New section 6D (effective from YA 2021) of the Malaysia Income Tax Act 1967, as amended (ITA)-Budget 2020. (Tax rebates for newly commenced business of a company or limited liability partnership only)
The ITA 1967 has introduced a new section 6D into Act 53 to provide for a tax rebate that will be granted to a start-up company or limited liability partnership (but has excluded sole proprietors and unincorporated partnerships) which fulfils the conditions and requirements as follows:
a) The rebate is the amount equivalent to its operating or capital expenditure which it has incurred limited to a maximum amount of twenty thousand ringgit [RM20,000] for each year of assessment (YA),
b) Where the total amount of the rebate under subsection (1) exceeds the income tax charged (before any such rebate) for any YA, the excess shall not be paid to the company or limited liability partnership, or be available as credit to set off the tax liability of the company or limited liability partnership for that YA or any subsequent YAs,
c) The company or limited liability partnership referred to in subsection (1) shall be a company or limited liability partnership resident and incorporated or registered in Malaysia —
Which has a paid-up capital in respect of ordinary shares or contribution of capital (whether in cash or in kind) of two million and five hundred thousand ringgit and
Less at the beginning of the basis period for a YA (& the Malaysian Inland Revenue Board (MIRB) has confirmed that companies with paid-up capital below RM2.5 million but wholly owned by a parent company with paid-up capital exceeding RM2.5 million may not qualify for this rebate
Which has a gross income from a source or sources consisting of a business not exceeding fifty million ringgit for the basis period for that YA,
A newly incorporated entity must commence operations within 01/07/2020 till 31/12/2021 and closed its first financial year any time in 2021 to be eligible for one year to three (3) consecutive years of tax rebate.
In addition, a Company that is not eligible for the rebate includes an entity with paid-up capital below RM2.5 million and with annual sales of not more than RM50 million, would also have to fulfil the condition of not being owned directly or indirectly by:
- Companies that have paid-up capital of more than RM2.5 million
- Multinational companies; or
- Government Linked Companies.
Additional conditions imposed among others are:
- The newly established entity must operate in a different premise than that of its related company (if applicable);
- The new entity must use a different plant, equipment and facility than that of any related company and the plant, equipment and facility are not transferred from any related company (if applicable);
- All employees (not including key personnel) must be different employees than that of any related company (if applicable);
- Partnership or company that changes into Limited Liability Partnership or vice versa is not eligible.
If all the above conditions/requirements are not fulfilled to qualify, the company or limited liability partnership for the tax rebate, the entitlement for that YA, and subsequent YA(s) shall cease. However, it shall not affect the rebate that was claimed in prior years (when the qualifying conditions were met)
Qualify to claim tax rebate
1st YA 2nd YA 3rdYA
Qualifying conditions not met in 1st YA. No No No
Qualifying conditions met in 1st YA but not met in 2nd YA Yes No No
Qualifying conditions met in 1st and 2nd YAs but not Yes Yes No
met in 3rd YA.
Qualifying conditions met in 1st and 3rd YAs but not Yes No No
met in 2nd YA.
This amendment has effect for the YA 2021 and subsequent YAs specified in the new section 6D and such conditions imposed by the Minister in the statutory order published in the Gazette.
(Pending revision once the gazette is available )
Additional References:
Extracts of JOINT MEMORANDUM ON ISSUES ARISING FROM 2021 BUDGET SPEECH & FINANCE BILL 2020 between the members of the accounting profession, MOF & IRBM dated 7th December 2020.
Comments:
a. We welcome this initiative to encourage new businesses to start-up at this crucial time. We hope the same proposal can also be applied to sole proprietorships and partnerships.
MOF’s Feedback: We take note of this suggestion. Currently, this provision only applies to a company / limited liability partnership.
b. It would appear that an application for the rebate to be granted is not needed. Therefore, we would request that the phrase “rebate may be granted” be re-worded to “rebate shall be granted” to be consistent with other parts of the Income Tax Act (“ITA”) 1967 e.g. tax rebate for an individual whose chargeable income does not exceed RM35,000 [S.6A(2)], tax rebate for departure levy [S.6A(2A)] and tax rebate for zakat or fitrah [S.6A(3)].
IRBM’s Feedback: The phrase “rebate may be granted” is preferred as unlike tax rebate for an individual whose chargeable income does not exceed RM35,000 [S.6A(2)], tax rebate for departure levy [S.6A(2A)] and tax rebate for zakat or fitrah [S.6A(3)], the rebate under the new section 6D can only be granted if the company/ limited liability partnership (LLP) fulfils the conditions under subsection 6D(3) and the conditions stated in the statutory order to be made under subsection 6D(4).
c. Commencement of operations – kindly confirm whether the definition in S.21A(8) is applicable to the new S.6D as well.
IRBM’s Feedback: Yes, the definition of “operations” in subsection 21A(8) is applicable.
d. Kindly confirm that companies with paid-up capital below RM2.5 million but wholly owned by a parent company with paid-up capital exceeding RM2.5 million may qualify for this rebate.
IRBM’s Feedback: The companies are not eligible for the rebate. Other than paid-up capital below RM2.5 million and annual sales of not more than RM50 million, companies would have to fulfil the condition of not being owned directly or indirectly by: i. Company that has paid-up capital of more than RM2.5 million ii. Multinational companies; or iii. Government Linked Companies. Additional conditions with regard to this rebate will be detailed out in the relevant statutory order.
e. Effective period The proposed S.6D(3)(c) stipulates that the commencement of operations is on or after 1 July 2020 but not later than 31 December 2021. However, the proposed rebate is to be effective from the year of assessment (“YA”) 2021. In the case of a company which commenced its operations on 1 July 2020 and closes its first set of accounts on 31 December 2020, its first YA would be YA 2020 with a basis period of 1 July 2020 to 31 December 2020. Such company would qualify for only 2 years of rebate, rather than 3 years. Given that this initiative was first proposed in the tax measures under PENJANA on 5 June 2020, we propose that the effective date for this proposal be amended to YA 2020, so that companies that commence operations between 1 July 2020 to 31 Dec 2020 qualify for 3 years of rebate regardless of accounting dates and basis periods.
IRBM’s Feedback: As the law takes effect from YA 2021, the company which commenced its operations on 1 July 2020 and closes its first set of accounts on 31 December 2020, is only eligible to claim the rebate for YA 2021 and YA 2022. Thus, the company is not eligible to claim rebate in the first year of assessment (YA 2020)
f. Other conditions
What are the other conditions to be gazetted via statutory order? SMEs would need the certainty of being able to meet all qualifying conditions early. Can businesses take this rebate into account for CP204 purposes or should they wait for the statutory order to be gazetted?
IRBM’s Feedback: Companies that are eligible for this rebate are not required to furnish estimates of tax payable (CP204) for the first and second years of assessment after they have commenced operation as provided under subsection 107C(4A). Therefore, there is no necessity to take this rebate into account for CP204. However, the eligible companies can take this rebate into account in the third year in submitting CP204.
Additional conditions among others are:
- The newly established entity must operate in a different premise than that of its related company (if applicable);
- The new entity must use a different plant, equipment and facility than that of any related company and the plant, equipment and facility are not transferred from any related company (if applicable);
- All employees (not including key personnel) must be different employees that that of any related company (if applicable);
- Partnership or company that changes into Limited Liability Partnership or vice versa is not eligible. The finalized conditions are to be detailed out in the statutory order