MEMBER FIRM OF BAKER & MCKENZIE INTERNATIONAL

Highlights of the Malaysian

Budget 2010

November 2009

Private & Confidential

 This memorandum has been prepared for clients and professional associates of Wong & Partners. It is intended to provide only a brief
outline on International Procurement Centres. For this reason, the information contained in this memorandum should not form the basis
of any decision as to a particular course of action; nor should it be relied on as legal advice or regarded as a substitute for detailed
advice in individual cases. The services of a competent professional adviser should be obtained in each instance, so that the
applicability of the relevant legislation or other legal development to the particular facts can be verified.

This memorandum is protected by copyright. No part maybe reproduced or transmitted by any process or means without prior written
permission of Wong & Partners.

The law is stated as at November 2009.

Wong & Partners 2009 Highlights of the Malaysian Budget 2

Table of Contents

1. Budget 2010............................................................................................................................... 1
1.1. Real Property Gains Tax……………………………………………………………....1
1.2. Individual Income Tax………………………………………………………………... 1
1.3. GST…………………………………………………………………………………… 2
1.4. New Tax Incentives…………………………………………………………………... 2
1.4.1 Iskandar Malaysia .........................................................................................................2

1.4.2 Health Tourism .............................................................................................................2

1.4.3 Small and Medium Enterprises to Register Patents and Trademarks ...........................3

1.4.4 Buildings Obtaining Green Building Index Certificate ................................................3

1.4.5 Islamic Finance .............................................................................................................4

1.4.6 Tax Administration .......................................................................................................5

1.4.7 Service Tax on Credit Cards and Charge Cards ...........................................................7

2. Double Tax Agreements Update................................................................................................ 7

3. Recent Developments for Labuan Offshore Companies............................................................ 7
4. Stamp Duty ................................................................................................................................ 8
1. Budget 2010

The Prime Minister and Minister of Finance YAB Dato’ Sri Mohd. Najib Tun Abdul Razak unveiled
the Malaysian Budget for the year 2010 (“Budget”) on October 23, 2009.

The theme of the Budget is “1Malaysia, Together We Prosper”.

The three main strategies focused in the Budget are namely, driving the nation towards a high-income
economy, ensuring holistic and sustainable development and focusing on well-being of the rakyat1.

We set out below the highlights of the Budget:

1.1. Real Property Gains Tax

The blanket exemption introduced on 1 April 2007 for real property gains tax has been lifted. Real
property gains tax (“RPGT”) at a fixed rate of 5% has been proposed. However, exemptions will be
given for first time disposal of residential property in a lifetime and transfer between parent and child,
husband and wife, grandparent and grandchild.

Purchasers will have to withhold 2% of the purchase price which shall be remitted to Inland Revenue
Board (“IRB”). There will be an exemption for individuals up to RM10,000 or 10% of the gains,
whichever is higher.

The proposed RPGT is generally more relaxed than the previous RPGT regime which had a higher
and tiered rate of tax for disposal of chargeable assets depending on the length of period between the
acquisition and disposal of the chargeable assets. The RPGT rate of tax also differed between
disposals by Malaysian citizens and permanent residents, companies and foreign individuals.

The Budget 2010 proposal is unclear as to the tax treatment of disposal of shares in real property
companies, which was previously a chargeable asset, although it is likely that the exemption for such
disposals will also be lifted.

This proposal is expected to come into effect on 1 January 2010.

1.2. Individual Income Tax

In what can be seen as a bid to attract high-income earners, the top rate for resident individual income
tax rate has been dropped from 27% to 26%, for the year of assessment (“YA”) 2010. This change
will affect those in the chargeable income group exceeding RM100,000.

As a grant of relief to all individual taxpayers, the personal relief has been increased from RM8,000 to
RM9,000 effective from YA 2010, increasing the average taxpayer’s chargeable income by RM1,000
a year.

The relief for Employees Provident Fund (“EPF”) contributions and life insurance premiums has also
been increased from RM6,000 to RM7,000. This will largely benefit middle-income to high-income
groups by increasing. The increased relief is given solely on annuity scheme premium from insurance
companies commencing payment from 1 January 2010. It is also applicable to additional premium
paid on existing annuity scheme commencing payment from 1 January 2010.

1
Means ‘an ordinary citizen’.

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Non-resident individuals’ fixed income tax rate will drop from 27% to 26%.

Knowledge workers in Iskandar Malaysia will enjoy an income tax rate of only 15%, for both
Malaysians and foreigners alike, as discussed below in paragraph 1.4.

1.3. GST
The Malaysian government has cautiously decided not to announce any implementation of goods and
services tax (“GST”) to replace the current sales tax and service tax, despite many calls for the
implementation of GST to reduce the growing budget deficit.

The Prime Minister nevertheless recognised the necessity of GST in supporting increasing
government expenditure and reducing Malaysia’s debt and that the government’s impact study was in
its final stages. He stressed that the Malaysian government was wary of burdening the consumers.
He anticipated that the GST rate, if introduced, would be lower than the current the sale tax and
service tax and that there would be exemptions for the low-income group.

1.4. New Tax Incentives

1.4.1 Iskandar Malaysia
Knowledge workers residing in Iskandar Malaysia working in qualifying activities, local and foreign,
will enjoy a lower income tax rate of 15%, compared to the normal rate of 26%. The qualifying
activities are:

1. green technology;
2. biotechnology;
3. educational services;
4. healthcare services;
5. creative industries;
6. financial advisory and consulting services;
7. logistics services; and
8. tourism.

This incentive will apply to workers who commence employment in Iskandar Malaysia between
October 24, 2009 and December 31, 2015.

1.4.2 Health Tourism

Effective from YA 2010 until YA 2014, the current tax exemption on statutory income given to
healthcare service providers who offer services to foreign clients in and from Malaysia to the amount
of 50% of the value of increased exports, will now be increased to 100%, subject to 70% of the
statutory income for each YA.

For the purposes of this increased exemption, foreign clients will exclude:

1. non-Malaysian citizens participating in Malaysia My Second Home Programme and

dependants;
2. non-Malaysian citizens holding a Malaysian student pass and dependants;
3. non-Malaysian citizens holding a Malaysian work permit and dependants; and
4. Malaysian citizens who are non-residents living abroad and dependants.

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However, healthcare services provided to the above will continue to enjoy the current incentive.

1.4.3 Small and Medium Enterprises to Register Patents and Trademarks

Small and medium enterprises (“SME”) will be allowed to deduct expenses incurred in the
registration of patents and trademarks in Malaysia. Such expenses are currently considered capital in
nature and not allowed as a deduction. Moving forward, registration expenses including fees or
payments made to patent and trademark agents registered under the Patents Act 1983 and the Trade
Marks Act 1976 will be deductible.

SME is defined according the Schedule 1 of the Income Tax Act 1967, as follows:

(i) Paragraph 2A
Manufacturing Industries, Manufacturing Related Services Industries and Agro-Based
Industries
• Enterprises with full-time employees not exceeding 150 persons or with annual sales
turnover not exceeding RM25 million.

(ii) Paragraph 2B
Services Industries, Primary Agriculture and Information & Communication Technology
• Enterprises with full time employees not exceeding 50 persons, or with annual sales
turnover not exceeding RM5 million.

This incentive will be effective from YA 2010 until YA 2014.

1.4.4 Buildings Obtaining Green Building Index Certificate

The Green Building Index (“GBI”) is a green rating index on environment-friendly buildings. It is
based on criterias such as:

1. energy and water efficiency;

2. indoor environmental quality;
3. sustainable management and planning of building site in respect of pollution control and
facilities for workers;
4. usage of recyclable and environment friendly materials and resources; and
5. adoption of new technologies.

Two new tax incentives in relation to such buildings are:

• Owners of buildings awarded the GBI certificate be given tax exemption equivalent to 100%
of the additional capital expenditure incurred to obtain the GBI certificate. The exemption is
allowed to be set-off against 100% of the statutory income for each YA. The incentive is
applicable for new buildings and upgrading of existing buildings.

This incentive will be effective for buildings awarded with GBI certificates from October 24,
2009 until December 31, 2014.

• Buyers of new buildings and residential properties awarded GBI certificates bought from real
property developers are eligible for stamp duty exemption on instruments of transfer of
ownership of such buildings. The amount of stamp duty exemption is on the additional cost
incurred to obtain the GBI certificate. The incentive is given only once to the first owner of
the building.

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 This incentive will be effective for sales and purchase agreements executed from October 24,
2009 until December 31, 2014.

1.4.5 Islamic Finance

Numerous tax incentives were granted previously to promote Islamic finance in Malaysia. These
incentives have now been extended in terms of scope and effective period.

(i) Export of Financial Services

Banking institutions currently enjoy a tax exemption on profits of newly established branches
overseas or income remitted by new overseas subsidiaries. This will be extended to insurance
and takaful companies too.

The current tax exemption is given for a period of five years from the commencement of
operations of the branches or subsidiaries. This effective period will be given more flexibility
to be deferred from the date of commence of operations to begin not later than the third year
of operations.

Currently applications to establish new branches or subsidiaries overseas must be submitted

to Bank Negara Malaysia between September 2, 2006 until December 31, 2009. This period
will be extended until December 31, 2015.

(ii) International Islamic Financial Centre

Currently expenses incurred in the promotion of Malaysia as an International Islamic

Financial Centre (“MIFC”) are given a double deduction incentive. This incentive was
originally effective between YA 2008 until YA 2010. This has now been extended until YA
2015.

The deductible expenses, which need to be verified by the MIFC Secretariat, are:

1. market research and feasibility study;

2. preparation of technical information relating to type of services offered;
3. participation in an event to promote MIFC;
4. maintenance of sales office overseas; and
5. publicity and advertisement in any media outside Malaysia.

(iii) Expenditure to Establish Islamic Stock Broking Companies

Currently expenditure incurred prior to the commencement of an Islamic stock broking

company is deductible. The incentive is subject to the condition that the company must
commence its business within a period of two years from the date of approval by the
Securities Commission.

This incentive, which would originally expire on December 31, 2009, will be extended until
December 31, 2015.

(iv) Incentives on Issuance of Islamic Securities

Currently expenses incurred in the Issuance of Islamic securities approved by the Securities
Commission are deductible.

The incentive was originally effective from YA 2003 until YA 2010. It will now be extended
until YA 2015.

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 This incentive will be further extended to Islamic securities approved by the Labuan Offshore
Financial Services Authority, effective from YA 2010 until YA 2015.
(v) Profits from Non-Ringgit Sukuk

Currently profits from non-Ringgit sukuk approved by the Securities Commission and issued
in Malaysia are tax exempt from YA 2008. However, this tax exemption does not cover
profits from sukuk approved by the Labuan Offshore Financial Services Authority.
Therefore, profits derived from the issuance of sukuk approved by the Labuan Offshore
Financial Services Authority will also be tax exempt effective from YA 2010.

(vi) Standardizing tax assessment system for Special Purpose Vehicles

Currently a special purpose vehicle (“SPV”) established under the Companies Act 1965 solely
to channel funds for the purpose of issuance of Islamic securities approved by the Securities
Commission will not be subject to income tax and is not required to comply with
administrative procedures under the Income Tax Act 1967.

Income received and the cost incurred in the issuance of Islamic securities by the SPV are
deemed as income and cost of the company establishing the SPV. Therefore, the company
establishing the SPV is subject to tax on that income and given deduction on such cost
incurred.

The above will now apply to SPV established under the Offshore Companies Act 1990
electing to be taxed under the Income Tax Act 1967. This will be effective from YA 2010.

1.4.6 Tax Administration

(i) Standardizing tax treatment for Upstream Petroleum companies

Upstream petroleum companies are subject to income tax under the Petroleum (Income Tax)
Act 1967, which uses the preceding year assessment system where tax assessed in the current
year is based on income received in the preceding year. This will now be switched to a
current year assessment system. However, upstream petroleum companies will be allowed to
pay income tax for YA 2010 based on income received in 2009 by instalments for five years,
to alleviate the burden of paying two years’ taxes in one year.

The official assessment system is currently undertaken by the Inland Revenue Board. This
will be switched to a self assessment system.

The purpose of this standardization is to ensure that the government’s cash flow reflects
current economic performance.

(ii) Expediting Investments for Selected Activities

The following incentives were granted from 2003. In order to ensure that investments in the
following activities are expedited, applications for the following incentives must be received
not later than December 31, 2011.

(a) Forest Plantation

• Investor company

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 o The company which invests in its subsidiary company engaged in
forest plantation activities is granted tax deduction equivalent to the
amount of investment made in that subsidiary; or

o The company which invests in its subsidiary company engaged in

forest plantation activities is granted group relief on losses incurred
by its subsidiary company before it records any profit.

• Subsidiary company undertaking forest plantation activities:

o The subsidiary company undertaking forest plantation activities is

granted income tax exemption of 100% on its statutory income for 10
years commencing from the first year the company derives profits;

o An existing forest plantation company that reinvests for purposes of

expansion of the forest plantation project is granted income tax
exemption of 100% on its statutory income for five years
commencing from the first year the company derives profits.

(b) Consolidation of the Management of Smallholdings and Idle Land

• A company or individual or partnership or a cooperative society that invests

in a wholly owned subsidiary company involved in the consolidation of
management of smallholdings or idle land is allowed a deduction equivalent
to the amount of investment;

• A company or individual or partnership or a cooperative society undertaking

the consolidation of management of smallholding or idle land is given tax
exemption of 100% of statutory income for a period of five years; and

• A wholly-owned subsidiary company undertaking the consolidation of

management of smallholdings or idle land is exempted from service tax.

(c) Knowledge Based Economy

• Companies participating in a strategic knowledge intensive activity is granted

‘strategic knowledge based company’ status and eligible for the following
incentives:

o Pioneer status with income tax exemption of 100% of statutory

income within a period of five years; or

o Investment Tax Allowance of 60% on the qualifying capital

expenditure incurred within a period of five years. The allowance to
be set-off against 100% of statutory income for each YA.

• Expenditure incurred by a company for drafting the individual corporate

knowledge based master plan is allowed as a deduction in the computation of
income tax. The deduction is claimed when the company begins to
implement the corporate knowledge based master plan.

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1.4.7 Service Tax on Credit Cards and Charge Cards
On April 1, 2001, the RM50 service tax per year imposed on each credit card and charge card was
withdrawn. This service tax was originally introduced on January 1, 1997.

Service tax will again be imposed on credit cards and charge cards including those issued free of
charge at RM50 per year on the principal card and RM25 per year on each supplementary card.

This service tax will be collected on the date the card is issued, even on cards issued free of charge,
effective from January 1, 2010. The purpose of this proposal is to encourage prudent spending.

2. Double Tax Agreements Update

Malaysia has recently extended its tax treaty network with the signing of double tax agreements
(DTAs) with Brunei bringing the number of countries that Malaysia has DTAs with to a total of 69
countries.

The DTA entered into between Malaysia and Turkmenistan has been gazetted but will only come into
effect upon ratification.

The DTA entered into between Malaysia and Qatar in the year 2008 has been ratified and hence
effective as shown in Table 1:

Income tax Petroleum income

(i) Qatar YA 2010 YA 2011

3. Recent Developments for Labuan Offshore Companies

The Labuan Offshore Financial Services (Amendment) Act 2008 came into effect on 15 June 2008,
and introduced a new provision – section 17A Preservation of Secrecy in the Labuan Offshore
Financial Services Act 1996 (“LOFSA 1996”). The new section 17A states that:

(1) No member, officer, servant, agent or consultant of the Authority or

person who has by any means access to any record, book, register,
correspondence, document, material or information, relating to the
business and affairs of the Authority in the performance of his duties
or the exercise of his functions, shall give, divulge, reveal, publish or
otherwise disclose to any person such record, book, register,
correspondence, document, material or information unless he is
lawfully required to do so by any court or under any written law.

(2) Any person who contravenes subsection (1) shall be guilty of an

offence and shall be liable on conviction to a fine not exceeding
RM500,000 or to imprisonment for a term not exceeding six months
or to both.

A number of amendments relating to information exchange were also made to the Labuan Offshore
Financial Services Act 1996. Section 28B(1) previously prohibited the collecting of any information
that disclosed the affairs, identity or account of a customer to the Labuan Offshore Services Authority

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(“LOFSA”). However, the new provision now expressly allows it, and this also expressly extends to
the beneficial owner of an account opened with an offshore financial institution or any corporation
related to the offshore financial institution. In short, the scope of information to be exchanged has
been widened significantly.

Exchange of information is further facilitated by LOFSA’s ability to disclose any information to any
local or foreign body or authority which supervises the operations of offshore financial institutions.
Previously, LOFSA could only disclose such wide-ranging information to central banks.

It is interesting to note that the introduction of these amendments relating to the exchange of
information was gazetted prior to the blacklisting of Labuan by the OECD during the G20 Summit
earlier in 2009, although they had not yet come into effect.

4. Stamp Duty

Due to the confusion and financial burden arising from the amendment to item 22 of Schedule 1 of the
Stamp Act 1949, which was amended to include “service agreements” and thereby imposing an ad
valorem on all service agreements, including construction service agreements, the Ministry of Finance
has announced a remission of stamp duty for service agreements executed between September 15,
2009 until December 31, 2009. These agreements are now only subject to RM50 stamp duty only,
while the excess is remitted. As this remission cannot be gazetted, the remission will be granted on a
case-by-case basis in accordance with section 80(1A) of the Stamp Act 1949.

Come January 1, 2010, service agreements will revert to ad valorem stamp duty.

However, the remission for multi-tier construction contract agreements granted by the Ministry of
Finance earlier in August 2009 will continue to apply. This was effective since July 15, 2009. The
remissions were granted as follows:

• Where the agreement is signed between the government and the contractor, the government is
liable to pay the stamp duty, and as a result the stamp duty is exempted.

• Ad valorem duty will only be imposed at the second level, which is the agreement between
the main contractor and the sub-contractor, and any construction service agreement entered
into between non-government parties.

• However, construction service agreements at subsequent levels will only be subject to RM50
stamp duty only and the excess will be remitted.

• Where a project has been cancelled by the party offering the contract and stamp duty has been
duly paid, only the ad valorem duty will be refunded. Stamp duty at the fixed rate of RM50
will not be refunded.

Approval for this is also granted on a case-by-case basis under section 80(1A) of the Stamp Act 1949,
as it has yet to be gazetted.

Wong & Partners 2009 Highlights of the Malaysian Budget 8

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