malaysia funds mtg taxation 2010

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© 2010 KPMG Tax Services Sdn. Bhd., a Malaysia partnership and a member firm of the KPMG network of

independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All

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MalaysiaTaxation

FUNDS AND FUND MANAGEMENT 2010

3.1 Taxation of funds

Dividend income

Unit trust

For Malaysian taxation purposes, a unit trust (except for approved Real Estate

Investment Trusts (REITs) or Property Trust Funds (PTFs)) is treated as an

investment holding entity.

With effect from the year of assessment 2008, a single tier income tax system

has replaced the imputation system. There are transitional provisions that allow

taxpayers to utilize their existing dividend franking credits up ti ll the end of theyear 2013.

Under the imputation system, a Malaysian resident company is required to

deduct tax at the prevailing corporate tax rate on taxable dividends paid to its

shareholders. This tax is already accounted for through the tax paid by the

company on its taxable profits which is accumulated as dividend franking

credits (Section 108 credits).

When shareholders receive taxable dividends, they are entitled to a tax credit

for the tax already paid by the company in respect of the income. Those credits

are then used to offset the shareholder’s tax liability.

Under the single tier system, profits are only taxed at the company level and

dividends received by shareholders are exempt from tax.

The following types of dividend income are also exempt from tax:

• Tax exempt dividends received from companies enjoying tax incentives (or

which had previously enjoyed tax incentives) which are paid out of exempt

income; or

• Dividend income received from sources outside Malaysia (foreign source)

and remitted to Malaysia (except where the recipient is a resident companycarrying on the business of banking, insurance or sea or air transport).



2 Malaysia – Taxation



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Closed-end fund companies

Under the single tier system, dividends received from resident companies are

exempt from tax. In addition, tax exempt dividends received from companies

enjoying/previously enjoyed tax incentives which are paid out of exempt

income and foreign-sourced dividends received by closed end fund companies

are also exempt from tax. Where the payer company pays franked dividends

during the transitional period, such dividend income would be subject to tax at

the prevailing corporate tax rate (unless exemption is granted to the closed-end

fund company). The corresponding Section 108 credits attached to the

dividends received may then be used to offset the closed-end fund company’s

tax liability.

Approved unit trust

Income of an approved unit trust would be exempted from tax pursuant to the

Income Tax Exemption (No 12) Order 1985. An approved unit trust is one which

is approved by the Minister of Finance where not less than 90 percent of the

investments are in government securities and the remainder in commercial

papers.

Interest income

Unit trust

Interest income received is assessed and charged to tax (the prevailing rate is

25 percent) unless exemption is granted to the unit trust. The tax rate of 25

percent will also apply to, amongst others, a trust body. However, certain

interest income earned from the following sources is exempt from tax:

• any savings certificates, issued by the government;

• securities or bonds issued or guaranteed by the government;

• debentures or Islamic securities, other than convertible loan stock,

approved by the Securities Commission;

• Islamic securities originating from Malaysia, other than convertible loan

stock issued in any currency other than Ringgit Malaysia and approved by

the Securities Commission or the Labuan Financial Services Authority;

• Bon Simpanan Malaysia issued by Bank Negara Malaysia;

• interest income derived from Malaysia and paid or credited by any bank or

financial institution licensed under the Banking and Financial Institutions

Act 1989 or the Islamic Banking Act 1983; or






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• bonds and securities issued by Pengurusan Danaharta Nasional Berhad.

Foreign-sourced interest income received by the unit trust in Malaysia is also

exempted from tax.


Interest income received is subject to the corporate tax rate (the prevailing rate

is 25 percent) unless exemption is granted to the closed-end fund company.

However, interest income received by a listed closed-end fund company from

the following sources is exempt from tax:

• any savings certificates, issued by the government;


• debentures or Islamic securities, other than convertible loan stock,







Foreign-sourced interest income received by the closed-end fund companies in

Malaysia is also exempted from tax.






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Approved unit trust

As highlighted in the section regarding dividend income, income (which would

include interest income) received by an approved unit trust would be exempted

from tax pursuant to the Income Tax Exemption (No12) Order 1985.

REITs/PTFs

Interest income received is assessed and charged to tax (the prevailing rate is

25 percent). However, interest income earned by the REIT/PTF from the

following is exempt from tax:

• any savings certificates issued by the government;


• debentures or Islamic Sercurities other than convertible loan stock,






• interest income derived from Malaysia and paid or credited by any bank or

financial institution licensed under the Banking and Financial Institutions

Act 1989 or Islamic Banking Act 1983; or


Foreign-sourced interest income received by the REIT/PTF in Malaysia is also

exempted from tax.

Rental income

Unit trusts and closed–end fund companies

Both unit trusts and closed-end fund companies are taxed on rental income at

the prevailing tax rate of 25 percent unless a specific exemption is granted to

the unit trust and closed-end fund companies. However, as income of an

approved unit trust is exempted from tax under Income Tax Exemption (No 12)

Order 1985, rental income derived by such approved unit trust would be

exempted from tax.






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REITs/PTFs

Pursuant to Section 63C of the Income Tax Act, 1967 (ITA), which is the main

operative section for the tax treatment on REITs/PTFs, any rental income

received by the REIT/PTF would be treated as business income.

Pursuant to Section 61A of the ITA, REITs/PTFs will be exempted from tax on

income provided that at least 90 percent of the total income is distributed to

the investors. Please see the section regarding the distribution of unitholders

below.

Gain from realization of investments

Gains arising from the realization of investments which are capital in nature of a

unit trust, closed-end fund companies, approved unit trusts and REITs/PTFs

may not be subject to tax under the ITA.

Effective from 1 January 2010, where chargeable assets comprising of real

property or shares in a real property company are disposed of after five years

from the date of the acquisition of such chargeable assets, the chargeable

gains arising from the disposal of such chargeable assets will be exempt from

tax. However, where the disposals of such chargeable assets are made within

five years from the date of the acquisition of such chargeable assets, the gains

will be subject to RPGT at an effective rate of 5 percent.

Permitted expenses

Unit trust

Pursuant to Section 63B of the ITA, only a proportionate deduction is given for

permitted expenses. The types of permitted expenses are:

• managers’ remuneration;

• maintenance of a register of unitholders;

• share registration expenses; and

• secretarial, audit, and accounting fees, telephone charges, printing and

stationery costs, and postage.

In the event that a unit trust derives rental income, a special deduction equal to

10 percent of the qualifying plant and machinery expenditure may be allowed.






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A proportionate deduction on permitted expenses similar to that for unit trusts

is extended to closed-end fund companies (Section 60H of the ITA).

REITs/PTFs

Pursuant to the Income Tax (Deduction for Establishment Expenditure of

REIT/PTF) Rules 2006, effective from year of assessment 2006, a tax deduction

is allowed on establishment expenditure incurred by the REIT/PTF in the basis

period for a year of assessment. Establishment expenditure means legal,

valuation, and consultancy fees for the purpose of establishing the REIT/PTF

prior to approval by the Securities Commission.

Where there is insufficient income to utilize the deductible expenses in the

current year, any excess of expenses would not be allowed to be carried

forward. Any unutilized losses of the REIT/PTF in respect of its business of

rental will not be allowed to set off against any other income sources of the

REIT/PTF.

Distribution to unitholders/shareholders

Unit trust

Distributions to unitholders from exempt income are tax exempt in the hands

of the unitholders.


Distributions of dividends to shareholders from exempt income comprising of

gains from disposal of investments, certain interest income, and foreign-

sourced income of the closed-end fund are tax exempt in the hands of the

shareholders.

Approved unit trust

Dividends received from approved unit trusts by an individual resident in

Malaysia are tax-exempt.






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REITs/PTFs

Pursuant to Sections 6(1)(i), 61A, 109D, and Schedule 1, Part X of the ITA:

• REITs/PTFs will be exempted from tax on all income provided that at least

90 percent of the total income is distributed to the investors;

• Non-corporate investors (such as, resident and non-resident individuals)

that receive distributions from REITs/PTFs out of the above exempt income

will be subject to a final withholding tax at the rate of 10 percent for the

period from 1 January 2009 to 31 December 2011;

• Foreign institutional investors (especially pension funds and collective

investment scheme funds) that receive distributions from REITs/PTFs out

of the above exempt income will be subject to a final withholding tax at the

rate of 10 percent for the period from 1 January 2009 to 31 December

2011;

• Local corporate investors will be subject to the existing tax treatment and

tax rates; and

• Foreign corporate investors that receive distributions from REITs/PTFs out

of the above exempt income will be subject to a final withholding tax at the

rate of 25 percent from the year of assessment 2009 onwards.

Where the 90-percent distribution is not complied with, the total chargeable

income of the REITs/PTFs will be subject to income tax at the prevailing tax

rate. Income of the REIT/PTF, which has been subjected to tax and not

distributed in prior years to unitholders (both resident and non-resident), would

be distributed to unitholders net of tax but with corresponding tax credits. The

tax credits may be set off against the unitholders’ taxable income. No other

withholding tax would be imposed on such income distribution of the REIT/PTF.

Others

• There are registration fees imposed on the registration of a new

prospectus and trust deed.

• There is no capital duty payable on the increase in the maximum unit size

of the fund.

• Pursuant to the Real Property Gains Tax (Exemption) (No 4) Order 2003,

chargeable gains accruing on the disposal of any chargeable assets to a

REIT/PTF which is approved by the Securities Commission, are exempt

from RPGT.






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• There are no Malaysian transfer duties imposed on overseas securities

transferred outside Malaysia. Stamp duty applies on the transfer of

securities affected in Malaysia. For Malaysian securities transacted

overseas, the transaction would only be deemed to take effect if the

documents are properly stamped in Malaysia.

• Pursuant to the Stamp Duty (Exemption) (No 4) Order 2004, all instruments

of transfer of real property to a REIT/PTF approved by the Securities

Commission are exempted from stamp duty. In addition, all instruments of

deed of assignment executed between a REIT/PTF approved by the

Securities Commission and the disposer relating to the purchase of real

property are also exempted from stamp duty under the Stamp Duty

(Exemption) (No. 27) Order 2005.

3.2 Taxation of resident unitholders/investors

Unit trust

A unitholder will be taxed on the amount equivalent to his/her share of the total

taxable income of the unit trust, to the extent that this is distributed to him/her.

A resident individual would be subject to tax in Malaysia at scale rates. The

prevailing scale rates range from 1 percent to 26 percent. A corporate

unitholder would be taxed at the corporate tax rate (the prevailing rate is 25

percent). Corporate unitholders with a paid-up capital of MYR 2.5 million and

below will be subject to a tax rate of 20 percent on chargeable income of up to

MYR 500,000. For chargeable income in excess of MYR 500,000, the prevailing

rate of 25 percent is applicable. With effect from year of assessment 2009,

changes have been effected to limit the applicability of the reduced tax rate

even where a resident company’s paid up ordinary share capital does not

exceed MYR 2.5 million. Amongst other things, the reduced tax rate will not

apply to a resident company with a related company whose share capital is

more than MYR 2.5 million at the beginning of the relevant year of assessment.

The income distribution from the unit trust will carry with it a tax credit in

respect of the tax paid by the unit trust. A unitholder will be entitled to utilizethe tax credit as a set off against the tax chargeable on the income distribution

received by him/her.

However, if the distribution is out of exempt income then such income

received will also be tax exempt in the hands of the unitholder (both individual

and corporate unitholders other than a company carrying on the business of

banking, insurance, shipping, and air transport). A unitholder is not taxed on

distributions out of gains from realization of investments by the fund.

A resident unitholder is not taxed on the undistributed income or gains of the

unit trust






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The taxation of gains on disposal of units in a unit trust depends on the status

of the unitholder. A passive investment holder is not subject to income tax on

such gains which are regarded as capital gains.

There are no wealth, gift, or inheritance taxes in Malaysia.

REITs/PTFs

You would note that REITs/PTFs have two forms of distributions, namely that

from income distributed in the same basis period and that from income that

had not been distributed in prior years. The taxation of these two forms of

distribution received by unitholders is outlined below.

Pursuant to Sections 6(1)(i), 61A, 109D and Schedule 1 Part X of the ITA:

Income of the REIT/PTF distributed in the same basis period

Where 90 percent or more of the REIT/PTF’s income is distributed to its

investors, the total income of the REIT/PTF is exempt from tax at the REIT level

pursuant to Section 61A of the ITA.

Non-corporate investors (such as, individual unitholders) would be subject to a

final withholding tax of 10 percent for the period from 1 January 2009 to 31

December 2011 on income received from a REIT/PTF distributed out of the

above exempt income.

Resident corporate unitholders would be subject to corporate tax (the prevailing

rate is 25 percent) on distributions of income from the REIT/PTF to the extent

of an amount equivalent to their share of the total taxable income of the

REIT/PTF. Corporate unitholders with paid-up capital in the form of ordinary

shares of MYR 2.5 million and below will be subject to a tax rate of 20 percent

on chargeable income of up to MYR 500,000. For chargeable income in excess

of MYR 500,000, the prevailing rate of 25 percent is applicable. With effect

from year of assessment 2009, changes have been effected to limit the

applicability of the reduced tax rate even where a resident company’s paid upordinary share capital does not exceed MYR 2.5 million. Amongst other things,

the reduced tax rate will not apply to a resident company with a related

company whose share capital is more than MYR 2.5 million at the beginning of

the relevant year of assessment.

Income of the REIT/PTF which was not distributed in the previous years

Such income would have been subject to income tax at the REIT/PTF level. The

income distribution from the REIT/PTF which has been subjected to tax at

REIT/PTF level would carry with it a tax credit proportionate to each unitholder’s

(both resident and non-resident) share of the total taxable income in respect ofthe tax paid by the REIT/PTF.






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Both resident and non-resident unitholders would be entitled to utilize the tax

credit as a set off against the tax payable by them. No other withholding tax

would be imposed on the income distribution of the REIT/PTF.

3.3 Taxation of resident unitholders/investors in a

foreign fund

Foreign-source income (such as, dividend and interest income) received by a

resident company (including closed-end fund companies but excluding

companies involved in the business of banking, , insurance, or sea or air

transport) or a unit trust or a resident individual is exempt from tax. Whether

gains upon the disposal of units in a foreign fund are subject to tax depends on

the status of the resident unitholder that is, whether he/she is regarded as

trading in securities or a passive investor. A trader is taxed on all gains as the

gains are viewed as income gains while for a passive investor, the gains are

capital gains and not subject to Malaysian tax. The onus is on the unitholder to

demonstrate that a gain is capital in nature. However, the resident unitholder

may be exposed to tax in the foreign jurisdiction.

There are no wealth, gift, or inheritance taxes in Malaysia.

3.4 Taxation of non-resident unit holders/investors in

a resident fund

Unit trust

Pursuant to Section 61(1A) of the ITA, a unitholder shall be assessed and

charged to tax on his/her share of the total income of the unit trust distributed

to him/her by way of distributions in the basis year of that year of assessment.

As mentioned in 3.1 above certain distributions are tax exempt.

The unitholder receives the distributions net of tax and the attached tax credit

will be allowed for set off against the tax payable on the income of the

unitholder.

As there is no capital gains tax in Malaysia, gains arising from the disposals of

the units by non-resident unitholders are not charged to tax.

REITs/PTFs

Income of the REIT/PTF distributed in the same basis period

Non-resident individual unitholders would be subject to a final Malaysian

withholding tax of 10 percent for the period from 1 January 2009 to 31

December 2011 on income received from a REIT/PTF.






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Foreign institutional investors would be subject to a final withholding tax of 10

percent for the period from 1 January 2009 to 31 December 2011 on income

received from a REIT/PTF.

Foreign corporate investors would be subject to a final withholding tax at the

prevailing corporate tax rate of 25 percent on distributions of income from a

REIT/PTF.

Non-resident unitholders may also be subject to tax in their respective

jurisdictions and depending on the provisions of the relevant tax legislation and

any double tax treaties with Malaysia, the Malaysian tax suffered may be

creditable in the foreign tax jurisdictions.

Income of the REIT/PTF which was not distributed in the previous years

In relation to the distribution of income not previously exempted at the

REIT/PTF level, unitholders who are not resident in Malaysia, for tax purposes,

would be subject to Malaysian income tax (the prevailing rate is 25 percent for

companies and 26 percent for non-resident individuals)

Where the income has been subjected to tax at the REIT/PTF level, both

resident and non-resident unitholders would be entitled to utilize the tax credit

as a set off against the tax payable by them. No other withholding tax would be

imposed on the income distribution of the REIT/PTF.

There are no gift taxes, inheritance taxes, or wealth taxes in Malaysia.

Malaysia does not impose taxes on undistributed income or gains at the

unitholders’ level.

Taxation of fund management/custodian companies

Fund management companies and trustees are subject to corporate income tax

(the prevailing rate is 25 percent) as any other resident company in Malaysia.

As such, the basic principles of taxation would apply in assessing the income offund management companies and trustees.

Where a foreign fund management company carries on business in Malaysia of

providing fund management services to foreign and local investors, the income

derived from the provision of fund management services to foreign investors is

treated as a separate and distinct business source from that source of income

derived from the provision of fund management services to local investors.

The chargeable income in relation to the source consisting of the provision of

fund management services to foreign investors is the statutory income from

that source reduced by any unabsorbed losses brought forward relating to that

source. This source of income is subject to a concessionary tax rate of 10






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percent. The source of income derived from the provision of fund management

services to local investors is taxed at the normal corporate tax (the prevailing

rate is 25 percent).

In the basis year for a year of assessment in which the foreign fund

management company is a tax resident, the source of the chargeable income in

relation to the provision of fund management services to foreign investors,

after the deduction of the tax thereon, is credited to a tax exempt account,

which can be used to pay tax exempt dividend.

The Income Tax (Exemption)(No15) Order 2007 exempts from income tax, the

statutory income derived by a resident company from the business of providing

fund management services to foreign investors in Malaysia in respect of anIslamic fund.

3.5 Entitlement to income

A unitholder in a fund is regarded as being in receipt of income only when a

distribution of income is made by the fund to the unitholder.

3.6 Double tax agreements

Malaysia has concluded double taxation agreements with the following

countries.

The number of effective double tax agreements is as follows:

Albania, Republic Mongolia

Argentina (2) Morocco

Australia Myanmar

Austria Namibia

Bahrain Netherlands

Bangladesh New Zealand

Belgium Norway

Bosnia Herzegovina (3) Pakistan

Canada Papua New Guinea

Chile Philippines

China, People’s Republic PolandCroatia Qatar

Czech Republic Romania

Denmark Russia

Egypt Saudi Arabia

Fiji Seychelles

Finland Singapore

France South Africa

Germany Spain

Hungary Sri Lanka

India Sudan

Indonesia Sweden

Ireland Switzerland

Islamic Republic of Iran (4) Syrian Arab Republic

Italy Taiwan (1)






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Japan Thailand

Jordan TurkeyKazakhstan (3) United Arab Emirates

Korea, Republic United Kingdom

Kuwait United States of America ( 2)

Kyrgyz, Republic Uzbekistan

Lebanese Republic Venezuela

Luxembourg Vietnam

Malta Zimbabwe (3)

Mauritius

Notes

(1) Double tax relief has been given to the Taipei Economic and Cultural Officein Malaysia by way of an exemption order. Malaysia has also signed the

Agreement for the Avoidance of Double Taxation with the Malaysian Friendship

and Trade Centre in Taipei (MFTC).

(2) Limited double tax treaty.

(3) Not effective

Double tax agreements under negotiation:

Brazil Norway (New Agreement)

Canada (New Agreement) PortugalCyprus Russia (New Agreement)

Finland (New Agreement) South Korea (New Agreement)

India (New Agreement) Tunisia

Laos Uruguay

Mexico Ukraine

3.7 Other tax-favored vehicles

Investing via Labuan

The Labuan Financial Services and Securities Act 2010, which was gazetted on

11 February 2010, now governs the licensing and regulation of financial

services and securities in Labuan, the establishment of an exchange and other

matters relating thereto. An enactment entitled Labuan Islamic Financial

Services and Securities Act 2010, also gazetted on 11 February 2010, governs

the licensing and regulation of Islamic financial services and securities in

Labuan and other matters related thereto. These legislation set out the

regulations pertaining to amongst others, the establishment of mutual funds

and fund managers.






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Tax Regime in Labuan

The Labuan Business Activity Tax Act 1990 stipulates that Labuan companies

involved in trading activities such as banking, insurance, trading, management,

licensing, shipping operations, and any other activity which is not a Labuan non-

trading activity, are given a choice of either paying tax at the rate of 3 percent

on net audited profits or a lump sum of MYR 20,000 for each year of

assessment. Labuan companies are provided with an irrevocable election for

their income from their Labuan business activities to be taxed under the ITA, as

an alternative to the existing option under the Labuan Business Activity Tax Act

1990.

A Labuan company must be one incorporated or registered under the LabuanCompanies Act, 1990. Subject to certain limited exceptions, the activities of

the company must be carried on with non-residents or other offshore

companies and in a currency other than the Malaysian Ringgit.

A Labuan company carrying on a Labuan non-trading activity is not chargeable

to tax. A Labuan non-trading activity means an activity relating to the holding of

investments in securities, stock, shares, loans, deposits, and any other

properties by a Labuan entity on its own behalf.

Where a Labuan company carries on both a Labuan trading activity and a

Labuan non-trading activity it will be deemed to be carrying on a Labuan trading

activity.

Income derived by a Labuan company from an activity which is not a Labuan

business activity will be taxed under the ITA. A Labuan business activity

means a Labuan trading or a Labuan non-trading activity carried on in, from or

through Labuan in a currency other than the Malaysian Ringgit by a Labuan

entity.

3.8 Transfer taxes, stamp duty, and capital duty

Generally, there are no transfer taxes in Malaysia. Additionally, there is also no

capital gains tax presently imposed in Malaysia except for capital gains arising

from the disposal of real properties or shares in real property companies.

A fund would be subject to stamp duty on the purchases and sales of securities

in Malaysia. The stamp duty chargeable on transactions effected via contract

notes on the Bursa Malaysia (the Malaysian Stock Exchange) is at the rate of

MYR 1 for MYR 1,000 or fractional part of the contract value (payable by either

buyer or seller), subject to a maximum of MYR 200 per contract (effective 17

March 2003). Whereas, for stocks not quoted on Bursa Malaysia, the stamp

duty payable will be based on 0.3 percent of the value of the securities involved

and this is normally borne by the acquirer. The basis for determining the value

of those shares is as set out below:






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• For cases where the sale of shares requires the approval of the Securities

Commission, the price/value per share as approved by Securities

Commission may be accepted for the purpose of valuation of such shares.

A copy of the letter from the Securities Commission must be submitted as

evidence;

• For cases of companies incurring losses, the par value or net tangible

assets (NTA) or sale consideration whichever is the highest is to be used

for the purpose of computation of the stamp duty payable. The formula for

computing the value per share based on NTA is as follows:

NTA per share = Total Assets-Total Liabilities

Issued Share Capital

• For cases other than those mentioned above, a comparison is to be made

between NTA, price earning multiple/price earning ratio (PER), and sale

consideration, whichever is the highest.

The tax implications on the purchase or sale of securities by a fund outside

Malaysia would depend on the tax system of each country in which the

securities are being traded.

Capital duties

There are no capital duties payable on the increase in the maximum unit size of

the fund. In the case of a closed-end fund company which is governed by the

Companies Act, the increase in authorized share capital would not attract

additional capital duties. This is due to the fact that it would have already

incurred the maximum capital duties payable of MYR 70,000 as a closed-end

fund company is required to have a minimum issued and paid up capital of

MYR 100 million (which attracts the maximum rate of duties) upon its

incorporation.

3.9 Miscellaneous

None

KPMG in Malaysia

Nicholas A. Crist

KPMG Tax Services Sdn Bhd

KPMG Level 10, KPMG Tower, 8, First Avenue, Bandar Utama

Petaling Jaya

47800

Malaysia

Tel. +603 7721 3388

Fax +603 7721 7288e-Mail: [email protected]

mailto:[email protected]









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The information contained herein is of a general nature and is not intended to

address the circumstances of any particular individual or entity. Although we

endeavor to provide accurate and timely information, there can be no guarantee

that such information is accurate as of the date it is received or that it will

continue to be accurate in the future. No one should act upon such information

without appropriate professional advice after a thorough examination of the

particular situation.

malaysia funds mtg taxation 2010

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