Foreign-Source Income in Malaysia — Exemption, Substance and Remittance

Read the expiry date off the Gazette, not off a blog. As at 14 August 2026 the foreign-dividend exemption that most Malaysian holding companies rely on — P.U.(A) 235/2022 — still says, in its own paragraph 1(2), that it has effect “from 1 January 2022 until 31 December 2026”, and no amending order pinned to a Gazette number has yet moved that date. The amending order that did exist, P.U.(A) 157/2024, rewrote the qualifying conditions and added Labuan companies that elect into the Income Tax Act; it did not touch the expiry.

Its sibling orders, though, have moved. The individual exemption was extended to 31 December 2036, and in the last week of July 2026 the capital-asset and unit-trust exemptions were extended to 31 December 2030 — by P.U.(A) 275/2026 and P.U.(A) 270/2026 respectively, both commencing 1 January 2027. The dividend order is expected to follow in the same batch but its own instrument is not yet confirmed. Orders made under the same section, on the same subject, can expire years apart; almost every summary you will find online states a single date for all of them, and is wrong for at least one.

Why foreign income became taxable at all

Paragraph 28 of Schedule 6 of the Income Tax Act 1967 used to exempt income arising outside Malaysia and received here by any resident other than a banking, insurance, sea or air transport business. The Finance Act 2021 [Act 833] narrowed it so that from 1 January 2022 the exemption no longer covers residents generally.

The stated reason, recorded at paragraph 1.2 of LHDN’s guidelines, is parity: foreign income should be treated the same as income accruing in or derived from Malaysia, in line with Malaysia’s commitment to international tax standards. The practical trigger was the EU listing process and its objection to Malaysia’s territorial regime.

Two transitional points still matter when you are reopening old years:

• For income received between 1 January and 30 June 2022, tax was charged at a flat 3 per cent of gross under Part XX of Schedule 1 (guidelines para 5.1.8).
• From 1 July 2022 the prevailing rates apply (para 5.1.9). There is no concessional rate now.

What is still exempt, and until when

This is the table to keep. Everything else in this article explains a row in it.

Recipient	Income covered	Order	Gazetted expiry
Resident individual	All s.4 income except partnership business income	P.U.(A) 234/2022 as amended by P.U.(A) 451/2024	31 December 2036
Resident company, LLP, or individual with a Malaysian partnership business	Foreign dividend income only	P.U.(A) 235/2022 as amended by P.U.(A) 157/2024	31 December 2026 (extension order not yet pinned)
Resident company, LLP, trust body, co-operative society	Gains or profits from disposal of a capital asset situated outside Malaysia	P.U.(A) 75/2024 as amended by P.U.(A) 275/2026	31 December 2030
Qualifying unit trust	Foreign-source income received in Malaysia	P.U.(A) 250/2024 as amended by P.U.(A) 270/2026	31 December 2030
Labuan company that has elected under s.3A LBATA	Foreign dividend income	P.U.(A) 235/2022 para 3(d), inserted by P.U.(A) 157/2024, effect from YA2022	31 December 2026

Note what is not in that table. A resident company receiving foreign interest, foreign rent, foreign royalties or foreign business income has no exemption at all. Only dividends and capital-asset gains are covered. Companies routinely assume the corporate exemption is as broad as the individual one. It is not — P.U.(A) 235/2022 applies, in terms, only to “dividend income received in Malaysia from outside Malaysia”.

Banking, insurance, sea transport and air transport businesses are excluded from both the dividend order (para 5) and the capital-asset order (para 4).

The 2026 cliff, and how far it has moved

Budget 2026 addressed this directly. Appendix 8 of Langkah Cukai Belanjawan 2026 records the pre-Budget position — companies and LLPs to 31 December 2026, individuals to 31 December 2036, unit trusts 1 January 2024 to 31 December 2026 — and proposes two changes:

1. Extend the company and LLP exemption for foreign dividends and foreign capital-asset gains to co-operative societies and trust bodies; and
2. Give that exemption, plus unit trust FSI, for a further four years.

The stated effective date is 1 January 2027 to 31 December 2030.

A Budget proposal is not law — exemptions under paragraph 127(3)(b) take effect only when the Minister makes an order and it is published in the Federal Gazette. Two of those orders have now appeared, in the last week of July 2026, just after the Attorney General’s Chambers subsidiary-legislation index was last current (17 July 2026):

• The capital-asset order P.U.(A) 75/2024 was amended by the Income Tax (Exemption) (No. 3) Order 2024 (Amendment) Order 2026, P.U.(A) 275/2026, gazetted 29 July 2026 and commencing 1 January 2027, moving its expiry from 31 December 2026 to 31 December 2030.
• The unit-trust FSI order P.U.(A) 250/2024 was amended by P.U.(A) 270/2026, gazetted 27 July 2026, on the same commencement and the same new expiry.

What is still outstanding is the companion amendment to the foreign-dividend order, P.U.(A) 235/2022. It belongs to the same late-July 2026 batch and firms report the dividend exemption as extended to 31 December 2030, but its own P.U.(A) number has not yet been confirmed against a primary Gazette text. So:

The company and LLP foreign-dividend exemption reads 31 December 2026 in the Gazette until its amending order is pinned. The capital-asset and unit-trust siblings are already extended to 2030; the dividend order is expected to follow in the same batch. Confirm the P.U.(A) number before you rely on a 2030 expiry for a dividend.

The pattern is by now well established — the individual extension was gazetted through P.U.(A) 451/2024 ahead of the cliff, and the July 2026 orders repeat it, each coming into operation on 1 January 2027. The drafting habit is to legislate the extension before the deadline, which is why the dividend amendment is expected rather than doubted. But an expectation is not a defence in an audit.

The subject-to-tax test for dividends

Under paragraph 4(2) of P.U.(A) 235/2022 as substituted by P.U.(A) 157/2024, a qualifying person must comply with conditions specified in guidelines issued by the Director General under s.134A, which shall include either:

• (a) the participation-exemption limb — the dividend has been subjected to tax of a similar character to income tax under the law of the territory where the income arises, and the highest rate of such tax in that territory at the time is not less than 15 per cent; or
• (b) the economic-substance limb — the recipient employs an adequate number of employees in Malaysia and incurs an adequate amount of operating expenditure in Malaysia.

The word is or. Paragraph 5.2.1.2 of the guidelines confirms the taxpayer chooses. Guidance that presents substance as an additional hurdle on top of the 15 per cent test is misreading the order.

Two refinements that decide real cases:

“Subjected to tax” includes underlying tax. Paragraph 5.2.1.4(a)(i) accepts either tax paid or payable in the source country as income tax or withholding tax, or the dividend having borne underlying tax — corporate tax on the operating profits out of which the dividend was paid. But there is a limit: if Company X pays a dividend out of a dividend it received from Company Y, the underlying tax paid by Company Y is not treated as tax paid by Company X. One layer only.

“Subjected to tax” can be satisfied by zero tax. Paragraph 5.2.1.4(a)(ii) deems the test met where no tax was charged because the underlying operating profit was sheltered by unabsorbed losses or capital allowances, was capital in nature, enjoyed a tax incentive granted for meeting substance conditions in that country, or fell within a tax consolidation regime. A nil source-country tax bill is therefore not automatically fatal.

Which year’s headline rate? Paragraph 5.2.1.4(b)(i): the headline rate is the highest corporate rate in the source country either in the year the dividend was subjected to withholding tax, or, if no withholding tax was imposed, in the year the dividend was received in Malaysia. The guidelines’ Examples 6 and 7 turn on exactly this distinction. And the headline rate need not be the rate actually suffered — Example 5 exempts a dividend taxed at 10 per cent in a country whose headline rate is 20 per cent.

For individuals the test is simpler and there is no 15 per cent limb at all. Paragraph 5.2.2.1 requires only that the income has been subjected to tax in the country of origin, with the same generous carve-outs — Example 11 exempts Brunei employment income that Brunei does not tax, because the non-taxation flows from that country’s tax system.

What economic substance actually requires

Nothing numeric. Paragraph 5.2.1.4(c)(ii) says the minimum threshold “is based on the facts of each case”, and lists the factors LHDN will weigh:

• the number of employees, judged against whether the activity is capital- or labour-intensive;
• whether those employees are full-time or part-time;
• whether office premises are used for the relevant activity, and whether they are adequate for it.

Any article quoting a headcount or a ringgit spend for the FSI substance test is inventing it. The Labuan regime has published thresholds; the FSI regime does not.

Three rules do the real work:

Relevant economic activity is defined by entity type. For an investment holding entity it means holding and managing its equity participations, or making the necessary strategic decisions on assets it acquires, holds or disposes of and managing and bearing the principal risks on those assets. For any other entity it means the business operations actually carried on in Malaysia.

Non-service directors are not employees. Paragraph 5.2.1.4(c)(iv) counts a service director engaged under a contract of service. A director under a contract for service does not count. Example 8 is a holding company with two non-service directors and nothing else — it fails substance and survives only because it can meet the participation-exemption limb instead.

Outsourcing is allowed, on five conditions. Paragraph 5.2.1.4(c)(v): the activity must be performed by the outsourcing entity in Malaysia; the principal must exercise adequate monitoring and control; the outsourcing entity is generally expected to charge for the work, subject to transfer pricing; the outsourcing entity’s qualified headcount and operating expenditure in Malaysia must be commensurate with the activity; and where it serves more than one principal, the expenditure must be apportioned. Example 10 lets a property investment holding company with one managing director and one company secretary qualify on this basis.

What “received in Malaysia” means in practice

Paragraph 4.2 of the guidelines: transferred or brought into Malaysia, whether in cash or by electronic funds transfer, or both. Paragraph 4.3 defines cash as notes, coins and cheques. Paragraph 4.4 defines electronic funds transfer to include bank transfers such as credit and debit transfers and payment cards.

The consequences are more practical than they look:

• Foreign income that stays in a foreign account is not received in Malaysia and is outside the charge. The charge is on remittance, not on accrual.
• Remittance can happen years after the income arose. Example 6 in the guidelines deals with a 2026 remittance of a dividend paid out of 2022 underlying profits.
• A Malaysian resident individual who commutes daily to Singapore and brings his salary home each month has received foreign income in Malaysia — Example 12 — and relies on the exemption, not on the absence of a charge.
• Withdrawing an approved foreign retirement fund and bringing the money home is a receipt of foreign income (Example 13), exempt because Singapore exempts it.

Note that none of this attempts to define constructive remittance — using foreign income to settle a Malaysian liability offshore, or drawing on a foreign credit card in Malaysia. The guidelines do not address it. Treat the risk as open.

Deductions, credits and record-keeping

Deductions attached to exempt income are disregarded. Paragraph 3(4) of P.U.(A) 234/2022 and paragraph 4(4) of P.U.(A) 235/2022 both say so. You cannot claim the interest cost of funding a foreign shareholding against Malaysian income while treating the dividend as exempt.

Where income is taxable, credit is available. Guidelines paras 5.1.4 to 5.1.7: bilateral credit under s.132 where a double taxation agreement exists, unilateral credit under s.133 where none does, evidence of foreign tax must be kept, the claim must be made within two years after the end of the year of assessment, and any excess credit is disregarded rather than refunded. Public Ruling 11/2021 sets out the computation.

The exemption does not remove the filing duty. Both orders carry an identical subparagraph — nothing in the exemption absolves the taxpayer from complying with any requirement to submit a return or statement of accounts or to furnish other information under the Act.

Common mistakes

Quoting one expiry date for everyone. The individual date is 2036, the capital-asset and unit-trust date is now 2030 (P.U.(A) 275/2026 and 270/2026), and the company foreign-dividend date still reads 2026 pending its own amending order. Several dates are in force simultaneously.

Treating the June 2024 LHDN guidelines as current on dates. They are the authoritative source on conditions, but they were published on 20 June 2024 — six months before P.U.(A) 451/2024 — and still print “1 Januari 2022 hingga 31 Disember 2026” for individuals at paragraph 5.2.2.1. The Gazette overrides the guidelines.

Assuming the corporate exemption covers all foreign income. It covers dividends. Foreign interest, rent, royalties and business profits received by a resident company are taxable at the prevailing rate, with treaty or unilateral credit as the only relief.

Reading substance and the 15 per cent test as cumulative. They are alternatives.

Counting non-executive directors towards substance. They are excluded by name.

Assuming a nil foreign tax bill kills the exemption. It may not — check the four carve-outs in paragraph 5.2.1.4(a)(ii) first.

Forgetting that Budget 2026 also expands the class. Co-operative societies and trust bodies are already inside the capital-asset order P.U.(A) 75/2024, now extended to 2030 by P.U.(A) 275/2026. Their addition to the foreign-dividend exemption from 1 January 2027 depends on that order’s amendment, which is expected in the same batch but not yet pinned to a P.U.(A) number.

What’s next

If you are a resident company sitting on foreign dividends, the decision point is now, not in December. Model the outcome of remitting before 31 December 2026 against the outcome of remitting after, on the assumption that no extension is gazetted. If the extension appears, you have lost nothing; if it does not, you have avoided a 24 per cent charge on a full remittance.

Then check which limb you actually qualify under. A holding company relying on substance should document headcount, contracts of service, premises and operating expenditure for the basis period before the remittance, because the condition in paragraph 4(2) as amended is tested “in the basis period of a year of assessment”, not at the time of the audit.

Read company-tax-residence next if you are unsure whether the recipient is resident at all — the exemption turns on residence, and management and control is a harder test than most groups assume.