Tax issues relating to income derived from investment in oversea subsidiary.

By Tan Thai Soon

Is dividend received from oversea subsidiary taxable?

1. Sec 127 (1) Income Tax Act 1967 provides that any income specified in Part 1 of schedule 6 shall be exempt from tax.
2. Part 1 schedule 6, para 28(1) exempt income of any person derive from sources outside Malaysia and received in Malaysia (see also exception).
   
3. The tax exemption is based on the principle that the income is not derived in Malaysia.
4. The rationale for the exemption is to encourage Malaysian individual or companies to remit back their income from oversea investment.
5. It is worth noted that the income remitted back to Malaysia may be subjected to withholding tax of the foreign country.

Can a Malaysian holding company paid dividend to shareholders without a tax credit?

1. 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.
2. With effect from YA2008, under single tier system, all dividend income received from a subsidiary (local or oversea) are tax exempted, therefore not taxable.
3. The tax exempted income in the holding company will becomes a revenue reserve which can be in turn distributed to Malaysian shareholders as dividend.

Is the gains from disposal of share in foreign subsidiary taxable in Malaysia?

1. 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.
2. In addition, with effect from YA2008, under single tier system, the Malaysian holding company can distributes its capital reserve to its shareholders as dividend.

Is the interest paid from the loan borrowed for investment in a foreign subsidiary tax deductible?

1. 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.