Spotlight On: Malaysia to Tax Foreign Income

In its recent budget announcement on 29 October 2021, Malaysia proposed to tax income derived from foreign sources and received in Malaysia by tax residents with effect from 1 January 2022, reverting to a previous income tax scope.

The tax exemption on foreign remittances has been in place since 1998 for companies and 2004 for individuals and was introduced to encourage repatriation of funds in the wake of the Asian financial crisis of 1997-1998. A Special Income Remittance Programme will allow residents to be taxed at a flat rate of 3% on gross foreign-sourced income remitted into Malaysia between 1 January 2022 and 30 June 2022. Non-tax residents will continue to be exempt on foreign remittances.

The change comes as Malaysia was placed, in October 2021, on an EU “grey list”, which highlights concerns about double non-taxation of certain foreign-sourced passive income such as interest and royalties under “harmful” foreign-sourced income exemption regimes. Hong Kong was also placed on the list, and it has committed to legislative amendments by the end of 2022 and implementation in 2023, while at the same time upholding its long-standing territorial-source principle of taxation.

The implications of the reimposition of income tax in Malaysia on foreign remittances may be far reaching, especially in respect of dividends and interest from foreign investments or gains from real property located overseas.