The Inland Revenue Board of Malaysia (“IRB”) has issued the Guidelines on Tax Treatment on Disposal of Foreign Capital Assets Received From Outside Malaysia (“Foreign Capital Assets CGT Guidelines”) dated 27 March 2024 on its website.

The Foreign Capital Assets CGT Guidelines explain the CGT treatment on the gains or profits from the disposal of foreign capital assets situated outside Malaysia that occur on or after 1 January 2024 that are received in Malaysia by a resident that is a company, limited liability partnership, trust body or co-operative society.

Key summaries as below :

Gains from the disposal of foreign capital assets situated outside Malaysia are considered taxable income under paragraph 4(aa) of the Income Tax Act 1967 (ITA), subject to the prevailing tax rate.

This includes assets such as immovable property (e.g., buildings, land), movable property (e.g., machinery, vehicles), intellectual property rights, and shares issued by companies incorporated outside Malaysia.

To avoid double taxation of gains from the disposal of foreign capital assets that are also taxed outside Malaysia. Taxpayers can claim a tax credit for foreign taxes paid, which is either bilateral (if the country has a Double Taxation Avoidance Agreement with Malaysia) or unilateral (if there’s no such agreement).

Taxpayers must keep records proving that foreign tax has been imposed on the income. The claim for tax credit must be supported by adequate documentation.

If the foreign tax credit claimed for a year of assessment exceeds the Malaysian tax payable on the same gains, the excess amount cannot be carried forward or refunded; it is simply disregarded.

Gains from the disposal of foreign capital assets received in Malaysia are exempt from tax from 1 January 2024 until 31 December 2026, provided they meet specific economic substance requirements.

Economic Substance Requirements – To qualify for the exemption, entities must employ an adequate number of qualified employees and incur a sufficient amount of operating expenditures in Malaysia for carrying out specified economic activities.

The determination of adequacy is based on the facts of each case, considering factors like the industry type, whether the business is capital or labor-intensive, and the nature of the employment (full-time or part-time).

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