Spotlight on: Malaysia changes stand on taxation of foreign income… Again

On 29 October 2021, the Minister of Finance presented the Budget 2022 in Parliament, proposing to tax foreign-sourced income remitted to Malaysia. Malaysia taxes income on a territorial basis and foreign income is generally not taxed unless it is remitted into Malaysia. However, during the 1997/1998 Asian financial crisis, Malaysia exempted taxation on foreign-sourced income regardless of remittance status, and the exemption has remained in place until the proposed change in Budget 2022. This was not unexpected, as just a few weeks earlier, Malaysia had been downgraded to the European Union’s “grey list” on tax evasion, which prompted an express commitment by Malaysia to either repeal or amend existing tax laws that exempt foreign-sourced incomes.

Nonetheless, barely 2 months later, on 30 December 2021, the government announced that it would continue to exempt all types of foreign-sourced income for individuals who are tax resident in Malaysia except those carrying on partnership businesses in Malaysia from 1 January 2022 until 31 December, 2026. Companies and limited liability partnerships that are tax resident in Malaysia will be exempted on foreign-sourced dividend income. It was also announced that foreign-sourced income received in the year of assessment 2022 will be exempt from the computation of tax for cukai makmur (windfall tax) purposes.