RESIDENCE is basically determining where the company or LLP’s home is for tax purposes.
Whenever you undertake international transactions, whether it is commercial or financial, one of the questions that has to be answered in any dealings with the bankers or trade partners is the location of your residence, because your residence status will have an impact on the transaction and the parties transacting with yourself.
In Malaysia, the tax treatment of a resident company and LLP is different from a non-resident. The key differences are in the area of tax rates, scope of taxes, withholding taxes, incentives, enjoyment of any specific exemptions, and entitlement to bilateral or unilateral tax credit.
Non-residents cannot enjoy the SME tax rates of 15% and 17%. They will be subject to the normal corporate tax rate of 24%. Dividends distributed by non-resident companies are not deemed to be derived from Malaysia.
Non-residents also benefit from the Malaysia double tax agreements to avoid double taxation.
The big disadvantage of being a non-resident is the impact of withholding taxes on any transactions the non-resident company or LLP undertakes with a Malaysian entity.
Generally, interest and royalty payments made by a Malaysian entity to a non-resident will be subject to withholding taxes. Any payments for services rendered by non-residents in Malaysia will also attract withholding tax.
Similarly, any service portion of longer-term projects will also be subject to withholding tax.
Overall, Malaysian resident entities dealing with non-residents will have to be very careful to ensure that proper withholding taxes are deducted.
Otherwise, the Malaysian payer will be denied the deduction of the expenditure and will be accountable for the withholding tax together with any late payment penalties.
Tax incentives under the Income Tax Act 1967 and the Promotion of Incentives Act will not be available to non-residents.
Residence is based on where the management and control of the company is, or in the case of LLPs, it is where the management and control of its affairs are exercised by its partners.
It is a question of fact. It is usually based on where the board of directors or the partners meet to take key management and commercial decisions that are necessary for the conduct of the entity’s business is made.
The authorities are looking at the place where the effective management is exercised. This is evidenced by the location of where the board of directors make their decisions.
It is possible for companies and LLPs to have dual residence. In such an event, you need to look at the double tax treaty and look at the tiebreaker rules.
Usually this is resolved by reviewing the actions taken by the parties in the different location and the residence is usually aligned to the location where the key policy decisions are taken.
Points to note
Once a company or LLP has established its residence in Malaysia, its residence status will automatically continue until the contrary is proven.
The evidence needed to support the residence status is usually the constitution of the company, minutes of board meetings, company’s letterhead, and locations of other important meetings etc.
Many countries require a certificate of residence to enjoy the double tax treaty benefits such as a lower rate of withholding tax. This can be obtained from the Inland Revenue Board provided you have the above information.
This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director
SM Thanneermalai (www.thannees.com).