CHAPTER 3: RESIDENCE STATUS FORCOMPANY AND BODY OF PERSONS

Introduction

The ascertainment of residence status for i) company; ii) body of persons

is a subjective test as defined in S8 of the act.

It is important to determine residence status in order to enjoy a preferential tax rate and tax incentives.

Company is a legal entity which can sued and be sued. PERSON ----> COMPANYBODY OF PERSONS ----> CLUB, TRADE

ASSOCIATION,TRADE ASSOCIATION,

CO- OPERATIVE SOCIETY, TRUST,

ESTATES AND HINDU JOINT

FAMILY.

Legislation

Section 8(1) sets up the test of residence status as follows:

Residence Status

Hindu joint family Company or body of persons- manager of karta is resident

Carrying on business(es)

- Management and control of any one of its businesses are exercised in Malaysia at any time during the basis year.

Not carrying on business (es)

- Management and control of its affairs are exercised in Malaysia at any time during the basis year.

Residence status of a company can be determine by:

Residence status of company

Business Non-Business (example: investment holding company)

1- management and control2- any one of its business or affairs (minimum one)3- at any time (minimum one point in time)4- during the basis year5- are exercised in Malaysia

•Starting from YA 2011 - basis period of company is not calendar year;• Requirement: only ONE time of Mgmt and Control is exercised in Malaysia will be sufficient for a co. to qualify as tax resident.

Example 3.1

• Gold Star Ltd, a United Kingdom company, has its business in the United Kingdom, South Africa, Hong Kong and Malaysia.• The company makes up its account to 30.9.• All major decisions affecting the company are made at the at the directors’ board meetings, all of which held in United Kingdom, except for one which held in Kuala Lumpur (Malaysia) on 1.11.2013

• Basis period for YA 2013 = 1.10.2013 – 30.9.2013• Basis period for YA 2014 = 1.10.2013 – 30.9.2014

• YA 2014 – Gold Star is Malaysia tax resident: one mgmt and control (one time) is enough to consider company as resident co.

• Gold Star tax resident from YA 2014 and subsequence YOA.

Presumption on continuance of residence status

• Section 8(2): If co. has been determined by DG as resident in Malaysia then the co. will be tax residence the subsequent year until the contrary is proved.

Management and control (MC)

• Section 8(1)(b) or (c) requires the place of management and control in Malaysia as the key factor in ascertaining the residence status of a co. or body of persons.• Management and control need not be the ‘central mgmt and control’.• One occasion of which the co. or body of persons exercises its mgmt and control in Malaysia is sufficient to qualify it as tax resident in Malaysia and subsequent year.• Not necessary location of the trading activities and the physical operation, to place mc.

Factors not relevant for determination of MC

1) Location of business, place of incorporation• Business operation in Malaysia, but ALL the directors

meeting are held overseas – Non resident in Malaysia.• Malayan Shipping Co Ltd vs. FCT 71, incorporated in

Singapore, carried on trading in Australia. Tax resident of Australia since MC was exercised in Australia.

2) Control by shareholders• Control by shareholder and control by directors is

different. • To determine MC determines by control by directors.

3) Directors’ residence status• Directors resident status is not relevant in determining

residence status of co.• MC determines by the place where the director meet

and make major decisions.

Factors not relevant for determination of MC

4) Concept of “dual residence”• Where a co. is treated as a tax resident in more than

one country according to the respective national laws.• Dual residence is overcome if countries have double

taxation agreement (DTA) with Malaysia.• Under DTA, the resident article only permits a single

country of residence. • Where there exist more than one residence, both

countries use factors like:a) effective management and control (MC)b) mutual agreement between treaty countries to resolve such issue.

• Examples DTA between a) Japan b) United Kingdom

“MT”

The Inland Revenue’s approach

Factors in ascertaining the company residence status for company and body of person:

1) Articles of Association (AOA): there are instances where the articles provide for the place of management and control;

2) Memorandum and articles: whether the place of residence is indicated;

3) Place where annual general meetings are held and what transpired during the meetings;

4) Minutes of the board of directors’ meeting and the decisions taken are relevant in determining the management and control of the company;

5) Location of the board of directors’ meetings;6) The company letter head

Distinction between resident and non-resident company (the law is stated for YA 2005 - 2011)

Resident Non-resident

i) Scope of charge

a) Companies other than (b) income accrued/derived in Malaysia. (territorial scope).

b) Companies carrying on business of banking, insurance, shipping and air transport.

Business income wherever derived is taxed. (world-wide scope)

Income accrued or derived in Malaysia.

ii) Foreign source income received in Malaysia from outside Malaysia

- Para 28 Sch 6, exemption

Co. (other than companies carrying on biz. of banking, insurance, shipping and air transport) that received foreign source in M’sia from outside M’sia will be exempted from income tax.

Such income is credited to an exempt income account which will be available to declare exempts (two-tier)

Non-resident company, would have the foreign source income exempted. However, the amount exempted can not be credited into exempt income amount.

Distinction between resident and non-resident company (the law is stated for YA 2005 - 2011)

Resident Non-resident

iii) Derivation of dividends from Malaysia

Dividends and distribution by a resident company in a basis year are deemed to be derived from M’sia.

Dividends and distribution by the non-resident company is not a M’sian source dividend.

iv) Application and availability of S 108 account to frank taxable dividend

Yes Not applicable

v) Business income

Taxable if deemed derived from M’sia (S12)

Only taxable if through a Permanent Establishment (applicable where Double Taxation Agreements between Malaysia and treaty countries exist) or a business present exist in Malaysia

Distinction between resident and non-resident company (the law is stated for YA 2005 - 2011)

Resident Non-resident

vi) Incentives available under the Act and PIA 1986

Yes No

vii) Withholding tax (S107A, 109, 109B and 109F of the Act)

Not applicable Subject to withholding tax, ranging from 10% to 15% on M’sian deemed derived gross income.

viii) Double Taxation relief

Applicable Not applicable

ix) Income Tax Rate Flat rate25% (2009 –

2011)

Flat rate25% (2009 – 2011)

IRB Practices

• Company which requires a confirmation of its residence status may apply to the respective assessment branch to issue the “certificate of residence” .• Tax residence status can be easily confirmed based on its prior years’ tax returns (Form C) and the evidence of its board of director’s meeting held in prior years.• The Certificate of Residence is crucial when dealing with withholding tax, keeping of S 108 account, and claiming of tax incentives.