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Malaysia To Phase Out 'Harmful' Tax Regime

Tuesday, August 7, 2018

Malaysia has suspended its MSC Malaysia tax regime, pending changes to bring it into line with recommendations from the OECD's Base Erosion and Profit Shifting initiative.

Under the regime, domestic and foreign information and communication technology-related businesses can apply for "MSC Malaysia Status," which allows them to benefit from tax breaks and other rights and privileges.

To make the regime compliant with Action 5 of the OECD's BEPS initiative, on countering harmful tax practices, MSC Malaysia Status will be awarded only to entities that satisfy "nexus" and "substance" tests. These tests ensure the MSC Malaysia tax regime applies only to income arising from activities carried on in Malaysia.

The Government says no new MSC Malaysia Status approvals will be granted from July 1, 2018. Applications to extend income tax exemptions or to add new MSC Malaysia qualifying activities are also suspended from this date.

Existing MSC Malaysia Status companies with tax incentives will be given the option to continue to enjoy income tax exemptions under their existing MSC Malaysia Status conditions of grant until June 30, 2021. Alternatively, and subject to new legislation and guidelines coming into force, these companies can migrate to the new BEPS-compliant regime immediately.

Special rules apply to MSC Malaysia Status companies granted approval on or after October 17, 2017, for non-intellectual property income. These companies can continue to benefit from the existing regime but only until December 31, 2018.

The new MSC Malaysia tax regime is scheduled to be in place by December 31, 2018.