Exemption Orders – Foreign-Sourced Income

Introduction

Before the 1st of January 2022, Foreign sourced income remitted back to Malaysia was exempt from taxation per Schedule 6 paragraph 28 of the Income Tax Act 1967 (ITA).

Budget 2022

The amendment to Schedule 6 paragraph 28 proposed by the Budget 2022 to take effect on 1 January 2022 will remove the exemption for foreign-sourced income for Malaysian tax residents.

The Finance Act of 2021 has adopted this proposal.

As a result of the Finance Act 2021

1. Foreign-sourced income for Malaysian tax residents, if brought into Malaysia, will be subject to Malaysian taxes;
2. If the foreign-sourced income is not brought into Malaysia, it will not be subject to Malaysian taxes;
3. All non-residents will continue to be exempted from tax under Schedule 6 paragraph 28;
4. The territorial basis of taxation, which has been used in Malaysia for a very long time, will now be replaced by a territorial and remittance basis due to this change.

Ministry of Finance (MOF)’s Press Release

It was announced by the Ministry of Finance (MOF) in a press release on December 30 2021, that subject to the eligibility conditions stated in the guidelines; the government has agreed to exempt from taxation until December 31, 2026:

1. All sorts of foreign income generated by individuals (except for individuals carrying on business through partnerships in Malaysia); and
2. Dividend income earned by Companies and Limited Liability Partnerships.

Federal Government Gazette

The following orders have been gazetted on July 19 2022, as a result of the above announcement made by the Ministry of Finance on December 30 2021, concerning the tax exemption of particular forms of foreign-sourced income (FSI) received from January 1 2022 to December 31 2026:

• Income Tax (Exemption) (No. 5) Order 2022
  • To provide an exemption of FSI for the individual resident in Malaysia who has income received in Malaysia from outside Malaysia;

• Income Tax (Exemption) (No. 6) Order 2022
  • To provide an exemption for dividends derived from overseas sources that are received by Malaysian resident businesses, limited liability partnerships (LLPs), and individuals in connection with a Malaysian partnership activity.