Tax Thursday: Malaysian restriction on deductions

Restriction on deductions for payments made by Malaysian residents to Labuan companies.

Effective 1 January 2021, the restriction on deductions for interest payments, lease rental payments and other payments made by a Malaysian resident company to a Labuan company shall apply to all Labuan companies regardless of whether the Labuan companies comply with the substantial activity requirements (i.e. number of full time employees in Labuan and minimum operating expenditure incurred in Labuan).

Additionally, the restriction percentage on deductions for interest payments and lease rental payments made by a Malaysian resident company to a Labuan company is revised to 25% instead of 33% of the expenditure incurred and this new restriction percentage shall apply retrospectively from 1 January 2019.

Background: With effect from 1 January 2019, a Malaysian resident company that transacts with a Labuan company is entitled for tax deductions on expenditure incurred but such deductions are restricted to 67% (i.e. for interest payments and lease rental payments) and 3% (i.e. for other payments) of the expenditure incurred. However, this restriction is only applicable for transactions with a Labuan company that complies with the substantial activity requirements.

To Do:

All Malaysian resident companies should review their current business transactions with Labuan companies to ascertain whether the expansion of the rules on restriction on deductions for payments made to Labuan companies will affect their current tax positions to avoid any potential penalty arising from mis-estimation of tax payable for the current year of assessment. 

If you have any questions, please contact Mervyn Ong Hean Chong.