Is dividend received from oversea subsidiary taxable?
- Sec 127 (1) Income Tax Act 1967 provides that any income specified in Part 1 of schedule 6 shall be exempt from tax.
- Part 1 schedule 6, para 28(1) exempt income of any person derive from sources outside Malaysia and received in Malaysia (see also exception).
- The tax exemption is based on the principle that the income is not derived in Malaysia.
- The rationale for the exemption is to encourage Malaysian individual or companies to remit back their income from oversea investment.
- It is worth noted that the income remitted back to Malaysia may be subjected to withholding tax of the foreign country.
- Under the old imputation system, when a company paid income tax , it will increase tax credit balance account under Section 108, with that the company can then paid dividend to its shareholders.
- With effect from YA2008, under single tier system, all dividend income received from a subsidiary (local or oversea) are tax exempted, therefore not taxable.
- The tax exempted income in the holding company will becomes a revenue reserve which can be in turn distributed to Malaysian shareholders as dividend.
- Malaysian law does not impose any tax on gains resulted from disposal of shares. It follows that, any gains resulted from the disposal of a foreign subsidiary is not taxable in Malaysia. However, it may be subjected to withholding tax of the foreign country when the money is remitted back to Malaysia.
- In addition, with effect from YA2008, under single tier system, the Malaysian holding company can distributes its capital reserve to its shareholders as dividend.
- Under the single tier system, the dividend receives from a foreign subsidiary is tax exempted, it follows that the interest expense is not tax deductible.
