate of 30 per cent (previously 28 per cent) with effect from the year of assessment 2020.

The Finance Act also increased the flat income tax rate for non-resident individuals from 28 per cent to 30 per cent, with effect from YA 2020.

Increase in tax deduction cap for donations
Previously, individual taxpayers were allowed to deduct cash donations made to approved charities (1) of up to 7 per cent of their aggregate income, whereas corporate taxpayers were permitted to deduct such cash donations made up to 10 per cent of their aggregate income (2).

Effective YA 2020, the Finance Act has increased the tax deduction cap of cash donations made by individual taxpayers to 10 per cent of their aggregate income. This amendment effectively standardises the tax deduction cap for cash donations made to approved charities, regardless of whether the donor is an individual or corporate taxpayer.

b. Changes relating to stamp duty
Restriction on stamp duty remission for transfers of real property between parents and children
Previously, 50 per cent of the stamp duty chargeable on instruments of transfer of real property between parents and children by way of love and affection was remitted ("Remission"), regardless of whether the parents and children are Malaysian citizens or non-citizens.

Under the Stamp Duty (Remission) (No. 2) Order 2019, the Remission is now restricted to transfers where the recipient is a Malaysian citizen. This new restriction applies to all instruments of transfer executed on or after 1 January 2020.

Increase in stamp duty for foreign currency loans
Previously, a conventional or Shariah-compliant foreign currency loan agreement was subject to stamp duty at an ad valorem rate of RM5 for every RM1,000 or part thereof of the loan amount, up to a maximum of RM500. Effective 1 January 2020, the maximum amount of stamp duty payable has been increased from RM500 to RM2,000 for foreign currency loan agreements.

c. Changes relating to Real Property Gains Tax ("RPGT")
Amendment of the categories of disposers for RPGT purposes
The Real Property Gains Tax Act ("RPGT Act") was amended on 31 December 2019 to differentiate categories of disposers, i.e. between companies incorporated in Malaysia and those incorporated outside of Malaysia. Such amendments effectively increased the RPGT rates applicable to foreign companies (as disposers). The new RPGT rates are reflected below:

Increase in RPGT retention sum where the disposer is a foreign company
Previously, the acquirer was required to retain a 3 per cent sum from the consideration price from the disposer who is a foreign company, and remit such amount to the Malaysian Inland Revenue Board ("IRB").

Following the amendments to the RPGT Act, this retention sum is increased from 3 per cent to 7 per cent where the disposer is a foreign company.

Change of calculation of acquisition price for calculation of RPGT
Under the RPGT Act, the calculation of the chargeable gain is the positive difference between the disposal price and the acquisition price of the chargeable asset. Previously, where real property was acquired prior to the year 2000, the market value for real property as at 1 January, 2000 was used as the acquisition price, for purposes of calculating the RPGT exposure on the subsequent disposal.

With effect from 12 October 2019, where real property was acquired prior to the year 2013, the market value of the real property as at 1 January 2013 is to be used as the acquisition price. However, this amendment does not apply to the disposal of real property between controlled companies (3) or disposal of shares of real property companies. (4)

2. Developments in economic substance requirements in Labuan
a. Revised economic substance requirements for Labuan holding companies
As part of Malaysia's continuing efforts to implement the initiatives under the Organization of Economic Cooperation and Development Inclusive Framework on Base Erosion and Profit Shifting, new economic substance requirements have been enacted for Labuan entities with effect from 1 January, 2019. This was done by way of amendments to the Labuan Business Activity Tax Act 1990 ("LBATA"), which now requires Labuan entities undertaking a "Labuan business activity" to have:

(i) an adequate number of full-time employees in Labuan; and
(ii) an adequate amount of annual operating expenditure in Labuan.
 

("Substance Requirements").
The Substance Requirements are further prescribed under the Labuan Business Activity Tax (Requirements for Labuan Business Activity) Regulations 2018 ("Regulations") and vary according to the type of the Labuan entity. Under the Regulations, a "Labuan holding company" is required to have a minimum of two full-time employees in Labuan and incur an annual operating expenditure of RM50,000 in Labuan. However, there is no further definition as to what constitutes a "Labuan holding company" and whether a pure equity holding company would still be required to adhere to the requirements prescribed under the Regulations.

To this end, the Labuan Investment Committee ("LIC") has published several pronouncements that seek to clarify the application of, and requirements under the Regulations. On 11 December 2019, 20 December 2019 and 11 March 2020, the LIC issued two pronouncements which clarified the following:

(i) A Labuan holding company that undertakes pure equity holding ("PEH") activities is not required to have full-time employees in Labuan, but will need to have its "management and control" exercised in Labuan. The minimum annual operating expenditure in Labuan is also lowered to RM20,000 (5). 
(ii) On the other hand, a Labuan holding company that undertakes activities other than PEH activities is required to have only one full-time employee in Labuan, and incur a minimum annual operating expenditure of RM20,000 in Labuan (6). 

Recently, the Minister of Finance formalised an exemption to Labuan holding companies undertaking PEH activities from having full time employees in Labuan. (7) There have not been any legislative amendment or gazetted regulation to give legal effect to the pronouncements above. However, the pronouncements are an indication of how authorities would treat affected Labuan entities in practice vis-à-vis the new Substance Requirements.

b. Tax at 24 per cent for non-compliant Labuan entities 
As a result of the recent Labuan Business Activity Tax (Amendment) Act 2020 ("LBATA Amendment"), with effect from YA 2020, a Labuan entity that fails to comply with the Substance Requirements (where required) will be taxed at the rate of 24 per cent on its net profits for that YA under the LBATA. This would level the playing field with Malaysian companies that are taxed separately under the ITA, for whom the corporate tax is also 24 per cent.

3. Disclosure of beneficial ownership
Previously, the Companies Act 1965 did not require disclosure of beneficial ownership ("BO") in Malaysian companies. 

Currently, under Section 56 of the Companies Act 2016 ("CA 2016") which came into force on 31 January 2017, companies may, by notice in writing, require any member of the company:
(a) to inform the company whether the member holds any voting shares in the company as beneficial owner or as a trustee; and
(b) if the member holds the voting shares as trustee, so far as it is possible to do so, to indicate the persons for whom the member holds the voting shares by name and by other particulars sufficient to enable those persons to be identified and the nature of their interest.

The Companies Commission of Malaysia ("CCM") recently issued the Guidelines for the Reporting Framework for Beneficial Ownership of Legal Persons which came into force on 1 March 2020 ("BO Guidelines"). The framework under the BO Guidelines imposes an obligation on all companies incorporated in Malaysia and foreign companies registered in Malaysia under the CA 2016 to:
(a) identify and verify its ultimate beneficial owners;
(b) keep the requisite information on their BO ("BO Information") and ensure the register of BO is accurate and up to-date;
(c) enable access to the BO Information in a timely manner; and
(d) notify the CCM of the BO Information obtained, including any changes thereto.

Accordingly, existing companies have until 31 December 2020 to obtain and update the BO Information. Thereafter, such companies are required to submit the BO Information to the CCM within 14 days from the end of the transitional period (i.e. within 14 days from 31 December 2020) or such extended time frame as the CCM may determine.

Generally, the beneficial owner of a company is defined as the "ultimate owner of the shares and does not include a nominee of any description". In relation to companies that are limited by shares, the BO Guidelines define a beneficial owner as an individual (i.e. natural person) who satisfies any one (1) of the criteria listed below:

(i) has a direct or indirect interest of not less than 20 per cent of the shares of the company;
(ii) holds directly or indirectly not less than 20 per cent of the voting shares of the company;
(iii) has the right to exercise "ultimate effective control" over the company, directors or the management of the company; (8)
(iv) has the right or power to directly or indirectly appoint or remove director(s) who hold a majority of the voting rights at board meetings; or
(v) is a member of the company and, under an agreement with another member, controls alone a majority of the voting rights in the company.

The BO Information required to be collected includes the full name of the beneficial owner, residential address, nationality, identification number, percentage of ownership or voting rights in the company, type of beneficial ownership (direct or indirect), and if such person becomes or ceases to be a beneficial owner.

4. Common Reporting Standard and automatic exchange of information in Malaysia - updated List of Reportable Jurisdictions
The IRB published the first List of Reportable Jurisdictions on 15 January 2018 and has subsequently updated the list several times. The latest update was on 15 January 2020 whereby Bulgaria was removed from the list, and Cook Islands, Cyprus and Saint Lucia were added. The list now includes 67 jurisdictions and forms the final list for reporting to the IRB in 2020.

5. Other relevant updates
a. Tax residency issues arising from travel restrictions due to COVID-19 
In efforts to curb the spread of the COVID-19 virus in Malaysia, the Malaysian government implemented a nationwide Restricted Movement Order ("MCO") effective 18 March 2020, which was further extended several times until 31 August 2020 inclusive (at the time of writing). The containment period included travel restrictions on the movements into, out of and within the country. As a result of this, there is concern as to whether Malaysians abroad would still be considered Malaysian tax residents, notwithstanding that such persons may not have spent enough time physically in Malaysia for this YA (8). Likewise, non-Malaysian tax residents who are unable to leave Malaysia to return to their home countries may be at risk of being treated as a Malaysian tax resident if the number of days spent in Malaysia is significant.

In view of the above, the IRB released a FAQ on International Tax Issues Due to COVID-19 Travel Restrictions in May 2020, which clarified that any period of temporary absence from Malaysia, or presence in Malaysia due to COVID-19 travel restrictions, will not affect the tax residency of the affected individuals. This means that (i) Malaysian tax residents abroad will continue to be treated as being physically in Malaysia; and (ii) non-Malaysian tax residents who are currently in Malaysia will not be treated as having spent time in Malaysia during this period. The affected individual must be able to show that his or her presence in Malaysia (or non-presence in Malaysia, as the case may be) is due to COVID-19 travel restrictions, and that all relevant documentations and records (such as travel documents, guidelines/announcements by local governments on travel policies, etc.) are kept and can be furnished to the IRB if requested.

b. Introduction of a Tax Identification Number ("TIN")
It has been announced that, beginning in January 2021, Malaysians above the age of 18 and corporate entities will automatically be assigned a TIN. However, no further details on this have been released yet.

Footnotes and references

1 Approved under Section 44(6) of the Income Tax Act ("ITA").
2 The tax deduction is applicable to cash donations or contributions in kind made to certain prescribed institutions and sports activities.
3 Under paragraph 34 of Schedule 2 of the RPGT Act.
4 Under paragraph 34A of Schedule 2 of the RPGT Act.
5 A PEH company has been defined by the LIC as a company that only holds equity participation and earn only dividends and capital gains. The receipt of interest from financial institutions arising from the placing of dividend monies or proceeds of disposal of shares, will not disqualify a company of its PEH status.
6 For Labuan non-PEH entities, a "full time employee" in Labuan can be an employee at any level so long as the functions or job scopes are dedicated to serve the business operations of the said entity
7 Pursuant to the Labuan Business Activity Tax (Exemption) Order 2020 which was gazetted on 2 June 2020.
8 Under the Malaysian ITA, a person is considered tax resident if he or she fulfils certain conditions, including
(amongst others) being in Malaysia for a period or periods amounting to at least 182 days in a YA ("Tax
Residency Test").