In the run-up to the new year, following the Budget 2022 on October 29, 2021, there was much chatter and concern about the removal of the tax exemption on foreign-sourced income (FSI) remitted back into Malaysia. An exemption that had been in force for individuals since 2004, following the Asian financial crisis of 1997/98. Most aren’t aware that Malaysia had recently been added to the Council of European Union’s “grey list” and identified as having a “harmful” FSI tax exemption, and this was the main driver behind removing the exemption in the Budget.
As we sat eating our Christmas dinners, removal of the exemption still loomed. Under the change, effective January 1, 2022, any income or dividends received and remitted back to Malaysia would suddenly fall under the scope of Malaysian tax. That was this case until, on December 30, just two days before the implementation, the Ministry of Finance reversed the decision and extended the exemption for a further five years, until December 31, 2026, providing a breath of relief to many.
For individuals, all sources of FSI are exempted. For companies, foreign sourced dividend income is exempted. So how can this benefit you?
As an expat living in Malaysia, you can take advantage of the FSI exemption. Investment vehicles established in the Channel Islands such as Jersey and Guernsey, or in the Isle of Man, can provide you with an income or dividends that meet the criteria for exemption in Malaysia. Better still, they are also not taxed at the source and therefore the jurisdictions are ideal to provide tax-efficient income for those living or retiring in Malaysia.
Previously, I have written about different pension structures based in Guernsey which protect your assets from inheritance taxes, but also pay pension income gross of tax. A QNUPS is an example of a highly tax-efficient structure that does just this and those residing in Malaysia would receive pension income gross of all taxes under the extended regime outlined above. If you are over 55, at least for the next five years, you could receive pension income from a QNUPS gross of tax while resident in Malaysia.
Potential tax savings under such an investment include 40% inheritance tax and 45% income tax compared with a UK resident! There would also be no capital gains tax paid within the structure.
Even simple investment structures such as platforms can provide income tax exempt dividend income. As is the case with most Malaysian-based investments, capital gains are also non-taxable in the Channel Islands and Isle of Man. For example, $1M invested with a dividend yield of 4% would provide $40,000 p.a. in tax exempt income.
Should you wish to learn more about your options for utilising the foreign sourced income tax exemption by investing overseas, please feel free to reach out for a no-obligation conversation with me.
Jamie is a Chartered Financial Planner and strives to raise the standards of international financial planning in Malaysia and Asia. You may direct any inquiries to [email protected] or call +6014.734 6689.
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