education about malaysian taxation principles and practice Part 6

7.0 Income received in Malaysia from outside Malaysia

Section 3 of the Act extends its territorial scope to include foreign source income that is ‘received’ in Malaysia from outside Malaysia. It imposes income tax on income received in Malaysia from outside Malaysia which is known as ‘foreign source income’.

The term ‘received’ is not defined in the Act. In the ordinary sense, it means ‘come into possession’. Thus, income that is not physically received in Malaysia would not be liable to Malaysia income tax. For example, the mere receipt of a cheque in Malaysia would not constitute ‘received’ unless it is credited into a bank account in Malaysia.

‘Received’ and ‘remitted’ are not the same. What is remitted, for example, a cheque payment, may have been lost in the post and may have never been received in Malaysia. Similarly, money brought into Malaysia by a debtor’s agent for payment to the Malaysian creditor may have never been received by the creditor if the debtor’s agent fails to discharge his debts.

7.1 Exemption
With effect from Y/A 2004, foreign source income received by any person (other than a resident company carrying on the business of banking, insurance, sea or air transport) will be exempted from income tax. The phrase ‘any person’ includes individual, trust, executor, unit trust, trading company, manufacturing company and investment holding company. Resident status is no longer relevant for exemption of foreign source income. [paragraph 28, Sch 6]

In the case of resident company, foreign source income exempted shall be credited into exempt income account of which exempt dividend on a two tier basis can be declared.

Prior to Y/A 2004, non-resident are exempted from income tax on foreign source income received in Malaysia by virtue of para 28, Sch 6 of the Act. Non-resident refers to non-resident companies, trust, individuals and other body of persons.

7.2 Y/As 1998-2003
Income Tax (Exemption) (No.48) Order 1997 [P.U.(A) 469/97]

With effect from Y/A 1998, the Minister of Finance exempts unit trust and resident companies (other than a company carrying on the business of banking, insurance, shipping and air transport) on income arising from sources outside Malaysia and received in Malaysia (foreign source income).

Such foreign source income which is tax exempt will be credited into an exempt income account for the purpose of declaring exempt dividends (two-tier exempt dividends). Corporate shareholder receiving such exempt dividends can further credit such dividends. Income Tax (Exemption) (No.48) Order replaced s 3C of the Act.
P.U.(A) 469/1997 was revoked with effect from Y/A 2004. [P.U.(A) 10/2004]

7.3 Foreign expert
In the year 2001, Malaysia government encourages Malaysian citizens working overseas (foreign experts) to return to Malaysia to boost the Malaysian economy. Income Tax (Exemption) Order 2001 [P.U.(A) 67/2001] takes effect on 1 January 2001 and its subsequent Y/As, allowing foreign source incomes of Malaysian citizens and their spouse which are received in Malaysia to be tax-exempt for a period of two years from the date they first arrived in Malaysia.

In order to qualify for the two years tax exemption, the experts must fall within one of the qualifying expertise and skills as stated by the Ministry of Human Resources and a prior approval must be obtained from the Special Committee set up by the same Ministry before their return.