Crowe Chat Vol.1/2024

Introduction 

The law governing Capital Gains Tax (CGT) was enacted by the Finance (No. 2) Act 2023 which came into effect on 29 December 2023. On the same day, the Income Tax (Exemption) (No 7) Order 2023 was gazetted in relation to CGT, in order to defer the effective date for CGT to 1 March 2024 in respect of disposal of shares of an unlisted company incorporated in Malaysia. For CGT on the gains from disposal of foreign capital assets received in Malaysia, the effective date remains as 1 January 2024.

Income Tax Exemption Order

To provide exemption from CGT on the gains from disposal of foreign capital assets received in Malaysia, Income Tax (Exemption) (No. 3) Order 2024 was gazetted on 4 March 2024.

Details of the Income Tax Exemption Order

• The Income Tax Exemption Order has been gazetted to provide exemption from CGT on gains from disposal of foreign capital assets (excluding the intellectual property rights) received by a company, limited liability partnership, trust body and co-operative society resident in Malaysia, during the period from 1 January 2024 until 31 December 2026.
• This exemption is subject to the conditions imposed by the Minister as specified in the guidelines to be issued by the Director General of Inland Revenue Board of Malaysia (IRBM) under Section 134A of the Malaysian Income Tax Act, 1967 (MITA) which shall include the following conditions:
  1. employ an adequate number of employees in Malaysia; and
  2. incur an adequate amount of operating expenditure in Malaysia.
• A person carrying on the business of banking, insurance, sea transport or air transport is not eligible for this exemption.
  
   

Introduction 

To provide exemption from CGT on the gains from disposal of foreign capital assets received in Malaysia, Income Tax (Exemption) (No. 3) Order 2024 was gazetted on 4 March 2024 (refer to page 5 and 6 of this Crowe Chat). It was mentioned in the Exemption Order that this exemption is subject to the conditions imposed by the Minister as specified in the guidelines to be issued by the Director General of IRBM under Section 134A of the MITA.

New Guideline

The IRBM has issued the Guideline on the Tax Treatment on Gains from the Disposal of Capital Assets Received from Outside Malaysia on 27 March 2024.

Details of the new Guideline

• Gains from the disposal of foreign capital assets received in Malaysia that are subject to tax refer to the disposal of foreign capital assets that occur on or after 1 January 2024. 
• The economic substance requirements to qualify for the exemption from CGT on the gains from disposal of foreign capital assets received in Malaysia are spelled out in the Guideline as follows:
  • employ adequate number of employees with necessary qualifications to carry out the specified economic activities in Malaysia; and
  • incur adequate amount of operating expenditure for carrying out the specified economic activities in Malaysia.
• It is also mentioned in the Guideline that due to the different operating methods between industries, the determination of any minimum threshold value for the appropriate economic substance requirements is based on the facts of a case. Factors that will be considered include:
  • the number of employees considering the type of activity involved, for example whether it is a capital or labor-intensive industry; 
  • whether the employee works full-time or part-time; and 
  • whether the office premises have been used to carry out related activities and whether the premises are sufficient for those activities. 
• A service director who is employed based on a contract of service and not on a contract for service can be considered as an employee. Therefore, a non-service director is not considered as an employee.
• Taxpayers must report the gains from the disposal of foreign capital assets received in Malaysia in the basis period for a YA in the annual Income Tax Return Form and not in the CGT Return Form.