Malaysia

*Updated July 2020*

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• Legal system
• Inheritance and succession
• Estate planning
• Taxation
• Residence and domicile
• Other relevant information

Legal system

The supreme law of the country is the Federal Constitution of Malaysia, a written document. The judiciary is composed of the Federal Court, the Court of Appeal, the High Courts, Sessions Courts and Magistrates’ Courts. Malaysia’s judiciary is independent, with judicial power vested in the High Court in Malaya and the High Court in Sabah and Sarawak, which are headed by their respective chief judges. The Federal Court and Court of Appeal have exclusive jurisdiction to determine appeals. The Chief Justice is the head of the judiciary.

In Sabah and Sarawak, native courts exist to regulate native law or custom. At state level, Syariah (Malay spelling for Shari’a) courts regulate Islamic law among Muslims.

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Inheritance and succession

Succession

Key legislative statutes with regard to succession planning include:

• Small Estates (Distribution) Act 1955.
• Distribution Act 1958.
• Intestate Succession Ordinance 1960.
• Inheritance (Family Provision) Act 1971.
• Probate and Administration Act 1959.
• Wills Act 1959.
• Trustee Act 1949.
• Public Trust Corporation Act 1995.
• Islamic Family Law (Federal Territories) Act 1984.

Additionally, there are various Islamic family law enactments for the other states in Malaysia.

Family law and defined inheritance rules

If a deceased person left a will, on death, the distribution of their estate will follow testacy laws, and the appointed executor will just need to obtain a Grant of Probate from the relevant high court. 

Whereas if a deceased person dies without leaving a will, their assets are distributed according to the rules of intestacy as laid down in the Distribution Act 1958 for West Malaysia and Sarawak and the Intestate Succession Ordinance 1968 for Sabah, provided the estate is valued at less than MYR2 million only. The intestacy laws enable property to pass to survivors according to the rules of intestacy but these rules do not operate as thriftily as a proper will. Both Muslims and non-Muslims must appoint an administrator for the estate by applying to the court to issue letters of administration authorising the person or persons named to administer the deceased person’s estate in accordance with the relevant statutes.

i) Non-Muslim

Generally, the estate will be distributed among the deceased’s immediate family: surviving parents(s), spouse, and issue(s). A person’s issue includes their children and any descendants of children who predecease them. The distribution among the family is shown below:

• If the deceased dies leaving parents only, but no spouse and issue, the parents receive the whole estate.
• If the deceased dies leaving spouse only, but no parent and issue, the spouse receives the whole estate.
• If the deceased dies leaving issue only,but no spouse and parents, the issue receive the whole estate.
• If the deceased dies leaving parents and spouse, but no issue, the parents and spouse receive one-half each.
• If the deceased dies leaving spouse and issue, but no parents, the spouse receives one-third and the issue receive two-thirds.
• If the deceased dies leaving parents and issue, but no spouse, the parents receive one-third and the issue receive two-thirds.
• If the deceased dies leaving parents, spouse and issue, the parents and spouse each receive one-quarter, and the issue receive one-half.
• If a person dies leaving no parents, spouse and issue, their estate will be held on trust for the following persons in order of priority (in equal shares:)
• Brothers and sisters.
• Grandparents.
• Uncles and aunts.
• Great grandparents.
• Great grand uncles and grand aunts.
• Where a person dies leaving no parents, spouse, issue, and any of the above family members, the whole estate goes to the government.

ii) Muslim

Whether or not a Muslim left a will prior to their death, their estate must be distributed according to the Shari'a rule of distribution, Faraid Law, unless express consent of the legal heirs has been obtained. The rule of bequest in Islam is that a Muslim can only bequeath up to one-third of the estate to non-legal heirs.

If the will purports to bequeath more than one-third of the estate, the bequests may be reduced proportionally such that the aggregate will not exceed one-third. That said, if all the legal heirs voluntarily agree, a testator’s will that bequests more than one-third of the estate will be valid.

Probate process

Grant of Probate (with a will):

• Obtain original death certificate, original will, a copy of the executor’s NRIC and residential address of executor.
• Executor applies from the court for probate with list of assets and beneficiaries.
• Probate obtained within three to six months (depending on locality).
• Executor distributes assets, after payment of debts and other statutory obligations according to the will.

Letter of administration (without a will):

• Obtain original death certificate.
• All lawful beneficiaries under intestacy choose administrator(s).
• Other lawful beneficiaries renounce their rights.
• Administrator finds two sureties who provide security equivalent to the value of the deceased’s gross estate.
• Administrator applies to the court for letters of administration with list of assets and lawful beneficiaries.
• Letters of administration usually obtained within six to 12 months.
• Administrators pay debts and distribute assets, according to Distribution Act 1958. Distribution of immovable assets however, is subject to court's approval.

Mental capacity

The Malaysian court has certain powers over the properties and affairs of a person who is considered mentally incapacitated under the Mental Health Act 2001, including the disposal of properties for the purposes of, among others, payment of the mentally incapacitated person's debts, and expenses for future maintenance of the mentally incapacitated person and their family.

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Estate planning

Use of trusts in estate planning

Discretionary trusts and fixed trusts are widely used for estate planning and succession planning.

The living trust concept is also being used to carve out an individual’s assets from their estate to achieve certain objectives. The living trust is a civil-law instrument for wealth planning. It is a type of gift created during the lifetime of the settlor that remains active thereafter. Essentially, the settlor appoints a trustee or declares himself as a trustee to hold the property in trust for the beneficiaries. This instrument permits the settlor to retain complete control of the trust property during his lifetime, and enables the beneficiary to fully benefit from the trust property as stipulated in the Trust Deed. The validity of a living trust under civil law has also been legally recognised to be applicable to Muslims (such as in the case of TM Feroze Khan & Ors v Meera Hussain TM Mohamed Mydin [2006] 3 CLJ 616) as one of the estate planning instruments in Malaysia.

Use of foundations in estate planning

Foundations are recognised in Malaysia in the form of a company limited by guarantee or an incorporated trustee under the Trustees (Incorporation) Act 1952. Of note is the Labuan Foundation, which is a statutory creature under the Labuan Foundations Act 2010 . These are generally no different from foundations found in other jurisdictions: it is a separate legal entity that holds assets with the objective of managing the assets for the benefit of a class of persons on a contractual basis. Labuan Foundations are also typically used for private-wealth management and charitable purposes.

Types of entities

• Company limited by shares.
• Company limited by guarantee.
• Unlimited company.
• Partnership.
• Limited partnership.
• Limited liability partnership.

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Taxation

Income tax system

The Malaysian system of taxation is territorial in nature. Income of any person, including a company, accruing in or derived from Malaysia, or received in Malaysia from outside Malaysia, is subject to income tax. However, income received in Malaysia by any person (other than a resident company carrying on business of banking, insurance or sea or air transport) for a year of assessment derived from sources outside Malaysia is exempt from tax.

To modernise and streamline the tax administration system, the self-assessment system was implemented for companies, sole proprietor, partnerships, cooperatives and salaried groups and the assessment of income tax is based on a current-year basis.

Personal income tax rates

See table below on rates for the year of assessment 2020.

CHARGEABLE INCOME	CALCULATIONS (MYR)	RATES (%)	TAX (MYR)
0-5,000	On the first 2,500	0	0
5,001 to 20,000	On the first 5,000 Next 15,000	1	0 150
20,001 to 35,000	On the first 20,000 Next 15,000	3	150 450
35,001 to 50,000	On the first 35,000 Next 15,000	8	600 1,200
50,001 to 70,000	On the first 50,000 Next 20,000	14	1,800 2,800
70,001 to 100,000	On the first 70,000 Next 30,000	21	4,600 6,300
100,001 to 250,000	On the first 100,000 Next 150,000	24	10,900 36,000
250,001 to 400,000	On the first 250,000 Next 150,000	24.5	46,900 36,750
400,001 to 600,000	On the first 400,000 Next 200,000	25	83,650 50,000
600,001 to 1,000,000	On the first 600,000 Next 400,000	26	133,650 104,000
1,000,001 to 2,000,000	On the first 1,000,000 Next 1,000,000	28	237,650 280,000
Exceeding 2,000,000	On the first 2,000,000 Next MYR	30	517,650 ............

Corporate income tax rates

For the year of assessment 2020:

Company with paid-up capital not more than MYR2.5 million and deriving gross business income of not more than MYR50 million in the year of assessment:

• On first MYR600,000 – 17 per cent.
• Subsequent balance – 24 per cent.

Company with paid-up capital more than MYR2.5 million: – 24 per cent

Real property gains tax (RGPT)

RPGT for disposals of Malaysian real property in the sixth year and thereafter by all disposers has increased by 5 per cent. Disposals by trustees is chargeable within Part II as well. The present chargeable RPGT, as provided by the Real Property Gains Tax Act 1976 (the Property Act), is as detailed below.

PART I

Except where Parts II and III are applicable, the following rates of tax shall apply:

Category of disposal

Disposal within three years after the date of acquisition of the chargeable asset

Disposal in the fourth year after the date of acquisition of the chargeable asset

Disposal in the fifth year after the date of acquisition of the chargeable asset

Disposal in the sixth year after the date of acquisition of the chargeable asset or thereafter

PART II

Where the transferor is a company, the following rates of tax are applicable:

Category of disposal

Disposal within three years after the date of acquisition of the chargeable asset

Disposal in the fourth year after the date of acquisition of the chargeable asset

Disposal in the fifth year after the date of acquisition of the chargeable asset or thereafter

Disposal in the sixth year after the date of acquisition of the chargeable asset or thereafter

PART III

In the case of an individual who is not a citizen and not a permanent resident, or an executor of the estate of a deceased person who is not a citizen and not a permanent resident, the following rates of tax shall apply:

Category of disposal	Rate of tax (%)
Disposal within five years after the date of acquisition of the chargeable asset	30
Disposal in the sixth year after the date of acquisition of the chargeable asset or thereafter	10

Pursuant to exemption orders made by the minister of finance, certain classes of persons, or certain types of disposals, may be exempted from the provisions of the Property Act. As of February 2020, such exemptions include the disposal of any chargeable asset pursuant to a restructuring scheme of a licensed person or its corporate group (Real Property Gains Tax (Exemption) Order 2015). Disposals of chargeable asset made in the sixth year after the date of acquisition and thereafter, and valued at not more than MYR200,000 is also exempted from RPGT.

Gains made from disposal of real properties may be subjected to income tax, if they are of a revenue nature.

RPGT chargeable on trust

The exemption for the disposal of any chargeable asset to a trustee-manager on behalf of a business trust (Real Property Gains Tax (Exemption) Order 2013) has been repealed.

An acquisition or disposal of an asset of a trust or partnership is assessed at the price at which the asset was in fact acquired or disposed of. Any gain or loss in respect of a disposal shall be assessed on or attributed to the trustee or the partnership. The executor of the estate of a deceased person, trustees (other than the trustee of an unincapacitated person), and any person specified as assessable and chargeable with the tax in respect of any chargeable gains are included as ‘chargeable persons’.

Where two or more persons act in the capacity of trustees of a trust or executors of the estate of a deceased person, they shall be jointly and severally liable for the payment of the tax payable on any chargeable gains accruing to the trust or estate.

For an asset that is disposed by way of gift between husband and wife, parent and child, or grandparent and grandchild, the donor shall be deemed to have received no gain and suffered no loss on the disposal if the donor is a citizen, and the disposal will not be charged for RPGT.

Non-residents

Non-residents taxable on

TYPES OF INCOME (NON-RESIDENTS)	RATE (%)
Business, trade or profession	26 (Year of assessment 2016-2019); 30 (With effect from year of assessment 2020)
Employment
Dividends
Rents
Public entertainer	15
Interest
Royalty	10
Payments for services in connection with the use of property or installation, operation of any plant or machinery purchased from a non-resident
Payments for technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme
Rent or other payments for the use of any movable property

Withholding tax rate (non-treaty)

The Income Tax Act 1967 provides that where a person (referred herein as ‘payer’) is liable to make payment as listed below (other than income of non-resident public entertainers) to a non-resident person (NR payee), they shall deduct withholding tax at the prescribed rate from such payment and (whether such tax has been deducted or not) pay that tax to the Director General of Inland Revenue within one month after such payment has been paid or credited to the NR payee.

All withholding tax payments (other than for non-resident public entertainers) must be made with the relevant payment forms, duly completed, together with copy of invoices issued by the NR payee and copy of payment documents as proof of date of payment/crediting the NR payee.

More information on the withholding tax applicable to different types of income can be found in the table below.

PAYMENT TYPE	INCOME  TAX ACT 1967	WITHHOLDING TAX RATE (%)	PAYMENT FORM
Contract payment	Sections 107A (1) (a) and 107A (1) (b)	10, 3	CP 37A
Interest	Section 109	15	CP 37
Royalty	Section 109	10	CP 37
Special classes of income: technical fees, payment for services, rent / payment for use of movable property	Section 109B	10	CP 37D
Interest (except exempt interest) paid by approved financial institutions	Section 109C	5	CP 37C
Income of non-resident public entertainers	Section 109A	15	Payment memo issued by assessment branch
Real Estate Investment Trust (REIT) (i)            Other than a resident company (ii)            Non-resident company (iii)           Foreign investment institution effective from 1/1/2007	Section 109D	10 25 10	CP 37E
Family fund / Takaful family fund/Dana Am (i)            Individual and other (ii)            Non-resident company	Section 109E	8 25	CP 37E(T)
Income under s.4(f) of the Income Tax Act 1967	Section 109F	10	CP 37F

Withholding tax rate (treaty)

NOT APPLICABLE

Taxation at death

NOT APPLICABLE

Other taxes

NOT APPLICABLE

Tax treaties

As of 8 April 2019, Malaysia has signed 74 double taxation agreements (DTAs). Further, there are six DTAs that have been gazetted, but which have not yet come into force, and 25 DTAs that are currently being negotiated. The full list of the countries with which Malaysia has signed such DTAs can be found at the following website: 

Tax information exchange agreements (TIEAs)

Malaysia has signed a TIEA with Bermuda, while TIEAs with the Bahamas, Guernsey and Liberia are currently under negotiation.

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Residence and domicile

Special rules on becoming resident

Pursuant to the Income Tax 1967 an individual is considered a Malaysian tax resident if they are:

• Section 7 (a): In Malaysia for 182 days or more in that basis year.
• Section 7 (b): In Malaysia for less than 182 days in that basis year, but this period is linked to either the preceding or subsequent basis year of assessment, in which they were in Malaysia for 182 or more consecutive days; provided that any temporary absence from Malaysia:
• connected with their service in Malaysia and owing to service matters or attending conferences or seminars or study abroad;
• owing to ill-health involving themselves or a member of their immediate family; and
• in respect of social visits not exceeding 14 days in the aggregate, shall be taken to form part of such period or that period, as the case may be, if he is in Malaysia immediately prior to and after that temporary absence.
• Section 7 (c): In Malaysia for 90 days or more in that basis year, and in three out of four basis years before the year assessment, was either:
• a tax resident; or
• in Malaysia for 90 days or more; and
• Section 7(d): A tax resident in Malaysia within the meaning of the Income Tax Act 1967 for the basis year following that particular year of assessment, having been a resident for each of the three basis years immediately preceding that particular year of assessment.

Special rules on ceasing residence

NOT APPLICABLE.

Domicile concept for gifts and inheritance

NOT APPLICABLE.

Taxation of holdings by non-residents on death and of gifts

• Gifts: nil.
• Death: nil.

Reporting/auditing requirements

No.

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Incentives

In an effort to attract FDI, the Budget has introduced, increased and extended various incentives, including:

Customised packaged investment incentives

The government will make available up to MYR1 billion worth of customised packaged investment incentives annually over a span of five years, targeted at “Fortune 500 companies and global unicorns in high technology, manufacturing, creative and new economic sectors”. These companies must invest at least MYR5 billion in Malaysia for economic activities.

Electrical and electronics (E&E) industry incentives

To propel the 5G digital economy and Industry 4.0, incentives in the E&E industry include income tax exemption of up to ten years for E&E companies, and special income tax exemption equivalent to investment tax allowance of 50 per cent on qualifying capital expenditure incurred within a period of five years for E&E companies that have exhausted the 15-year eligibility period to claim investment expenditure.

Invest KL’s China special channel (CSC)

In tandem with the CSC announcements in the Budget, Invest KL has signed a memorandum of agreement in January 2020 with Chinese Business Chambers, targeting to achieve at least MYR5 billion in investments from China to Malaysia. This initiative aims to attract Chinese investors operating in key sectors including consumer technology, renewable energy, medical technology, E&E, mechanical engineering and aerospace.

Green technology incentives

The Green Investment Tax Allowance and Green Income Tax Exemption has been extended from 2020 to 2023. A ten-year masterplan was approved in September 2019. The key reform initiative includes allowing generators to source their own fuel from providers other than Tenaga Nasional Berhad (the Malaysian government-linked electricity company) and establish third-party access framework and network charges for the grid, which could encourage power purchase from other ASEAN countries. The government’s vision is to increase its green energy generation mix to 20 per cent by 2025.

Other relevant information

Asset protection laws

No specific asset protection laws.

Foreign currency restrictions

No.

Foreign ownership restrictions

No restrictions on foreign ownership of equity except as set out in specific laws, like the National Land Code.

AML/due diligence and other requirements and regulatory procedures for advisors

• To establish a trust.
• For incorporation.
• To open a bank account.

Generally, as part of its international obligations and commitments, Malaysia enacted its Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001 (the AMLATFA), which came into force on 1 September 2014 and 1 October 2014 for provisions relating to Part IVA of the AMLATFA. The AMLATFA complies with nearly all of the Financial Action Task Force (FATF) 40 Recommendations (original) and recent amendments have been enacted to the AMLATFA pursuant to the Anti-Money Laundering (Amendment) Act 2003 that extend its application to cover the offence of terrorist financing. The AMLATFA is therefore Malaysia’s primary legislative framework on anti-money laundering and anti-terrorist financing and these legislations applicable to the reporting institutions including branches and subsidiaries outside Malaysia carrying on any activity listed in the First Schedule of AMLATFA.

The definition of money laundering is now broader under the AMLATFA and includes the act of a person who:

• engages, directly or indirectly, in a transaction that involves proceeds of any unlawful activity;
• acquires, receives, possesses, disguises, transfers, converts, exchanges, carries, disposes, uses, removes from or brings into Malaysia proceeds of any unlawful activity; or
• conceals, disguises or impedes the establishment of the true nature, origin, location, movement, disposition, title of, rights with respect to, or ownership of proceeds of any unlawful activity.

The key phrase here is ‘proceeds of any unlawful activity’ and the AMLATFA has defined it as ‘any property derived or obtained, directly or indirectly, by any person as a result of any unlawful activity'.

Key resources for further information

WEBSITES

• Bank Negara Malaysia: www.bnm.gov.my
• Malaysian Investment Development Authority: www.mida.gov.my
• Inland Revenue Board of Malaysia: www.hasil.gov.my
• Securities Commission Malaysia: www.sc.com.my

LEGISLATION

• Income Tax Act 1967.
• Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001.   
• Stamp Duty Act 1949.
• Real Property Gains Tax Act 1976.

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