S.140C has been added to Income Tax Act 1967 to restrict interest deduction where an entity is excessively debt funded by a related party. The restriction is introduced to address the tax planning trick by which profit is being shifted between related parties within the country, or from Malaysia to another country with the intention to minimise tax.
In some countries, similar restrictions are called “Thin Capitalisation Rules”.
The Ministry of Finance has been tasked with the responsibility to make any rules in relation to this new section. And it is expected that Earning Stripping Rules will be introduced by the Inland Revenue Board of Malaysia (IRBM) soon.
It appears that once the earning striping rules are introduced, the requirements would be effective from 1 Jan 2019, retrospectively.
While waiting for the related guidelines, IRBM has confirmed that:
For borrowings from third party (local or foreign) without any guarantee provided by a related party, the S.140C restrictions would not be applicable.
However, for any borrowings from a foreign third party which is guaranteed by any related party (either local or foreign) – S.140C restrictions would be applicable.
S.140C reads as follows:
RESTRICTION ON DEDUCTIBILITY OF INTEREST
140C (1) This section shall apply without prejudice to section 140 or 140A and subject to any rules made under this Act.
(2) In ascertaining the adjusted income of a person from each of his sources consisting of a business for the basis period for a year of
assessment, no deduction from the gross income from that source for that period shall be allowed in respect of any interest expense in
connection with or on any financial assistance in a controlled transaction granted directly or indirectly to that person which is in excess
of the maximum amount of interest as determined under any rules made under this Act.
(3) In this section—
"control" has the meaning assigned to it in subsection 140A(5A);
"controlled transaction" shall be construed as a financial assistance—
(a) between persons one of whom has control over the other; or
(b) between persons both of whom are controlled by some other person (in this section referred to as “third person”);
"financial assistance" includes loan, interest bearing trade credit, advances, debt or the provision of any security or guarantee;
"interest expense" means—
(a) interest on all forms of debt; or
(b) payments economically equivalent to interest (excluding expenses incurred in connection with the raising of finance).
1. Companies with inter-company loans from related parties (local and foreign) should assess their current financing arrangements.
2. If a company’s interest expense from related party loans is higher than 10-20% of the company’s EBITA (Earnings before interest taxes and amortisation), immediate rationalisation exercise may be required.
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Every effort has been made to provide accurate information. However, the information
and regulations contained in this article are subject to changes and amendments by the
relevant authority at any time. As such, the information in this article may not be current.
And the information provided in this article is general commentary only and shall
not be considered as advice or recommendation. As all tax situations are specific to
their facts and will differ from the situations in this article - if you have specific tax
questions you should consult a licensed tax agent.