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Why Re-dom to Labuan?

Why Re-dom To Labuan

Why re-domicile to Labuan?

Why bear the risk of significant penalties and compulsory strike off when you can have a better solution? 0% withholding tax? 0% indirect tax? Exempted dividend income? All benefits you can enjoy in Labuan! There is no need for complicated group restructuring. Re-domicile to Labuan can help to solve all these problems while maintaining status quo of the company.
Country
BRITISH VIRGIN ISLANDS
Economic Substance Act 2018
CAYMAN ISLANDS
The International Tax Co-operation (Economic Substance) Law 2018
LABUAN, MALAYSIA
Labuan Business Activity Tax Regulation 2018
Relevant activities
  1. Banking business;
  2. Distribution and service centre business;
  3. Financing and leasing business;
  4. Fund management business;
  5. Headquarters business;
  6. Holding company business;
  7. Insurance business;
  8. Intellectual property business; or
  9. Shipping business.
  1. Banking business;
  2. Distribution and service centre business;
  3. Financing and leasing business;
  4. Fund management business;
  5. Headquarters business;
  6. Holding company business;
  7. Insurance business;
  8. Intellectual property business; or
  9. Shipping business.
  1. Labuan insurance business;
  2. Labuan international commodity trading company;
  3. Labuan banking business;
  4. Labuan trust company;
  5. Labuan leasing company;
  6. Labuan credit token company;
  7. Labuan development finance company;
  8. Labuan building credit company;
  9. Labuan factoring company;
  10. Labuan money broker;
  11. Labuan fund manager;
  12. Labuan securities licensee;
  13. Labuan fund administrator;
  14. Labuan company management;
  15. Labuan international financial exchange;
  16. Self-regulatory organisation; or
  17. Holding company.
  18. Other trading entity such as administrative, accounting, legal services and management services.
Exemption
Investment Fund
Investment Fund
Dormant company
Minimum employment
Adequate
Adequate
1 – 4

(for Labuan entity that undertakes pure equity holding activities, no Full Time Employees required but to comply with management and control requirements).
Minimum spending
Adequate
Adequate
RM50,000 – RM180,000;
(RM3mil for Labuan International Commodity Trading Company)
Requirements
  1. Direction and management in the islands;
  2. Adequate expenditure and employees and appropriate premises in the islands and
  3. CIGA carried on in the islands.
  1. Direction and management in the islands;
  2. Adequate expenditure and employees and appropriate premises in the islands and
  3. CIGA carried on in the islands.
  1. Physical office in Labuan; and
  2. Expenditure and employees as per minimum requirements
Penalty for non-compliance
First determination:
Penalty of USD5k to USD20k (high risk IP entity will be USD50k)

Second determination:
Penalty of USD10k to USD200k (high risk IP entity will be USD400k)

Final – COMPULSORY STRIKE-OFF
First year fail to meet ES test: USD10k

Subsequent year: USD100k

Final – COMPULSORY STRIKE-OFF
Not eligible to enjoy the LBATA tax preferential treatment e.g. tax rate of 3%.

Consequently, it will be taxed at a higher rate of 24% under LBATA.

It is an offence for non-compliance on the Economic Substance requirements and company may subject to significant fines or eventually being compulsory struck off. Beneficial ownership on the company assets, shares, subsidiaries and other investments will be lost and Directors may be disqualified from acting as a director.

 

Group restructuring may take place but subject to limitations. Careful considerations should be taken on double taxation issue, withholding tax and additional stamp duty charges. In addition, the BVI or Cayman Islands company is non-replaceable if it is used as listing vehicle for the group.

 

Re-domiciliation to Labuan can be a better solution in order to maintain status quo given the comprehensive taxation system of Labuan. It is also worth mentioning that there is no withholding tax on interest payments, no stamp duty and no tax on dividend declared to Malaysia.

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Ideas & Insights Newsletter Tax

0% Corporate Income Tax Rate up to 15 years For Foreign Direct Investment (FDI) into Malaysia

0 Percent Corporate Income Tax Rate

0% Corporate Income Tax Rate up to 15 years For Foreign Direct Investment (FDI) into Malaysia

Key Takeaway

0% corporate income tax rate up to fifteen (15) years for Foreign Direct Investment (FDI) into Malaysia.

Beneficiaries

Foreign Direct Investments

Investment Quantum

Minimum RM300 million (USD70 million*)

Timeline

Applications made from 1 July 2020 to 31 December 2021

Tax Incentives For Company Relocating Into Malaysia

  1. 0% corporate income tax rate for 10 years for new investment in manufacturing sectors with capital investment between RM300 – RM500 million (USD70 – 116 million*);
  2. 0% corporate income tax rate for 15 years for new investment in manufacturing sectors with capital investment above RM500 million (USD116 million*);
  3. 100% Investment Tax Allowance for 3 years for eligible existing company in Malaysia relocating overseas facilities into Malaysia with capital investment above RM300 million (USD70mil*);

Conditions

For (i) and (ii), foreign companies must begin their operations within one (1) year from the date of approval and the investment amount has be achieved within a period of three (3) years.

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Movement Control Order Updates to the Inland Revenue Board’s Announcements (Dated 10 April 2020)

Updates to the Inland Revenue Board’s Announcements

Movement Control Order Updates to the Inland Revenue Board’s Announcements (Dated 10 April 2020)

Key Takeaway

  • General
  • Forms
  • Payment
  • Real Property Gain Tax (RPGT)

Our Prime Minister Tan Sri Muhyiddin Yassin had announced on 10 April, 2020 that the Movement Control Order (MCO) will be extended by another two weeks, from April 15 to April 28, to curb the spread of Covid-19.

In response to the extension of the MCO, the Inland Revenue Board of Malaysia (IRBM) has updated their ‘Frequently Asked Questions (FAQ) On Tax Matters During The Movement Control Order Period’ (Updated on 10 April 2020) to cover the period extended under the MCO.

This alert highlights the changes to the FAQ as compared to the earlier FAQ which was updated by the IRBM on 3 April 2020.
Question

Remarks by the IRB

1.
GENERAL
(a)
Extension of time to submit documents for audit or investigation within the period of 18 March 2020 until 15 May 2020.
Extension of time will be given until 31 May 2020.
(b)
Extension of time to provide feedback to IRB letters within the period of 18 March 2020 until 15 May 2020.
Extension of time will be given until 31 May 2020.

(c)

Extension of time for submission of audited accounts by the institution or organisation approved under section 44(6) of the ITA 1967.
Extension of time will be given until 30 June 2020.
2.
FORMS
(a)
Extension of time for the submission of return forms either manually or e-Filing.
The last day to file the various income tax return forms has been extended by up to two months from the original deadline.

Please refer to the 2020 Return Form Filing Programme (Amendment 2 / 2020) as per link below:
http://lampiran1.hasil.gov.my/pdf/pdfam/ProgramMemfailBN_2020_Pin.2_1.pdf
(b)
Extension of time for the submission of Form CP58.
Extension of time will be given until 31 May 2020.

(c)

Extension of time for submission of Form Q.
Extension of time will be given until 31 May 2020.

(d)

Submission of Country-by- Country Reporting (CbCR).
a) Entities in Malaysia responsible for the filing of the CbCR report will be given an extension of time as follows:-

i. CbCR report for submission due on 31 March 2020. Extension of time until 15 May 2020.

ii. CbCR report for submission due on 30 April 2020. Extension of time until 31 May 2020

b) Constituent entities in Malaysia responsible for the submission of CbCR notification will be given an extension of time as follows:-

i. CbCR notification for submission due on 31 March 2020. Extension of time until 31 May 2020.

ii. CbCR notification for submission due on 30 April 2020. Extension of time until 31 May 2020.

(e)

Submission of Forms CP21, CP22, CP22A or CP22B within the MCO period.
Forms can be submitted beginning 29 April 2020.
(f)
Extension of time to Labuan entities for the submission of irrevocable election form to be taxed under the Income Tax Act 1967 (Form LE3) where the due date is during this period.

Example of scenario:

 

Accounting period / basis period for a Labuan entity is 01/01/2020 – 31/12/2020. The due date for submission of Form LE3 for Year of Assessment 2020 is on 31/03/2020.

 

Extension of time will be given until 31 May 2020 for the submission of Form LE3 for Year of Assessment 2020.

(g)

Extension of time for the submission of Application Form of an Approved Research and Development (R&D) Project under section 34A ITA 1967 Borang 1.

a) Due date for submission of completed Borang 1 (New Project/Extension Project) which ends on 31 March 2020. Extension of time will be given until 30 June 2020.

 

b) Due date for submission of completed Borang 1 (New Project/Extension Project) which ends on 30 April 2020. Extension of time will be given until 30 June 2020.

3.

PAYMENT

(a)

Extension of time to submit all types of tax estimate which are due within the MCO period.

Extension of time will be given until 31 May 2020.

(b)

Extension of time for tax estimate payments which are due on 15 April 2020 and 15 May 2020.
Extension of time will be given until 31 May 2020.

(c)

Deadline for the submission of the revised of tax estimate in the 3rd month of instalment in 2020 under the Economic Stimulus Package.
Extension of time will be given until 31 May 2020 forrevision in the 3rd month of instalment that falls in April 2020.

(d)

Sources of data that will be used by the IRBM in order to determine whether the SMEs qualify for the deferment of estimated tax payment.
YA 2018 Return Form received by the IRBM.

(e)

Will a tax increase be imposed if there is a delay in making payment during this period?
Extension of time for tax payments will be given until 31 May 2020. Therefore payments received during this period will not be subjected to tax increase.

(f)

Whether I can choose to reject the automatic deferment of tax estimates payment and continue payments based on the original payment schedule? If so, do I need to notify the IRBM?
Taxpayer can reject and continue paying tax estimates based on the original payment schedule without having to inform the IRBM.

(g)

Will the IRBM issue a notification to the taxpayers who are entitled for deferment of tax estimates payment?
The IRBM will notify taxpayers who are entitled for deferment of tax estimates payment by e-mail registered with IRBM. If taxpayer entitle for deferment of but has not yet received the e-mail, the taxpayer will not have to make a payment for the instalment which is due on 15 April 2020.

(h)

How to appeal for deferment of tax estimate?
To submit appeal letter / e-mail to the Records Management and Taxation Information Division. A notification e-mail will be issued if the appeal is approved.

(i)

Submission of forms and payment of tax for Labuan entities during this period.

Extension of time of up to 31 May 2020 will be given to submit forms and make tax payments.

(j)

How to make withholding tax payment during this period?

Payment of withholding tax which falls between 18 March 2020 to 28 April 2020 can be made beginning 1 April 2020 up to 31 May 2020.

 

Payment can also be made through telegraphic transfer (TT) by furnishing complete payment details to IRBM through fax at 03-6201 9637 or through e-mail at: HelpTTpayment@hasil.gov.my

(k)

Will penalty be imposed on withholding tax payments which should be made during this period?
No penalty will be imposed on late payment during that period.

(l)

Will there be extension of time to submit MTD data and make MTD / CP38 payment for March and April 2020 remuneration?
Extension of time will be given until 31 May 2020.

(m)

Will compound payment for Monthly Tax Deduction (MTD) which should be paid during this period be deferred?
Extension of time will be given until 31 May 2020.

(m)

Will IRBM defer the tax refund process?
Tax refunds will be processed as usual. For an ongoing audit case, taxpayers are required to submit the supporting documents as requested within the MCO period for the purpose of tax refund.

4.

REAL PROPERTY GAINS TAX (RPGT)

(a)

Is extension of time provided for the submission of RPGT return forms and payment?

For the submission of RPGT return forms and payment of RPGT (section 21B or payment of notice of assessment) where the due date falls within 18 March to 30 April 2020, the deadline for filing of the forms and payment is 30 April 2020.

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Movement Control Order – Updates to the Inland Revenue Board’s Announcements

MCO Updates to the Inland Revenue Board’s Announcements

Movement Control Order – Updates to the Inland Revenue Board’s Announcements

Key Takeaway

  • Extension of time to submit various tax forms and make payments of tax
  • Deferment of payment of tax estimates

 

On 3 April 2020, the Inland Revenue Board (IRB) updated their Frequently Asked Questions on tax matters during the Movement Control Order (MCO) period. Besides the matters already highlighted in our Client Alert 1/2020 to 3/2020, the following are the key updates to the FAQ.

Extension of Time

Filing of Form Q

An extension of time will be given until 30 April 2020 for the submission of Notice of Appeal to the Special Commissioners of Income Tax (SCIT) [Form Q] where the due date falls within this period. However as provided under Section 100 of Income Tax Act (ITA) 1967, taxpayer is required to file Form N and state that the delay is due to the implementation of MCO.

Submission of Form CP204B

An extension of time for submission of notification of change in accounting period (Form CP204B) due in the period of 18 March 2020 to 14 April 2020, will be given until 30 April 2020.

Income Tax Estimates (CP204) and Payments

a. Income Tax Estimates (CP204)

An extension of time will be given until 30 April 2020 to submit all types of tax estimate which are due from 18 March 2020 to 14 April 2020.

The due date for CP204 tax estimate payments which are originally due on 15 April 2020 will be extended to 30 April 2020.

The IRB clarified that the deadline for the submission of the revised tax estimate in the third month instalment in 2020 is based on the company’s basis period. An extension of time is granted until 30th of April 2020 for revision in the third month of instalment that falls in April 2020.

All types of businesses with Small and Medium Enterprises (SMEs) status are eligible to defer the CP204 tax estimates payments which are due between April to June 2020, while Companies related to the tourism industry (including those with SME status) are eligible for deferment of CP204 payment for 6 months beginning April until September 2020.

Deferment of CP204 payment will be given automatically to all SMEs based on IRB’s record, which includes businesses in the tourism industry. From the Year of Assessment (YA) 2020 onwards, a SME is defined as:

  • Company with paid-up capital or LLP with capital contribution of up to RM2.5 million at the beginning of the basis period for a YA; and
  • gross business income from one or more sources for the relevant YA of not more than RM50 million

b. Deferment of CP500 Payments for Businesses Other than Company (CP500)

CP500 payments will be deferred starting from April 2020 to June 2020. The monthly instalments eligible for deferment are March 2020 and May 2020.

 

No application is required from the IRB to defer CP500 payments due in the above period. Deferment of CP500 payments will be given automatically to eligible taxpayers based on payment records with IRB.

 

As usual, taxpayers are still allowed to revise CP500 on or before the 30th of June 2020.

c. Payment of Income Tax

For the CP204 / CP500 tax estimates payments which are deferred, taxpayers do not need to pay the deferred payments. The balance of tax (if any) has to be settled upon the submission of the income tax return for the YA 2020.

The deferment of CP204 / CP500 tax estimates payments to the companies / businesses that qualify under this will not be subject to tax increase under 107C (9) / 107B (3) of the ITA 1967.

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Movement Control Order – Supplementary Stimulus Package For SMEs

MCO-Supplementary

Supplementary Stimulus Package For SMEs

Key Takeaway

  • Wage subsidy programme expanded
  • Grants for eligible micro enterprises
  • Additional tax deduction for rental reduction to SMEs
  • Reduction of foreign workers levy by 25%
  • Automatic 30-day moratorium for companies to lodge the statutory documents to SSM


On 6 April 2020, our Prime Minister has announced a supplementary stimulus package valued at RM10 billion which is specially targeted to support small and medium enterprises (SMEs). SMEs are a key driver of the country’s economy which contribute to more than two thirds of total employment in the country and almost 40 percent to the economy.

The additional measures highlighted in the supplementary stimulus package are:

(a) Wage subsidy programme expanded from RM5.9 billion to RM13.8 billion. All companies with local employees earning a monthly salary each of RM4,000 and below will receive wage subsidies as follows:
Company Size
Companies with up to 75 employees
Companies with 76-200 employees
Companies with more than 200 employees
Financial Assistance
RM1,200 subsidy per month for each eligible employee
RM800 subsidy per month for each eligible employee
RM600 subsidy per month for each eligible employee
Limitations on the Number of Employees
75 employees
200 employees
200 employees

Other conditions to qualify for the wage subsidy programme:

  • Assistance is for a 3-month period.
  • Employer must be registered with the Companies Commission of Malaysia (SSM) or local authorities before 1 January 2020 and are registered with the Social Security Organisation (SOCSO)
  • Companies must be in operation prior to 1 January 2020
  • The companies must retain the employees for 6 months i.e. during the 3 months when the subsidy is in effect followed by the next 3 months.


(b) A Special PRIHATIN Grant amounting to RM2.1 billion will be established for eligible micro enterprises, where a grant of RM3,000 will be provided to each company. The micro SMEs will have to register with the Inland Revenue Board of Malaysia to enjoy this assistance. The local authorities and SSM will provide the list of eligible micro enterprises to Government.

(c) Abolishing the 2% interest rate to 0% under the Micro Credit Scheme amounting to RM500 million under Bank Simpanan Nasional (BSN). The soft loan scheme for micro enterprises is also extended to TEKUN Nasional with a maximum loan limit of RM10,000 at 0% for each enterprise. A total of RM200 million fund will be allocated for this purpose. Applicants are given an option to choose either scheme to ensure more beneficiaries of this facility.

(d) Owners of private business premises which provide rental reduction or waiver to tenants that consist of SMEs are given an additional tax deduction which is equivalent to the amount of rental reduction for the months of April until June 2020. To qualify for the this additional tax deduction, the rental reduction must be at least 30% of the original rental rate for that particular period.

(e) Reduction of foreign workers levy by 25% to all companies with work permits which will expire from 1 April 2020 to 31 December 2020. This reduction however, does not apply to domestic workers.

(f) An automatic 30-day moratorium from the last day of Movement Control Order (MCO) for companies to lodge the statutory documents to SSM. A 3-month extension will also be granted for the lodgement of financial statements for companies with financial year ended 30 September 2019 to 31 December 2019. Companies are required to apply to SSM for this extension and no fees will be imposed by SSM.

Our Comments

We expect more clarification on the administrative and qualifying aspects of the various measures highlighted above, in the weeks to come.

According to SME Corporation Malaysia, the definition of ‘micro’, ‘small’ and ‘medium’ enterprises is as follows:
CATEGORY
MICRO
SMALL
MEDIUM
Manufacturing

Sales turnover of less than RM300,000

OR

employees of less than 5

Sales turnover from RM300,000 to less than RM15 million

OR

employees from 5 to less than 75
Sales turnover from RM15 mil to not exceeding RM50 million

OR

employees from 75 to not exceeding 200
Services and Other Sectors
Sales turnover of less than RM300,000

OR

employees of less than 5
Sales turnover from RM300,000 to less than RM3 million

OR

employees from 5 to less than 30
Sales turnover from RM3 million to not exceeding RM20 million

OR

employees from 30 to not exceeding 75
The following businesses are excluded from the definition of SMEs:

  • Public-listed companies in the main board such as Bursa Malaysia or main bourses in other countries.
  • Subsidiaries of the following entities:
  • Public-listed companies in the main board; and
  • Large firms, multinational corporations (MNCs), Government-linked companies (GLCs), Syarikat Menteri Kewangan Diperbadankan (MKDs) and State-owned enterprises.

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FAQ on Wage Subsidy Programme

FAQ on Wage Subsidy Programme

FAQ on Wage Subsidy Programme

Key Takeaway

  • Documents required to apply for the Wage Subsidy Programme
  • Table of the enhanced Wage Subsidy Programme
  • Who is not eligible to apply

This Alert presents the Frequently Asked Questions (FAQ) about the enhanced Wage Subsidy Programme (WSP) which was announced on 6 April 2020 and replaces the previous programme announced on 27 March 2020.

Documents required to apply for the WSP

  1. Employee name list (according to enterprise size qualification and restrictions)
  2. Employer bank account information (the first page of bank statement)
  3. Details of the employer’s panel bank registration (pengenalan pendaftaran bank panel majikan)
  4. Copy of the employers’ Companies Commission of Malaysia (SSM)/ROS/ROB registration or business licence
  5. Other supporting documents such as financial statements or sales reports which have been certified by the management (required for employers having 76 employees and above)

Table of the enhanced WSP (6 April 2020)

Businesses in the tourism industry such as travel agencies, hoteliers and airlines will be given a deferment of their monthly tax instalment payments for six (6) months from 1 April 2020 to 30 September 2020.

 

This will affect instalment payments from 1 April 2020 to 30 September 2020 and the Inland Revenue Board (IRB) clarified in their media release dated 9 March 2020, that an application for the deferment has to be made via a manual form to the Tax Operations Department of the IRB.

a) Company size
Companies with up to 75 employees
Companies with 76-200 employees
Companies with more than 200 employees
b) Financial assistance
RM1,200 subsidy per month for each eligible employee

RM800 subsidy per month for each eligible employee

RM600 subsidy per month for each eligible employee
c) Limitations on the number of employees
75 employees

200 employees

200 employees

d) Period of assistance
3 months
3 months
3 months
e) Qualifying conditions
Rate of decrease in revenue or sales
No conditions specified
Reduction of 50% or more of total sales or revenue compared to January 2020 or the following months

Employer registration

1. Employers and employees must be registered or contributing to SOCSO
2. The employer is registered with the Companies Commission of Malaysia
3. (SSM) or Local Authorities before January 1 2020
4. Employers must have started operations before January 1 2020
Employee’s salary
Employees earning a monthly salary of RM4,000 and below
Other conditions
For employers who choose to receive this assistance, they are required to retain their employees for a period of at least 6 months, i.e. during the 3 months when the subsidy is in effect followed by the next 3 months.
f) Effective Date
1 April 2020
g) How to Apply

Employers must apply online through SOCSO’s official website prihatin.perkeso.gov.my

 starting from April 9 2020.

h) Application Deadline
September 15 2020 or subject to the availability of funds or any decision by the Government.
i) Payment Method
The wage subsidy payment will be credited to the employer’s account within 7-14 days from the date of approval.

Who is NOT eligible to apply for the WSP?

  • Employer or company which registered and started operations on or after January 1, 2020;
  • Employers and employees who have not registered or contributed to Social Security Organisation(SOCSO);
  • Employees who are receiving the Employment Retention Program (ERP) financial aid during the
    same month;
  • Employees with salaries of more than RM4,000 per month;
  • Employees who have been terminated;
  • Employees of the public sector, federal and state statutory bodies, Local Authorities and self- employed (without employers) including freelancers; and
  • Foreign workers and expatriates.

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Economic Stimulus Package 3.0 Special Deduction On Rental Reduction Offered To Small And Medium Enterprises Tenants

Economic Stimulus Package 3.0

Economic Stimulus Package 3.0 Special Deduction On Rental Reduction Offered To Small And Medium Enterprises Tenants

Key Takeaway

  • Eligibility criteria for the special deduction.
  • Mechanism of the special deduction.
 
In the supplementary stimulus package announced on 6 April 2020 which was targeted to support small and medium enterprises (SMEs), the Prime Minister urged owners of private business premises to provide rental reduction or waiver to tenants that consist of SMEs.

Landlords of business premises that offer reduction or relief of rental payment to SMEs tenants of at least 30% of the existing rental rate from April 2020 to June 2020, are allowed to claim a special deduction equivalent to the rental reduction.

The Inland Revenue Board of Malaysia (IRBM) has issued a ‘Frequently Asked Questions’ (FAQ) on this matter on 25 April 2020 and the following is a summary of the mechanism of the special deduction.

1. Eligibility

Any taxpayers (corporate, individual, cooperative or other business and non-business entities) renting out their business premises to any qualified SMEs tenants.

2. Conditions of eligibility

  • The rented premises must be used by the tenant for purpose of carrying out his business.
  • The landlord must be a taxpayer with rental income under subsection 4(a) and subsection 4(d) Income Tax Act (ITA) 1967
  • The rental reduction should be at least 30% of the existing rental rate of the determined period, ie. from April 2020 to June 2020

2. Conditions of eligibility

a) General

Category
Micro
Small
Medium
Manufacturing
Sales turnover of less than RM300,000 OR employees of less than 5
Sales turnover from RM300,000 to less than RM15 million OR employees from 5 toless than 75
Sales turnover from RM15 mil to not exceeding RM50 million OR employees from 75 to not exceeding 200
Services and Other Sectors
Sales turnover of less than RM300,000 OR employees of less than 5
Sales turnover from RM300,000 to less than RM3 million OR employees from 5 to less than 30
Sales turnover from RM3 million to not exceeding RM20 million OR employees from 30 to not exceeding 75
A business just has to fulfil either one criterion across the different sizes of operation to qualify as a SME. For example, a company which have sales turnover of RM100 million is not considered as SME. However, if the same company have only 150 full-time employees, the company would still be considered as SME.

b) Exclusion

Companies which are excluded from National SME definition, hence not eligible for the special deduction, are:

i. Entities that are public-listed on the main board; and

ii. Subsidiaries of:
  • Publicly-listed companies on the main board;
  • Multinational corporations (MNCs);
  • Government-linked companies (GLCs);
  • Syarikat Menteri Kewangan Diperbadankan (MKDs); and
  • State-owned enterprises.

c) Related companies

A company (landlord) will still qualify for the special deduction even if the premises is rented toa related company (tenant), so long as the tenant fulfils the definition of SME as above.

d) Cut-off date used in determining the SME criteria of the tenant

SME Criteria
Period
Annual sales turnover
Annual sales turnover at the end of basis period of preceding year of assessment.

Note: If SME’s basis period ended on 31 December 2019, sales turnover for that period must be used.
Number of full-time employees
Number of full-time employees at the end of basis period of a year of assessment, before or on 1 April 2020.

4. Meaning of ‘business premises’

  • All premises used for carrying out a business, eg, office, workshop, warehouse, childcare and rented lot/bazaar/booth/stall.
  • Rental of a residential house used for both residential and business activities, is excluded.
  • Special deduction is not applicable to rental of other than ‘premises’ such as machines, motor vehicles, parking spaces, telecommunication towers, etc.

5. Quantum of special deduction

  • Subject to fulfilling the conditions of eligibility and the definition of SME, a special deduction of equivalent to the amount of monthly rental reduction offered by the landlord to the eligible SME tenants.
  • Even if the landlord reduces the rental amount at a different rate every month, the company is still eligible for the special deduction provided that reduction amount should not be less than 30% for each eligible month.
  • If in any of these eligible months, the rental reduction is less than 30%, then the company is not eligible to claim the special deduction for that particular month/months.

6. Calculation of special deduction

Example:

A Sdn. Bhd rents a shop lot to B which is an eligible SME for RM5,000 a month (RM60,000 yearly). A Sdn. Bhd. has agreed to offer rental reduction to B for the month April, May and June 2020 of RM2,500 a month.
Without special deduction (RM)
Without special deduction (RM)
Monthly rental income

–

5,000
5,000
Annual rental income
–
60,000
60,000
Rental reduction of 50% for April, May and June 2020
RM5,000 x 50% x 3 months
(7,500)
(7,500)
Annual gross rental income
–
52,500
52,500
Special deduction 1
RM2,500 x 3 months
–
(7,500)
Taxable income
–
52,500
45,000
Tax payable at 24% 2
–
12,600
10,800

1 Assuming no other allowable expenses

2 Current corporate tax rate

 

Total tax savings to be enjoyed by the landlord is as follows:

Tax savings = RM12,600 – RM10,800 = RM1,800.

 

For other taxpayers such as individuals, the tax savings is according to the taxpayer’s income tax bracket.

7. Rental already received in full for the months of April 2020 to June 2020

The landlord who has received the rental payment for April, May and June 2020 in advance can still claim the special deduction, provided that the landlord offers a rental reduction according to the conditions above.

8. Supporting documents required

The supporting documents required to be kept by the taxpayers (landlords) who claim this special deduction are:

i. Valid tenancy agreement;
ii. Rental income statement;
iii. Details of the tenant as SME such as number of business registration, tax file number etc.; and
iv. Details of the rental reduction.

*Items (iii) & (iv) will have to be provided in Working Sheet (HK) of Company Return Form. For the full FAQ, please visit: http://lampiran1.hasil.gov.my/pdf/pdfam/FAQ_PRE3.0_RENTAL_REDUCTION_1.pdf

Our Comments

The rental reduction initiated by the taxpayer coupled with the special deduction, would probably result in a lower tax incidence in some taxpayers’ case, while others instead may see an actual or tax rental loss.

This special deduction is favourable to taxpayers whose rental income qualifies as a business source under subsection 4(a) ITA 1967, as the taxpayer’s current year business loss (if any) can be utilised to set off against income from all sources in the current year. Any unutilised losses can be carried forward for a consecutive period of 7 years of assessment (YA) to be utilised against income from any other business source.

However, taxpayers whose rental income is assessed under subsection 4(d) ITA 1967 will see lesser or no benefits, as rental loss can only be set off against the rental income of other properties and cannot be deducted against the aggregate income from other sources. Neither can the rental loss be carried forward to subsequent YAs.

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