Exemption from Capital Gains Tax (“CGT”) and Foreign Sourced Income (“FSI”) on unit trusts

As highlighted in our Newsflash Malaysia January 2024, the following Gazette Orders have been issued to legislate the changes:

Income Tax (Unit Trust) (Exemption) Order 2024

The Exemption Order exempts unit trust residents in Malaysia (excluding Real Estate Investment Trusts or Property Trust Funds listed on Bursa Malaysia) from CGT on gains or profits from the disposal of:

Unlisted shares of a company incorporated in Malaysia; or
Shares of a company incorporated outside Malaysia deriving value from real property situated in Malaysia (“Section 15C shares”).

Additional considerations to note are:

The exemption is not applicable to disposals which are taxable as business income;
Loss from disposal shall be allowed to be deducted against gains from subsequent disposals;
Unit trusts exempted from CGT are still required to comply and submit the CGT Return.

The exemption is effective for disposals made from 1 January 2024 to 31 December 2028.

Income Tax (Unit Trust in relation to Income Received in Malaysia from Outside Malaysia) (Exemption) Order 2024

The Exemption Order exempts unit trust residents in Malaysia managed by a management company (excluding Real Estate Investment Trusts or Property Trust Funds listed on Bursa Malaysia) from income tax on FSI from all sources of income under section 4 of the Income Tax Act 1967 which is received in Malaysia from outside Malaysia.

The unit trusts are required to fulfil either one of the following conditions to qualify for the tax exemption:

The FSI has been subject to foreign tax, and the minimum headline income tax rate at the source jurisdiction where the income arises is at least 15 %; or
The management company of the unit trust must have met economic substance requirements in Malaysia, i.e. employed an adequate number of employees and incurred an adequate amount of operating expenditure. Further guidance on the economic substance requirements should be released soon.

The exemption is effective from 1 January 2024 to 31 December 2026.

Tax Incentives for Forest City Special Financial Zone

The Malaysian Government has recently announced the following tax incentives for the Forest City Special Financial Zone (“Forest City SFZ”):

0 % Corporate Tax rate for Family Offices under the Single-Family Office Scheme coordinated by the Securities Commission. This scheme aims to attract wealthy families to set up a private business entity to exclusively manage the financial and personal needs of their family;
5 % Corporate Tax rate for operators of financial global business services, financial technology (fintech) and foreign payment systems;
15 % Personal Income Tax rate for individual knowledge workers (including Malaysians) working in Forest City SFZ;
Special Tax deduction on relocation costs, enhanced industrial building allowance and Withholding Tax exemptions will be provided to banking, insurance, capital market intermediaries and other eligible entities in the financial sector.

Apart from tax incentives, the Central Bank of Malaysia will also provide regulatory flexibilities to locally incorporated foreign banks to open additional branches in the Forest City SFZ, foreign exchange flexibilities for foreign currency offshore borrowings and investment in foreign currency assets.

The Forest City SFZ is a special financial zone located within the Iskandar Special Economic Zone in the southern region of Peninsular Malaysia. It comprises four man-made islands with duty-free status.