BBFT3024 ADVANCED TAXATION (RPA)

Tutorial 1: Cross-Border Activities / Transactions

Suggested answer to Q1

RPA Tax Consultant Sdn. Bhd.

No. 1 Jalan Satu
50000 Kuala Lumpur
Malaysia

Current date 2023

The Board of Directors

Fragrance Pte. Ltd.
Any Street, P-Town
S-Land

Dear Sirs & Madam,

Tax Implications of Setting Up A Branch or A Subsidiary Company or Agent in Malaysia

Further to your letter dated 14 February 2023 regarding the above options under consideration for
expanding the business into Malaysia, we have the pleasure of advising your board on the
respective tax implications as follows:

(a)
(i) Setting up a branch
The branch in Johor Bahru would constitute a ‘permanent establishment’(PE).
A PE means a ‘distinct site’ or ‘fixed place of management’ in which business is
wholly or partly carried on.

Your company, Fragrance Pte. Ltd. (FPL) would be regarded as trading in Malaysia.
It has a business source in Malaysia. The business profit of the PE is deemed to be
derived from Malaysia and is liable to income tax in Malaysia.

(ii) Setting up a subsidiary company

FPL will not be having a PE in Malaysia if a subsidiary company is set up in
Malaysia. When its Malaysian subsidiary buys the perfumes from FPL and distributes
them/sells them to Malaysian customers in Malaysia, FPL would be regarded as
trading with Malaysia. FPL has no business source in Malaysia. The business profit
made from selling perfumes to its subsidiary company in Malaysia will not be
regarded as derived from Malaysia. Such business profit will not be subject to tax in
Malaysia.
BBFT3024 ADVANCED TAXATION

Suggested answer to Q1(cont’d)

(iii) By appointing a non-independent agent in Malaysia, FPL can be deemed to have

a PE only if:

1. The agent is given the authority to conclude sale contracts (habitually)

in the name of FPL (on behalf of FPL); or

2. The agent maintains a stock of goods belonging to FPL from which he

regularly fills orders on behalf of FPL.

(b) The subsidiary company which is set up will be a chargeable person. It will be resident in
Malaysia for a year of assessment (YA) if its management and control of its business are
exercised in Malaysia at any time in the basis year for the relevant YA. It is chargeable to
tax on the profit of the business carried on in Malaysia.

If the subsidiary company is not resident in Malaysia, the rate of tax is flat at 24% for the
YA 2022. If it is a resident, its chargeable income will be taxed at 24% as its holding
company has a paid-up share capital of more than RM2.5 million (actual: RM6 million)
on the first day of the basis period for the year of assessment 2022. The preferential rate
of 17% cannot be applied in respect of the first RM600,000 of its chargeable income
although its paid-up capital is not more than RM2.5 million (actual: RM1.5 million).

The subsidiary company (resident in Malaysia) would be treated as a single-tier

company. The single-tier dividend distributed by it would be tax-exempt (in hands of
shareholders) under Para. 12B of Sch. 6.

(c) There are some differences in the tax treatments in respect of a branch and a subsidiary
company and can be seen as follows:

1. A branch is not a chargeable person in Malaysia and the chargeable person is the
non-resident company which is having a branch in Malaysia; whereas a
subsidiary company itself is a chargeable person in Malaysia.

2. Residence status is irrelevant to a branch in Malaysia; whereas a subsidiary

company will have a residence status and it will be resident in Malaysia for a
year of assessment (YA) if the management and control of its business are
exercised in Malaysia at any time in the basis year for that relevant YA.

3. A branch constitutes a permanent establishment. Hence a non-resident person

having a branch in Malaysia is regarded as trading in Malaysia. Whereas a non-
resident company having a subsidiary company in Malaysia cannot be regarded
as trading in Malaysia as such a subsidiary company cannot be regarded as its
permanent establishment in Malaysia.

I hope the above information will be helpful for your company to consider the best option
available. Please do not hesitate to contact us for any further information or clarification.

Yours faithfully,

Emily
Emily, Tax Manager
BBFT3024 ADVANCED TAXATION

Suggested answer to Q2

I. Setting up a branch
If a branch is set up in T-Land, it would constitute a permanent establishment (PE) in
T-Land. A branch by itself is not a chargeable person. Alpha Sdn. Bhd. (ASB) can be
regarded as trading in T-Land and has a business source there.

The business income of the branch is derived from T-Land and not from Malaysia.
The branch profit (after tax suffered in T-Land), when remitted into Malaysia, would be
taxable.

For the annual interest on the loan amounting to RM20,000,000 x 7% = RM1,400,000 to

be paid by the foreign branch, it would be subject to withholding tax of RM210,000
(RM1,400,000 x 15%) in T-Land. The interest income (after foreign tax) of RM1,190,000
remitted into Malaysia would be taxable.

Since Malaysia and T-Land have a double taxation agreement, ASB is resident in
Malaysia, the company can claim a bilateral credit on the income that suffered double
taxation (in T-Land and Malaysia). Hence the bilateral credit can be given to ASB as the
business profit and interest received or remitted in Malaysia from T-Land are taxable.

II. Setting up a subsidiary company

A subsidiary company is a chargeable person. The business profits of the subsidiary
company will not be taxed in Malaysia as the business carried on in T-Land is not derived
from Malaysia.

When the business income (after-tax suffered in T-Land) is distributed as dividends to ASB
and remitted into Malaysia, these dividends will be exempt in the year of assessment in
which basis period the dividends are remitted. Such exempt income can be credited to an
exempt income account, and exempt dividends can be distributed from it.

The profits of the foreign subsidiary company can be distributed as dividends but it would
be subject to 15% withholding tax in T-Land. These dividends may be remitted into
Malaysia in the basis period for the same year of assessment in which the business profit
was accrued in T-Land, or for any subsequent years of assessment.

There would not be any bilateral credit to be given to your company as the dividends
received in Malaysia are tax exempted in Malaysia. There is no double taxation on the
dividend income received in Malaysia.
BBFT3024 ADVANCED TAXATION

Suggested answer to Q4(a)

(i) If the royalty is attributed to the PE in Malaysia, it will be taxed as income of business
carried on in Malaysia by the permanent establishment. It will be taxed at 24% on its
chargeable income.

The royalty will not be subject to withholding tax. The payer is not required to deduct
withholding tax under s109.

If the royalty (derived from Malaysia) is not attributed to the PE in Malaysia, it will be
subject to withholding tax at 10%. The payer is required to deduct withholding tax under
s109 when making or crediting payment.

(ii) Under the double tax agreement, the royalty may be exempted from withholding tax or
subject to a rate of withholding tax that is lower than the domestic Income Tax Act
(ITA), 1967. The rate of tax stipulated in the DTA will supersede/override the rate
stipulated in the domestic ITA, 1967.

Suggested answer to Q4(b)

For a local company with business income to be given a bilateral credit, the conditions to be
fulfilled are as follows:

1. The company is resident in Malaysia on the basis year for the year of assessment 2022;

2. It has income which suffers double taxation which means that income is taxed in
Malaysia in the year of assessment 2022 and taxed outside Malaysia;

3. This double taxation of income can occur if it carries on a specialized business (banking,
insurance, sea or air transport) which is taxed on a wherever-derived basis. Besides with
such a specialized business, its other foreign business income and non-business income
will not be exempt when received in Malaysia (taxable on a remittance basis);

4. There is a double tax treaty between Malaysia and the foreign country (country of source)
concerned; and

5. The claim is made within two years after the year of assessment 2022 which would mean
not later than 31.12.2024.
BBFT3024 ADVANCED TAXATION

Suggested answer to Q4(c)

The differences are:

No. Bilateral credit Unilateral credit

1. There is a double tax agreement (DTA) There is no DTA between Malaysia and the
between Malaysia and the country of the country of the source which income is
source which income is derived from. derived from.

2. The bilateral credit is the lower of - The unilateral credit is the lower of -

Statutory income# x Malaysian tax payable* ; Foreign income x Malaysian tax payable;
Total income Total income
Or Or
Foreign tax suffered Half the foreign tax suffered

# The statutory income from the foreign

source and the income derived from Malaysia
charged/subjected to foreign tax.

* Before Sections 132 and 133 credits/reliefs