A company that qualifies for group relief may surrender a maximum of 70% of its adjusted loss for a year of assessment to one or more related companies. The period in which a company may surrender its adjusted loss is limited to the first three consecutive years of assessment following the basis period for the year of assessment in which it commences operations, provided the basis period consists of a period of 12 months. The following conditions must be met by both the claimant and surrendering companies:
- Both must be resident and incorporated in Malaysia.
- Each has paid-up capital of ordinary shares exceeding MYR 2.5 million at the beginning of the basis period.
- Both have the same (12-month) accounting period.
- Both are ‘related’ throughout the basis period for a particular year of assessment as well as the 12 months preceding that basis period.
- Both are not currently enjoying specific incentives, such as pioneer status, investment tax allowance, reinvestment allowance, etc.
- Both do not have unutilised investment tax allowances or unabsorbed pioneer losses after the expiry of the respective incentive periods.
‘Related company’ is defined in the Income Tax Act 1967 and involves the application of a two-tier test. The companies are regarded as 'related' if:
- either company owns at least 70% of the ordinary share capital of the other company or a third company owns at least 70% of each of the companies, and
- the holders of ordinary shares are entitled to at least 70% of the distributable profits and assets of the company on winding up.
Companies that wish to avail themselves of group relief must make an irrevocable election to surrender or claim the tax loss in the return to be filed with the Inland Revenue Board for that year of assessment.
The Director General of Inland Revenue (DGIR) is empowered to make adjustments on transactions of goods and services if the DGIR is of the opinion that the transactions were not entered into on an arm’s-length basis.
The transfer pricing rules that apply to controlled transactions (defined, including financial assistance) specify the methods to determine the arm’s-length price and the circumstances under which the DGIR may re-characterise transactions. The advance pricing arrangement (APA) rules that apply only to cross-border transactions outline the application procedures for unilateral, bilateral, or multilateral APAs.
Country-by-country (CbC) reporting
The CbC Rules require that Malaysian multinational corporation (MNC) groups with total consolidated group revenues of MYR 3 billion to prepare and submit CbC reports to the tax authorities no later than 12 months after the close of each financial year. Malaysian entities of foreign MNC groups will generally not be required to prepare and file CbC reports as the obligation to file will be with the ultimate holding company in the jurisdiction it is tax resident in. However, the Malaysian entities of the foreign MNC group will have an obligation to inform/notify the tax authorities, by the end of its financial year, if it is the holding company or has been appointed as the surrogate holding company. If it is neither the holding company nor surrogate holding company, the Malaysian entities must notify the tax authorities of the identity and tax residence of the entity responsible for preparing the CbC report.
Earnings stripping rules
The earnings stripping rules apply on interest expense (of more than MYR 500,000 in a basis period) in connection with or on any financial assistance granted in controlled transactions (as defined), whether directly or indirectly, to a person. The earnings stripping rules guideline narrows the application of the prescribed rules to cross-border controlled transactions.
The prescribed rules specify that the maximum amount of interest deduction allowed is 20% of the earnings before interest, taxes, depreciation, and amortisation (EBITDA) from each source consisting of a business. The interest expenses in excess of the maximum deduction allowed may be carried forward indefinitely to be deducted against future income. However, in the case of a company, the carry forward of the above-mentioned interest expenses would not be allowed if there is a substantial change in the company's shareholders in the following year.
Controlled foreign companies (CFCs)
There are no CFC rules in Malaysia.