Malaysia published the Finance Act 2020 in the Official Gazette on 31 December 2020. Some of the main changes made in the Act include the following with effect for the year of assessment 2021 and subsequent years of assessment:

• New incentives rules are introduced to provide that the income received by any person in respect of an incentive scheme approved by the Minister is subject to tax at the rate specified in a new Part XVII of Schedule 1 (not more than 20%) and that the income of an individual resident who is not a citizen and exercises employment in a company that carries on a business in respect of a qualifying activity under an approved incentive scheme is subject to the tax rate as specified in a new Part XVIII of Schedule 1 (not more than 20%) - qualifying activities include:
  • any high technology activity in manufacturing and services sectors; and
  • any other activities which would benefit the economy of Malaysia;
• With respect to the new rules on approved investment schemes, it is provided that:
  • the business of a person from the qualifying activity shall be treated as a separate and distinct business and source of that person;
  • any loss for a year of assessment which is carried forward to the following year of assessment can only be deducted from the source of income of the qualifying activity;
  • any unabsorbed losses during the period of an incentive scheme shall only be utilized for a period of 7 consecutive years of assessment after the year of assessment in which the incentive scheme ends; and
  • if a person fails to comply with the conditions prescribed by the Minister for the approved incentive scheme, the Director General may make an additional assessment on the person at any time within five years after the expiration of the year of assessment for which the rate was applied to recover the amount of tax ought to be paid;
• A tax rebate for companies and limited liability partnerships is introduced that may be granted for a period of three consecutive years from the year of assessment in which a company or limited liability partnership first commences operation (between 1 July 2020 and 31 December 2021), in an amount equivalent to its operating or capital expenditure incurred, limited to a maximum amount of MYR 20,000 for each year of assessment and subject to the conditions that paid-up capital does not exceed MYR 2.5 million and gross income does not exceed MYR 50 million;
• It is provided that the deduction for R&D is limited to residents in Malaysia, including the double deduction for in-house R&D, with a further limitation providing that the double deduction is not available where more than 30% of the R&D expenditure is incurred outside Malaysia (if more than 30% incurred outside Malaysia, only a single deduction is allowed);
• It is provided that the special deduction for persons incurring expenses for contributions to a research institute, payments for services of an approved research institute, approved research company, R&D company, or contract R&D company is limited to residents in Malaysia;
• For the purpose of the loss surrender group relief rules in relation to indirect holdings, it is clarified that a surrendering company and a claimant company are related companies if 70% of the paid-up capital in relation to ordinary shares of the surrendering company and the claimant company are held indirectly through the medium of a company resident and incorporated in Malaysia;
• Return filing requirements are amended to require a limited liability partnership to furnish a return in the prescribed form electronically; and
• The individual income tax rate on chargeable income between MYR 50,001 and MYR 70,000 is reduced from 14% to 13%.

Additional measures that apply from 1 January 2021 include the following:

• It is provided that any amount in respect of payments made by a resident to any Labuan entity are non-deductible, regardless of whether the Labuan company complies with substance requirements;
• New penalties are introduced for transfer pricing, including that failing to furnish contemporaneous transfer pricing documentation in accordance with any rules may result in a fine of not less than MYR 20,000 and not more than MYR 100,000, or to imprisonment for a term not exceeding six months, or to both;
• Amendments are made to empower the Director General to disregard any structure adopted in entering into a transaction and to make adjustments to the structure of that transaction to reflect the structure that would have been adopted by an independent person dealing at arm’s length having regard to economic and commercial reality;
• Amendments are made to provide that the Director General may, by notice in writing, require any person to pay a surcharge of not more than 5% of the amount of an increase of any income generally, or reduction of any deduction or loss, as a consequence of exercising the Director General’s power to substitute the price in respect of a transaction to reflect an arm’s length transaction or to disregard any structure adopted in entering into a transaction; and
• The substance requirements for Labuan entities are amended to provide separate requirements, as prescribed by regulations, for Labuan trading activity and for Labuan non-trading activity as follows:
  • in relation to a Labuan trading activity:
    • have an adequate number of full-time employees in Labuan; and
    • have an adequate amount of annual operating expenditure in Labuan;
  • in relation to a Labuan non-trading activity:
    • have an adequate number of full-time employees in Labuan;
    • have an adequate amount of annual operating expenditure in Labuan; and
    • comply with any condition in relation to control and management in Labuan (new requirement).

Lastly, the special reinvestment allowance is amended to provide that where a company has made a claim for reinvestment allowances for a consecutive period of 15 years of assessment (i.e., exhausted eligibility) and that claim ends either on the year before the year of assessment 2019, on the year of assessment 2019, 2020 or 2021, that company is entitled to a claim for reinvestment allowances until the year of assessment 2022.