Tax incentives for Islamic finance transactions in Malaysia extended until 2020
The assessment year (AY) 2007 saw the introduction of various tax incentives for Islamic finance transactions in Malaysia, whether banking or Takaful. The incentives were originally made available until AY 2016, and have now been extended until AY 2020. The full income tax exemption to Malaysian Islamic banks and Takaful companies on the income from business conducted in international currencies shall continue further until AY 2020.
The SPVs established specifically for issuing Shariah compliant units shall continue to be tax-exempt. The costs associated with issuing of the units are generally not tax-deductible due to the fact that such costs are viewed as capital in nature. However, in order to assist the use of Shariah compliant products in raising funds, the borrower is allowed to take a deduction of the costs incurred for sett ing up the SPV and issuing the securities. The tax law presumes the SPV as a look-through entity and hence, a borrower in this case is deemed to be receiving the SPV’s income and will be taxed accordingly, similar to the borrower company being able to deduct the associated costs. Likewise is the case with the establishment costs of an Islamic stock broking firm dealing in Shariah compliant products.
Malaysian resident fund management companies continue to enjoy full income tax exemption for providing fund management services to foreign and local investors. The funds must be approved by Securities Commission Malaysia in order for the fund manager to qualify for this exemption. Apart from income tax, the other challenge to Islamic finance transactions is the additional instruments resulting in additional stamp duties. In order to have a level-playing field with conventional banking, stamp duties have been totally exempted on instruments pertaining to Islamic banking and Takaful business transacted in international currencies. This incentive is further extended until the end of 2020 as well.
Payments for providing services in Malaysia attract withholding tax at the rate of 10% on the gross payment unless restricted by the double tax agreement between Malaysia and the other country. However, in order to boost the Islamic financial sector, Malaysia has cut down the source taxation on the payments to Shariah compliant experts.
Dhana Pillai is the head of real estate, tax and project finance at Al Hashmi Law Firm (Oman). She can be contacted at email@example.com.