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Taxation for Limited Liability Partnership (LLP) in Malaysia

 

Tax Treatment of LLP

LLP have a similar tax treatment like Company* where chargeable Income from LLP will be taxed at the LLP level at tax rate of 24% generally. However, LLP with capital contribution of RM2.5 million or less will enjoy a preferential tax rate of 19% on the first RM 500,000 of its chargeable income. Profits paid, credited or distributed to partners in the LLP are exempt from tax. There is no withholding tax on profits paid, credited or distributed to the partners.

* Specific incentives provided to a company do not apply to an LLP.

Under the Income Tax Act, 1967, LLP means a limited liability partnership registered under the Limited Liability Partnerships Act 2012 (different from company).

In general, specific incentives provided to a company does not apply to an LLP. These special incentives are only given exclusively to a “company”. For example, under the Promotion of Investment Act 1986, only company is eligible to enjoy incentive under the Promotion of Investment Act 1986.

However, there is an exception whereby an LLP with a capital contribution not exceeding RM2.5 million is eligible to deduct certain incorporation expenses under the Income Tax (Deduction for Incorporation Expenses) Rules 2003 and Income Tax (Deduction for Incorporation Expenses)(Amendment) Rules 2005, even though both the Rules provided that the deduction is given to a company. This eligibility is provided in the Public Ruling on Taxation of LLP.

 

Tax Residence Status of LLP

Similar to a Company, tax residence of an LLP in Malaysia is determined based on the place of management and control of its business or affairs exercised by its partners. Management and control refer to the authority in deciding policies to be followed by an LLP. If at any time in the basis year for a year of assessment, at least one partners’ meeting is held in Malaysia in relation to the management and control of the LLP, the LLP is deemed resident in Malaysia for the basis year (even though all the other meetings are held outside Malaysia).

The location of trading activity or physical operations is not necessary the place of management and control. An LLP that carries on trading activity in Malaysia is not resident in Malaysia if it is found that commercial activities such as manufacturing or production and sales are controlled from overseas and partners’ meetings, during which all important business decisions are made, are also held overseas.

The appointment of local compliance officers in Malaysia does not determine the residence status of an LLP. If the authority of control is exercised by a compliance officer who is at the headquarters abroad, the LLP is not resident in Malaysia.

 

Preparation of financial statement for Income Tax Purpose

LLP is not required to prepare audited financial statement by an auditor but needs to keep proper and sufficient accounting and other records to indicate the true financial position.

For income tax purposes, an LLP is required to prepare complete accounting records containing the profit and loss account, balance sheet and explanatory notes to the accounts. However, if the accounting records are not prepared according to normal accounting format, the LLP shall keep the following records:

  1. information on income
  2. information on expenditure
  3. list of debtors and creditors/ liabilities
  4. list of all assets (current and fixed)
  5. percentage of capital contribution by each partner
  6. explanatory notes to items (i) to (v)
  7. other supporting documents to prove the business transactions.

 

Basis Period of LLP

Generally, basis period of LLP will be same as its accounting period.

For LLP just commences operation, the first accounting period is the basis period for a year of assessment when the accounts are closed. It would be the first year of assessment for the entity.

If the 1st accounts are prepared for-

  • a period of less than 12 months ending on a day in the same year, that period is the basis period for the first year of assessment

Example: 3E Accounting PLT submitted its accounts as follows:

Accounts Accounting Period Period
First 1.02.2014 – 30.9.2014 8 months
Second 1.10.2014 – 30.9.2015 12 months

The basis periods for the 3E Accounting PLT are as follows:

Year Of Assessment Basis Period Period
2014 1.02.2014 – 30.9.2014 8 months
2015 1.10.2014 – 30.9.2015 12 months
  • any period ending on a day in the second year, that period is the basis period for the second year of assessment and there is no basis period for the first year of assessment;

Example: 3E Accounting PLT submitted its accounts as follows:

Accounts Accounting Period Period
First 1.5.2013 – 31.3.2014 11 months
Second 1.4.2014 – 31.3.2015 12 months

The basis periods for the 3E Accounting PLT are as follows:

Year Of Assessment Basis Period Period
2014 1.5.2013 – 31.3.2014 11 months
2015 1.4.2014 – 31.3.2015 12 months
  • a period of more than 12 months ending on a day in the third year, that period is the basis period for the third year of assessment and there are no basis periods for the first year of assessment and the second year of assessment.

Example : 3E Accounting PLT submitted its accounts as follows:

Accounts Accounting Period Period
First 1.11.2013 – 30.4.2015 18 months
Second 1.05.2015 – 30.4.2016 12 months

The basis periods for the 3E Accounting PLT are as follows:

Year Of Assessment Basis period Period
2015 1.11.2013 – 30.4.2015 18 months
2016 1.05.2015 – 30.4.2016 12 months

 

Submission of Estimate of Tax Payable and Tax Payment

LLP is required to provide estimate of tax payable and payment by instalments as provided in section 107C ITA. This mean LLP need to submit Estimate of Tax Payable vide Form CP204 for a Year of Assessment not later than 30 days before the beginning of the basis period. However, when a LLP commences operations (i.e. during the first basis period), the estimate of tax payable must be submitted to the Inland Revenue Board (IRB) within 3 months from the date of commencement of its business and thereafter no later than 30 days before the beginning of the basis period.

Tax is generally payable by 12 equal monthly instalments, each monthly tax instalment is due and payable to the IRB by the 15th of the following month.

An LLP that is converted from a company or a partnership is not exempted from estimate of tax payable and payment by instalments under subsection 107C (4A) ITA as the business of the LLP is deemed to be a continuous business of the company or the partnership.

 

Filling of Tax Returns (Form PT)

All LLP must file the tax returns (Form PT) within 7 months from the date of closing of its basis period (i.e. accounting period).

 

Restrictions on Partner’s Salary Deduction

Remunerations or similar payments to partners of LLP are not allowable for deduction if not specified or provided for in the LLP agreement. Remuneration refers to basic salary and fixed allowances but does not include employer’s contributions to the Employees Provident Fund (EPF), Social Security Organisation (SOCSO) or insurance.

The IRB has clarified that, where such payment of remuneration has been disallowed, the amount received by the partners would nevertheless be liable on them. However, the IRB has added that details of any remuneration payable need not be stated in the LLP agreement. The mere mention of payment of remuneration without specifying details of the relevant amounts would be sufficient for the amounts paid to be deductible expenses.

Remunerations to be paid to the partners should be documented in the LLP agreement. Thus, if there is a change of partners in the LLP, where new partners will be paid remuneration, the LLP must prepare a supplementary agreement or any document to record the change.

 

Incorporation Expenses

LLP which has capital contribution not exceeding RM2.5 million shall be allowed a deduction in respect of incorporation expenditure for the basis period for a year of assessment, as provided in the Income Tax (Deduction for Incorporation Expenses) Rules 2003 [P.U.(A) 475/2003] and the income Tax (Deduction for Incorporation Expenses) (Amendment) Rules 2005 [P.U.(A) 472/2005].

 

Distribution of profits to partners

LLP can distribute profits to its partners. The profits paid, credited or distributed to partners in the LLP are exempt from tax. There is no withholding tax on profits paid, credited or distributed to the partners.

 

Tax Treatment of Partners of A LLP

Partners are not liable to tax on their share of income from LLP (whether distributed or not). Nevertheless, they will be taxed on remunerations, perquisites and benefits-in-kind received from the LLP. The payment (non-distribution of income) is subject to income tax and is charged on the person concerned.

 

Responsibilities of Compliance Officer for Income Tax Purposes

Responsibilities of the compliance officer or partner for income tax purposes amongst others are that he is required to:

  • keep complete accounting records of the business of the LLP.
  • complete and submit the income tax return form (ITRF) in accordance with section 77A ITA and amendment of ITRF if any, in accordance with section 77B ITA within the prescribed period.
  • provide estimates of tax payable and make instalment payments in accordance with section 107C ITA.
  • inform the Director General of Inland Revenue (DGIR) on the changes of accounting period by submitting Form CP204B within the prescribed period (PR No. 7/2011 titled ‘Notification of Change of Accounting Period of a Company/Trust Body/Co-operative Society’).
  • ensure payment of tax by the LLP.
  • undertake any other responsibilities under the ITA.