Question

QUESTION 1:

Alex and Carmila agreed to buy the fixed assets and goodwill of a business for a lump sum consideration of RM400,000 payable in full on the transfer of the business in 2018. Not having enough money, they borrowed RM200,000 from Taram Ltd, located in Indonesia, which is repayable in full after two years. In the meantime, Alex and Carmila are to pay interest every three months starting from 1 March 2019 at the rate of 10% per annum (RM5,000 per quarter). Alex and Carmila will carry on the business at its existing location in Malaysia sharing profit equally, Alex is a Malaysian resident but Carmila is not.

Required:

a) Briefly explain whether the interest that Alex pays to Taram Ltd is deemed to be derived from Malaysia and should he withhold any tax on making payment.

b) Briefly explain whether the interest that Carmila pays to Taram Ltd is deemed to be derived from Malaysia and should she withhold any tax on making payment.

(Total: 10 marks)

Answer 1

SOLUTION :-

a) Any interest paid to a Non-resident lender in foreign currency should be taxable at 5% plus surcharges plus cess applicable subject to the income tax act 1961.

As Alex is a resident of Malaysia he must pay tax to the government for the interest payable to Taram Ltd by him and it is deemed to be derived from malaysia

He cannot withold any taxes on making payment.

b) Any interest payable by Carmila is not considered for taxation and it is also not deemed to be dervied from malaysia as she is not a malaysian resident

she can withhold taxes on making payment in malaysia but, she must be taxable in her home country.

• if both alex and Carmila jointly running any type of businness registered in malaysia then the total interest paid (RM5000 per quarter) by them is taxable.