Malaysia: Tax implications of statutory changes for unit trust funds (Finance Act 2021)

The Finance Act 2021—effective 1 January 2022—introduced several amendments to the Income Tax Act 1967 that would change the tax landscape for unit trust funds in 2022.

For background on the Finance Act 2021, read TaxNewsFlash.

Fund managers need to examine how the tax changes (described below) will affect the unit trust industry, especially on operational matters and the return of investment to unit holders.

• Taxation of foreign-sourced income: The income tax exemption on foreign-sourced income received in Malaysia by a Malaysian resident person has been repealed. This effectively covers all foreign-sourced income received in Malaysia including foreign-sourced income derived prior to 1 January 2022, both passively and actively derived from sources outside Malaysia. A transitional tax rate of 3% is accorded on the gross amount received in Malaysia during the period from 1 January 2022 through 30 June 2022. From 1 July 2022, the prevailing tax rate will apply to chargeable income computed in respect of the foreign-sourced income remitted into Malaysia.
• Distribution from “retail money market funds” to unit holders: The distribution of certain income by a retail money market fund to non-individual unit holders is subject to tax, effective from 1 January 2022. A new withholding tax mechanism has also been introduced. Retail money market funds must deduct and remit the withholding tax within one month of the distribution of the interest income to non-individual unit holders.
• Other withholding tax obligations: The Finance Act 2021 also introduced a new withholding tax provision on payments made by a company to its authorized resident individual agents, dealers or distributors, if certain thresholds are met. This is effective from 1 January 2022 and will mainly affect fund managers that pay commissions to authorized resident individual agents for drawing investors to invest in the unit trust funds.

Due to these changes, affected unit trust funds may need to consider the following operational issues, to navigate through the new tax landscape:

• Review the tax effects on remittance of any taxable foreign-sourced income from outside Malaysia into Malaysia, which is particularly important for revising the estimated tax payable for a year of assessment to avoid any underestimation penalty
• Re-evaluate the effect on the net return on investment on foreign assets and look into prospectuses and information memoranda to reflect the latest legislation position
• Consider the need to modify and update accounting systems and to maintain appropriate records
• Consider the deferred tax accounting implications
• Conduct a briefing and training for the relevant department or personnel on the requirements of withholding tax remittance and the related deadline
• Collect all the supporting documentation to substantiate the nature of the foreign funds

Read a May 2022 report [PDF 2.76 MB] prepared by the KPMG member firm in Malaysia