Malaysia tax: Budget 2010 - Moving towards a high-income economy

Faced with the challenge of managing a growing deficit amidst the global recession, Malaysia's 2010 budget, presented on 23 October 2009, emphasizes government spending and providing a business friendly environment through administrative improvements, grants and funding for specific activities and industries. While tax initiatives were not prevalent in the budget, some taxes were proposed and old ones reinstated, along with an offering of various tax breaks.


Real property gains tax

Suspended since 1 April 2007, the real property gains tax (or RPGT) would be reinstated on 1 January 2010 on chargeable gains arising from the disposition of real property. The effective rate for RPGT would be 5% on the chargeable gain irrespective of the holding period or category of taxpayer.


Tax breaks for individuals

The highest marginal tax rate for a tax resident individual whose chargeable income exceeds MYR 100,000 would be reduced from 27% to 26%, while a nonresident individual would enjoy a lower flat income tax rate of 26% instead of 27%.

Personal relief would be increased from MYR 8,000 to MYR 9,000, and additional relief would be given for premiums paid on deferred annuity schemes contracted from 1 January 2010 if the total relief for Employee Provident Fund contributions and life insurance/deferred annuity premiums does not exceed MYR 7,000 per year (the current threshold is MYR 6,000). A new tax relief of up to MYR 500 per year for broadband subscriptions would be given for years of assessment 2010 to 2012.

To attract knowledge workers to Iskandar Malaysia (a development region in Johor), a flat income tax rate of 15% is proposed for tax resident individuals, whether Malaysian or foreign, deriving employment income from qualifying activities. The special rate would be subject to certain conditions determined by the Minister of Finance and the commencement date of employment would need to be before 31 December 2015.


Promotion of Malaysia as an international Islamic financial center

To ensure the continuous development of Malaysia as an international Islamic financial center and the rebranding of Labuan as a new international financial center, the following tax incentives would be extended:
- Stamp duty exemption of 20% on Islamic financing instruments;
- Double deduction for qualifying expenses incurred in the promotion of Malaysia as an international Islamic financial center;
- Deduction for expenditure incurred to establish an Islamic stock broking company;
- Deduction for expenditure incurred on the issuance of Islamic securities approved by the Securities Commission (SC) or the Labuan Offshore Financial Services Authority(LOFSA); and
- Tax exemption on profits derived from non-MYR sukuk (i.e. an Islamic financial certificate or bond designated in a currency other than MYR) approved by the SC or LOFSA issued in Malaysia.


Miscellaneous

The following tax incentives also are proposed:
- Tax deduction for expenses incurred on the registration of patents and trademarks in Malaysia by small- and medium-size enterprises in select industries;
- Increase in the tax exemption (from 50% to 100% of the value of increased exports) for income derived from providing healthcare services to foreign clients in Malaysia by healthcare service providers ;
- Tax exemption equal to 100% of the additional capital expenditure incurred to obtain the Green Building Index certificate by owners of buildings, which could be set off against 100% of statutory income; and
- Extension of the five-year tax exemption for income derived from newly established bank branches or companies overseas (which is normally taxed based on worldwide income) to insurance (including takaful) companies.