Capital Gains Tax (CGT) is applicable to gains from the disposal of foreign capital assets received in Malaysia by a resident. Prior to 1 January 2024, such capital gains were not subject to tax.
In the event the disposal was made before 1 January 2024, but the proceeds are only received after 1 January 2024, the gains are not subject to CGT as the disposal was made before 1 January 2024.
Who will be subjected to CGT?
The following categories of person will fall in the scope of CGT:
- Company
- Limited Liability Partnership
- Co-operative Society
- Trust Body
This provides clarity that individual taxpayers will not be subject to CGT.
What are the examples of foreign capital assets?
The following are examples of foreign capital assets for the purposes of CGT:
| Types | Examples |
| Immovable property | Building and land situated outside Malaysia |
| Movable property | Machinery, vehicle, fixtures, fitting, painting, plant situated outside Malaysia |
| Intellectual property | Copyright, patent, research and development, computer software and trademark situated outside Malaysia |
| Shares | Company shares issued outside Malaysia that are not subject to any provisions of the Income Tax Act 1967. |
Foreign tax credit
Taxpayers can claim bilateral or unilateral tax credit when the gain from disposal has been subjected to foreign tax.
Tax exemption based on economic substance
CGT can be exempted with the condition of complying with the following economic substance requirements:
(a) employ adequate number of employees with necessary qualifications to carry out the specified economic activities in Malaysia; and
(b) incur adequate amount of operating expenditure for carrying out the specified economic activities in Malaysia.
There is no prescribed level or threshold with respect to economic substance. It should be determined on a case-by-case basis based on factors such as:
- the type of activity involved (whether capital or labour intensive)
- whether the employee is on a full time or part time basis
- whether the office premises have been used (sufficiently) to carry out such activities.
It is also important to note that a service director who is employed based on a contract of service basis can be considered as an employee.
Outsourcing the specified economic activities
It is likely that the performance of specified economic activities is outsourced to another party. For the purposes of compliance with economic substance, the outsourcing is permitted provided that:
(a) Specified economic activities are carried out by outsourcing entity in Malaysia;
(b) A company, LLP, trust body and co-operative society have implemented sufficient monitoring and control over the implementation of specified economic activities by outsourcing entity;
(c) Outsourcing entity are generally expected to charge company, LLP, trust body and co-operative society for specified economic activities carried out subject to the application of transfer pricing rules;
(d) The number of qualified employees employed and the total operating expenses incurred by the outsourcing entity in Malaysia is equivalent to the level of specified economic activities carried out by the outsourcing entity; and
(e) There is no double counting if the outsourcing entity provides services to more than one company, LLP, trust body and co-operative society.
Applicable tax rate
The tax rate shall be the prevailing income tax rate for Company, LLP, trust body or co-operative society. It is applicable when gains from the disposal of foreign capital assets are “received” in Malaysia from outside Malaysia.
Tax reporting and administrative matters
Taxpayers are requried to report the gains from the disposal of foreign capital assets received in Malaysia in the annual income tax return form. For example, this will be declared in the e-C Form for companies.
Therefore, the IRB does not require a CGT return (e-CKM Form) to be submitted within 60 days from the date of disposal.
What should be considered?
A proactive approach can be considered to confirm with the Inland Revenue Board on the compliance of substance requirements prior to the submission of the annual tax return.
Please refer to this link for further information on CGT.
