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.
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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.