Capital Gains Tax exemption on gains from disposal of foreign capital assets received in Malaysia

The Income Tax (Exemption) (No. 3) Order 2024 (“Exemption Order”) was gazetted on 4 March 2024 to exempt Capital Gains Tax (“CGT”) on gains from disposal of foreign capital assets received by companies, limited liability partnerships, trust bodies and co-operative societies resident in Malaysia which meet the economic substance requirements from 1 January 2024 to 31 December 2026.

Under the Exemption Order, the economic substance requirements that need to be fulfilled are:

employ adequate number of employees with necessary qualifications to carry out the specified economic activities in Malaysia; and
incur adequate amount of operating expenditure for carrying out the specified economic activities in Malaysia.

In line with this, the Inland Revenue Board (“IRB”) has issued the Guidelines on Tax Treatment on Gains from the Disposal of Foreign Capital Assets Received from Outside Malaysia on 27 March 2024 (and updated on 26 April 2024).

Based on the Guidelines, the IRB does not prescribe the adequacy thresholds. Instead, factors that will be considered include:

the number of employees, considering the capital or labor-intensity of the industry;
whether the employee works full-time or part-time; and
whether the office premises have been used to carry out related activities and whether the premises are sufficient for those activities.