MALAYSIAN taxpayers may have numerous sources of foreign income which have been subjected to tax in the countries concerned. The types of income could be business, rental, pension, employment, dividend, interest, etc.
The question in the mind of taxpayers is whether they can claim the tax paid overseas on the foreign income against their Malaysian tax liability. You can only claim the suffered overseas against the Malaysian tax liability if the foreign income is brought to tax in Malaysia.
The types of taxes suffered overseas will include corporate taxes, personal taxes, withholding taxes, branch remittance taxes, dividend withholding taxes, capital gains taxes, etc. They will not include any contributions to public insurance deductions such as the national health deductions in the United Kingdom. Any contributions to the Employer’s Provident Fund or pension funds will not be regarded as taxes for this purpose.
What is the situation now?
Currently, resident individuals receiving foreign income in Malaysia are exempted from income tax until Dec 31, 2026. The only exception is dividends. However, dividends received by individuals can also be exempted provided the foreign company paying the dividends has been subjected to income tax in the foreign country, and the headline tax of that country is not less than 15%.
Resident companies receiving all types of foreign income in Malaysia will be subject to tax in Malaysia. However, foreign dividend income can enjoy the exemption provided the foreign company paying the dividends has been subjected to income tax in the foreign country, and the headline tax of that country is not less than 15%, or the Malaysian company receiving the dividends meets the substance requirements (staff and operating expenditure conditions).
If you do not meet these conditions, then the foreign income will be taxed in Malaysia. Please bear in mind that Malaysian companies providing services from Malaysia or in the foreign country using the Malaysian resources will be subject to Malaysian tax on the grounds that the source of that income is in Malaysia provided the companies do not have a business presence in the form of a registered branch, project office, or a permanent establishment.
Calculating the tax credits
Malaysia allows taxpayers to claim a tax credit against the Malaysian tax payable. The tax credit you can claim will be limited to the Malaysian tax imposed on the foreign income. However, if the foreign taxes paid exceeds the Malaysian taxes imposed, the credit will be limited to the Malaysian tax payable on the foreign income only.
There are two types of tax credits. Where Malaysia has a tax treaty with the foreign country, you will be given the tax credit as stated above. However, if Malaysia does not have a tax treaty or a full tax treaty with the foreign country (e.g. USA) only 50% of the foreign taxes suffered will be allowed as a tax credit against the Malaysian tax payable on the foreign income.
When you are dealing with foreign dividend income that will be taxed in Malaysia, you must look at the tax treaty to determine whether underlying taxes can be included for your tax credit claims. The concept of underlying tax is to also take into account the share of the corporate taxes paid by the foreign company relating to the dividends paid. In calculating your tax credits, there are tax treaties that will allow you to claim the withholding tax and the underlying tax. An example would be the tax treaty between Malaysia and Singapore.
This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (www.thannees.com).
