Malaysia Tax Treatment for Limited Liability Partnership (LLP)

Tax Treatment of LLP

Income received from an LLP will be taxed at the LLP level at a tax rate of 24% for year assessment 2016 generally. Nevertheless, LLP resident in Malaysia with a total capital contribution (whether in-kind or cash) of RM2.5 million or less will enjoy a preferential tax rate of 19% on the first RM500,000 of its chargeable income subject certain conditions.

Distribution of profits to LLP Partners

LLP can distribute to its partners. Profits paid, credited or distributed to Partners in the LLP are exempt from tax. Additionally, there is no withholding tax on profits paid, credited or distributed to the Partners. However, specific incentives provided to a company do not apply to an LLP.

No audited financial statement or accounts for Income Tax Purpose

An 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 (1) to (5)
  7. Other supporting documents to prove the business transactions.

Tax Resident Status in Malaysia based on Management and Control of an LLP

An LLP is deemed as a resident in Malaysia provided that the management and control of its business or affairs are exercised in Malaysia at any time during the basis year for a year of assessment (YA). Management and control refer to the authority in deciding policies to be followed by an LLP. Management and control are considered exercised in the place where the partners met to discuss management of the business or affair of the LLP such as at least one partners’ meeting is held in Malaysia in relation to this at any time in the basis year for a year of assessment (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 the 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.

Importance of Determination of Basis Periods

Determining the basis period for a Year of Assessment is important as it determines the period in which:

  • income arising is recognized,
  • expenses are treated as incurred, and
  • capital expenditure on assets is treated as incurred.

Determination of Basis Period For LLP

The basis period for the year of assessment is the calendar year which coinciding with a year of assessment. In short, the basis period of an LLP for a year of assessment will be the same as its accounting period where the accounts are closed.

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

There following are the 3 circumstances to determine basis period where the accounts are prepared for:

  1. 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;
  2. 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;
  3. 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.

Below are the examples for your understanding.

Example 1 – First Accounts Closed In The Same Year `{`Refer to Note (a) above`}`

ABC Sdn. Bhd. submitted its accounts as follows:

Accounts Accounting Period Period
First 01.02.2014 – 30.09.2014 8 months
Second 01.10.2014 – 30.09.2015 12 months

 

The basis periods for the ABC Sdn. Bhd. are as follows:

Year Of Assessment Basis Period Period
2014 01.02.2014 – 30.09.2014 8 months
2015 01.10.2014 – 30.09.2015 12 months

Example 2 – First Accounts Closed In The Following Year `{`Refer to Note (b) above`}`

DEF Sdn Bhd submitted its accounts as follows:

Accounts Accounting Period Period
First 01.05.2013 – 31.03.2014 11 months
Second 01.04.2014 – 31.03.2015 12 months

 

The basis periods for the DEF Sdn. Bhd. are as follows:

Year Of Assessment Basis Period Period
2014 01.05.2013 – 31.03.2014 8 months
2015 01.04.2014 – 31.03.2015 12 months

Example 3 – Accounts Made Up For More Than 12 Months And Ending In The Third Year `{`Refer to Note (b) above`}`

IJK Sdn Bhd submitted its accounts as follows:

Accounts Accounting Period Period
First 01.11.2013 – 30.04.2015 18 months
Second 01.05.2015 – 30.04.2016 12 months

 

The basis periods for the IJK Sdn Bhd are as follows:

Year Of Assessment Basis Period Period
2015 01.11.2013 – 30.04.2015 18 months
2016 01.05.2015 – 30.04.2016 12 months

Incorporation Expenses Allowable for LLP

LLP which has a capital contribution of not exceeding RM2.5 million shall be allowed a deduction in respect of incorporation expenditure incurred for the basis period for a year of assessment in which the company commences its business.

The following expenses of incorporation allowable as a deduction against the gross income from its business:

  1. the cost of preparing and printing the memorandum of association, the articles of association and the prospectus, and of circulating and advertising the prospectus;
  2. the cost of registering the company and the statutory documents, together with fees and stamp duties payable thereon;
  3. the cost of drawing up the preliminary contracts and stamp duties payable thereon;
  4. the cost of printing debentures and stamp duty (if any) payable thereon and of share certificates and letters of allotment;
  5. the cost of the seal of the company; and
  6. underwriting commission.

Estimate of Tax Payable and Tax Payment For LLP

LLP is required to provide an estimate of tax payable and payment by instalments as provided in Section 107C of Income Tax Act (ITA). As for LLP that is converted from a private limited company or a conventional partnership is also to provide an estimate of tax payable and payment by instalments as the business of the LLP is deemed to be a continuous business of the company or the partnership.

As such, LLP is subject to submit the estimate of tax payable through Form CP204 for every year of assessment within 30 days before the beginning of the basis period. Where for an LLP just commence its operations during the year, 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, subsequently within 30 days before the beginning of the basis period. Instalments of tax are payable by 12 equal monthly instalments to IRB by every 15th of the month.

Tax Returns for LLP (Form PT)

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

Restrictions on LLP Partner’s Salary Deduction

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 remuneration is an expense which is wholly and exclusively incurred in the production of income.

In order for a Partner to receive remunerations, all terms and conditions and the basis of making payments shall be documented in the LLP agreement as evidence. Therefore, remunerations or similar payments to partners of an LLP are not allowable for a deduction if not specified or provided for in the LLP agreement.

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.

Tax Treatment of LLP Partners

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

Responsibilities of Compliance Officer for Income Tax Purposes

All actions and things that should be done by or on behalf of LLP for income tax purposes shall lie jointly or severally on the compliance officer appointed from amongst the partners of the LLP or any one or all of the partners if no compliance officer is appointed.

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 within the prescribed period.
  • provide estimates of tax payable and make installment payments.
  • inform the Director General of Inland Revenue on the changes of the accounting period by submitting Form CP204B within the prescribed period.
  • ensure payment of tax by the LLP.
  • undertake any other responsibilities under the ITA.

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