Section 4(c)

Dividend income received is chargeable under the Income Tax Act.

Comment:-
1) Under Imputation System
1.1. Dividend received under imputation system, tax paid by companies are not
final tax.Tax paid by companies are passed on to shareholders as tax credit (S110).

1.2. Where shareholders received dividends have been tax deducted as source
(e.g.25%) and received a net dividend (e.g. 75%)

1.3.Tax payer is require to declare gross dividend income (100%) in the income tax
return. If the Tax payer is in the lower tax bracket (e.g.19%), then the tax payer is
entitle for a refund of 6%. On the other hand, if the tax payer is in the tax bracket
of 27%, the tax payer is require to pay 2% additional tax on the gross dividend
received.

2) Under Single Tier System

2.1. Dividend received under Single Tier System.

2.2. Tax paid (e.g.25%) by companies is final tax. The dividend income (100%)
received by shareholders are tax exemption.

2.3. Tax payer is not required to declare the dividend income in the tax return.
 INCOME TAX ACT 1967 (ACT 53)
PART VII - COLLECTION AND RECOVERY OF TAX

Section 108. Deduction of tax from dividends.

(1) Where a dividend is paid or credited by a company to any of its shareholders in the basis period for a
year of assessment, then, if the dividend is deemed by virtue of section 14 to be derived from Malaysia,
the company shall be entitled to deduct tax therefrom at the rate applicable to the company on the
chargeable income for that year of assessment or, where there is no chargeable income of the company
for that year at the rate which would be so applicable if there were such chargeable income.

(2) Where a company pays, credits or distributes without deduction of tax a dividend from which it is
entitled to deduct tax (or a dividend from which it would have been entitled to deduct tax if the dividend
had been wholly paid in cash) , the dividend shall be deemed to be a dividend of such a gross amount as
determined in accordance with the formula-
1XB
--–----
(1– A)

where

A is the rate of tax applicable to the company for a year of assessment at the time of the payment,
crediting or distribution of the dividend; and

B is the amount in fact paid or credited or where the dividend consists of property other than money, the
amount of the market value of that property at the time of the distribution of the dividend,

and a sum equal to the difference between that gross amount and the amount in B in the above formula
shall be deemed to have been deducted from the dividend as tax.

(3) Notwithstanding any other provision of this Act, where a dividend is paid, credited or distributed with or
without deduction of tax in the basis period for a year of assessment, and there is a revision in the rate of
tax for companies for that year of assessment (in this subsection referred to as the revised rate) , the
amount of the dividend received by the shareholder shall be deemed to be a dividend of such a gross
amount as determined in accordance with the formula-
1XB
--–- ----
(1– A)

where

A is the revised rate of tax applicable to the company for that year of assessment at the time of the
payment, crediting or distribution of the dividend; and

B is the amount in fact paid or credited or where the dividend consists of property other than money, the
amount of the market value of that property at the time of the distribution of the dividend,

and a sum equal to the difference between that gross amount and the amount in B in the above formula
shall be deemed to have been deducted from the dividend as tax.

(4) Every company shall upon paying, crediting or distributing to a shareholder a dividend of the kind to
which subsection (1) or (2) applies (whether tax is deducted therefrom or not) furnish the shareholder with
a certificate setting forth in respect of the dividend-

(a) the gross amount;

(b) the amount of tax-

(i) which the company is entitled to deduct under subsection (1) ; or

(ii) which is deemed to have been deducted under subsection (2) ; and

(c) the amount in fact paid or credited or where the dividend consists of property other than
money, the amount of the market value of that property at the time of the distribution of the
dividend.

(5) Within six months following the close of the accounting period, every resident company shall render to
the Director General a statement in the prescribed form showing for a year of assessment-

(a) the total amount of tax-

(i) which the company is entitled to deduct under subsection (1) ; and

(ii) which is deemed to have been deducted under subsection (2) or (3) ,
from that dividend paid, credited or distributed to its shareholders in the basis period for that year
of assessment (that total amount being in this section referred to as the compared total) ; and
(b) the aggregate of the amount-

(i) of the tax paid (if any) and an amount of the tax set off under section 110 (if any)
(restricted to the amount of the tax on the chargeable income of the company less any
rebate under section 6B or any relief given for a year of assessment under section 132 or
133) less any tax refunded to the company in the basis period for that year of
assessment; and
[Am.Act A1151:s.21]
(ii) the balance (if any) carried forward for the credit of the company in accordance with
subsection (8),

(that aggregate amount being in this section referred to as the compared aggregate) .

(6) Where, in relation to a year of assessment and a company, the compared total exceeds the compared
aggregate at the end of the basis period for a year of assessment, a sum equal to the amount of the
excess shall be a debt due from the company to the Government and that debt shall be due and payable
on the due date.

(7) Where any excess due and payable by a company under subsection (6) has not been paid by the due
date, so much of the excess as is unpaid upon the expiration of that day shall, without any further notice
being served, be increased by an amount equal to ten per cent of the excess so unpaid, and the amount
unpaid and the increase on the amount unpaid shall be a debt due from the company to the Government
and that debt shall be payable forthwith to the Director General.

(8) Where in relation to a company, the compared aggregate exceeds the compared total at the end of
the basis period for a year of assessment, a sum equal to the amount of the excess shall be carried
forward as a balance for the credit of the company to the following year of assessment.

(9) Where in relation to a year of assessment, a company fails-

(a) to render the statement referred to in subsection (5) ; or

(b) to provide the information required in the statement referred to in subsection (5) ,
and the Director General is of the opinion that the company has paid, credited or distributed dividends to
its shareholders in the basis period for that year of assessment, he may compute the amount of the
excess referred to in subsection (6) , if any, and shall serve on the company a written requisition in the
prescribed form calling upon the company to pay an amount equal to that excess and an amount of an
increase not exceeding the amount equal to that excess, and the amount equal to that excess and the
increase on that amount shall be a debt due from the company to the Government and that debt shall be
payable forthwith to the Director General upon the service of the requisition.

(10) Where a company-

(a) is not entitled to deduct tax under this section from a dividend paid or credited in a basis
period for a year of assessment to any of its shareholders; and

(b) issues to any one of its shareholders a certificate which purports to show that an amount of
tax has been deducted or is deemed to have been deducted under this section from a dividend
paid, credited or distributed to that shareholder,

an amount equal to what would have been the total amount of tax deducted or deemed to have been
deducted, if subsection (1) or (2) has been applicable, from the gross amount of the dividend (ascertained
in accordance with subsection (2) ) paid, credited or distributed to all its shareholders at the time that the
dividend was paid, credited or distributed to those shareholders shall be an amount due from the
company to the Government and that amount shall be increased by an amount not exceeding the amount
due; and the Director General shall serve on the company a written requisition in the prescribed form
calling upon the company to pay the amount due and the increase on the amount due, and that amount
shall be a debt due from the company to the Government and shall be payable forthwith to the Director
General upon the service of the requisition:

Provided that, where the company satisfies the Director General that such certificates have been issued
only to particular shareholders specified by the company, that debt shall be reduced to an amount
ascertained by reference to the certificates issued to those particular shareholders.

(11) Where in relation to a year of assessment there has been a payment of tax under section 103A an
instalment payment under section 107C or a refund of tax , the Director General may make-
[Am.Act A1151:s.21]
(a) all such revisions of the compared total, the compared aggregate or the balance mentioned in
subsection
(8) (if any) ;

(b) all such repayments of the whole or any part of a debt paid pursuant to subsection (6) , (9) or
(10) ; and

(c) all such requisitions under subsection (9) or (10) , as appear to him to be appropriate in the
circumstances.
(12) The provisions of section 23(b) as to the day on which a dividend is to be treated as paid or
distributed shall apply for the interpretation of this section and where this section has applied to a dividend
which has been credited it shall not apply to that dividend when paid.

(13) Any debt due under this section shall be recoverable as if it were tax due and payable under this Act.

(14) In this section-

"due date" has the same meaning as in section 103A(12) ;

"tax paid" means any payment of tax made by the company in the basis period for a year of assessment,
whether or not paid through instalments under section 107C, less payments (if any) in respect of-

(a) the tax payable for the year of assessment 2000 on current year basis and prior years of
assessment;

(b) any penalties imposed under section 112(3) or 113(2) ;

(c) any increase in tax under section 103, 103A, 107B or 107C or

(d) any excess or any increase on the excess under section 108.

(14A) In this section,a reference to "tax refunded " or "a refund of tax "is a reference to —
(a) the amount of instalments that has been paid under section 107C for a year of assessment
less the amount of tax payable (excluding any penalty imposed under section 112 or 113) for that
year of assessment;or

(b) the amount of tax payable (excluding any penalty imposed under section 112 or 113)
discharged by virtue of the assessment that has been reduced or discharged:
Provided that the amount of tax payable (excluding any penalty imposed under section 112 or 113) under
that assessment has been paid.
[Ins. Act A1151:s.20]

(15) This section shall not apply to-

(a) a co-operative society;

(b) an offshore company in respect of a dividend paid, credited or distributed out of-

(i) income derived from an offshore business activity; or

(ii) income exempt from tax;

(c) a life insurer in respect of his chargeable income which is subject to tax under Part VIII of
Schedule 1; or

(d) a company limited by guarantee.

[Subs. Act A1093: s.15]

 Special provision relating to section 108.

Notwithstanding the provisions of subsection 108(4) of the principal Act before the coming into operation
of the amendment to section 108 in section 15 of this Act, in relation to the year of assessment 2000 on
current year basis, the statement referred to in that subsection shall be rendered by the company to the
Director General within three months after the end of that year of assessment.
[Ins. Act A1093: s.16]
______________________________________________________
[Shall have effect for the year of assessement 2004 and subsequent years of
assessment.]

(11) Where in relation to a year of assessment there has been a payment of tax under section 103 or an
instalment payment under section 107C or a refund of tax , the Director General may make-

[Am. Act A1151:s.21]

(14) In this section-

"due date" has the same meaning as in section 103(12)(a) ;

"tax paid" means any payment of tax made by the company in the basis period for a year of assessment,
whether or not paid through instalments under section 107C, less payments (if any) in respect of-

(a) -
(b) -

(c) any increase in tax under section 103 , 107B or 107C or

(d)--
[Am.Act A1151:s.21]

Related reading:
[Act A1093: s.15; Act A1093: s.16]

Copyright © 2002 PNMB LawNet. All rights reserved.

B est m atches f or w hat i st ax c redit s

ection 1 08
Introduction

Prior to 1 January 2008, Malaysia adopted the imputation system which required the imposition
of tax on the profit at corporate level and again at shareholders level. The principle behind the
imputation system is to overcome the double taxation of income. Under the imputation system,
companies resident in Malaysia are required to deduct tax at source at the prevailing corporate
tax rate on dividends paid to their shareholders. The same income would be taxed twice if the
credit is not imputed to the shareholders.

The single-tier tax system was introduced in Budget 2008 to replace the imputation system
with effect from year of assessment 2008. Under this system, corporate income is taxed at
corporate level and this is a final tax. Companies may declare single tier exempt dividend that
would be exempt from tax in the hands of their shareholders.

There are a few reasons for the move to the single tier system. First, the imputation system was
not able to accommodate increasingly sophisticated business transactions. Second, the
obligation of resident companies to maintain the franking account which entailed high
compliance costs. Third, to remove the constraint that a company might have distributable
profit and yet could not frank dividend because of insufficient credits.
Comparison between imputation and single tier tax system

Single Tier System

Imputation System
Tax paid by a company is not a final tax Tax paid by a company is a final tax
Tax is deducted from dividend paid, credited or No tax is being deducted from dividend paid,
distributed to shareholders credited or distributed to shareholders
Shareholders are taxed on gross dividends Dividends are exempt in the hands of
received and entitled to claim section 110 set-off shareholders
Tracking mechanism through section 108 account No tracking mechanism is required

Transitional Priod

The section 108 balance is a tax credit balance which a company can pay dividend under the
imputation system. Many companies may still have substantial section 108 balances as at 31
December 2007. If the single tier system were implemented without any transitional period,
companies would have forfeited those credits and most shareholders, especially individuals,
would lose out on the tax refunds. Thus the government has allowed a six-year transitional
period (1 January 2008 to 31 December 2013) to enable companies with unutilized balances to
continue to pay franked dividends during the period. Shareholders who received such dividends
are entitled to claim section 110 set-off against their tax payable.

During the six-year transitional period, all resident companies are required to comply with the
transitional provisions. The transitional provisions spell out, among other things:

a. the six-year transitional period allowed resident companies to utilize their section 108
balances as at 31 December 2007;
b. companies with nil section 108 balances as at 31 December 2007 would automatically
be able to declare single tier exempt dividend from 1 January 2008;
c. companies that have utilized all the section 108 balances anytime during the transitional
period are not entitled to deduct tax from dividend paid or distributed. Instead, the
companies are to declare single tier exempt dividends there from; and
d. companies have the option of disregarding the section 108 balances in order to declare
single tier exempt dividends during the transitional period.

For the purpose of applying the transitional provisions, reference would be made to section 108
balance as at 31 December 2007. The balance is determined as follows:

a. the amount of the balance for the credit of that company at the end of the basis period
for year of assessment 2007 would be increased by:
i. any tax paid during the period from the first day of the basis period of that
company for the year of assessment 2008 to 31 December 2007; or
ii. the final instalment paid under section 107c of the Income Tax Act 1967 for
companies whose financial years end on 31 December.
b. the amount of the balance for the credit of that company would be decreased by:
i. any dividend paid during the period from the first day of the basis period of that
company for the year of assessment 2008 to 31 December 2007; or
ii. any tax discharged, remitted or refunded until 31 December 2007.

As a concession, companies are allowed to increase their section 108 balances as at 31

December 2007 by an amount equivalent to:

a. amount of section 110 set-off on dividends received on or before 7 September 2007;

and
b. the amount of advance payment made on or before 7 September 2007.

Determination of section 108 balance during the transitional period.

a. during the transitional period, any tax paid or tax charged on any assessment or
composite assessment made after 31 December 2007 are not to be added to the 108
balance or revised 108 balance.
b. section 108 balance or the revised balance would be adjusted downwards by the
 followings:
i. any dividend paid from 1 January 2008 to 31 December 2013; or
ii. amount of tax paid which has been taken into computation of section 108
balance is discharged, remitted or refunded from 1 January 2008 to 31
December 2013.

Anti avoidance provisions during the transitional priod

To avoid manipulation and to safeguard the government from the adverse effect of having
substantial outflow of fund due to unexpected increase of tax refunds during the transitional
period, the government has imposed conditions as stated below:

a. franked dividends paid by companies must be in cash in respect of ordinary

shareholdings. Companies are neither allowed to credit to nor to contra the dividends
against their shareholders' accounts;
b. companies cannot pay franked dividends and single tier exempt dividends to ordinary
shareholders concurrently if the companies still have section 108 balances. Companies
must utilized all 108 balances in their section 108 accounts before declaring single tier
exempt dividends;
c. shareholders are not entitled to section 110 set-off if the shareholding period is less then
90 days from the date of acquisition to the date of disposal. However, this condition
does not apply to shares in companies listed on Bursa Malaysia;
d. for companies that receive franked dividend (which are of non business source), the
statutory income from franked dividends is deemed to be the total income with effect
from year of assessment 2008;
e. companies may declare single tier exempt dividends or to pay dividends in specie to
their preference shareholders.

Impact of the single tier system

Some of the benefits and drawbacks of the single tier system are as follows:

Benefits

a. reduce administrative cost and enhance efficiency (for companies and government) as
there is no need to maintain section 108 balances;
b. companies with huge section 108 balances may pay special dividends during the
transitional period. Companies with capital gains and non taxable accounting profits are
also able to declare dividends without any constraint. Thus shareholders may enjoy
higher dividend yields;
c. high income bracket individuals need not pay tax on the differential between his
marginal tax rate and the corporate tax rate; and
d. reduces tax leakages as the dividends are exempt from tax. Any manipulation to shift
tax burden on dividends ceased to serve its purpose.
Drawbacks

a. the holding costs (interest on loans, bonds etc) that are attributable to the financing of
investments will no longer be tax deductible once dividends becomes single tier exempt
dividends. Corporations need to undertake a tax review on how their investments are
held and funded.
b. issuers of fixed rate preference shares need to ascertain whether the coupon rate
specified is a gross or net rate as there may be additional cost on payment of dividends;
c. individuals with lower income such as pensioners and retirees will not enjoy any tax
refunds. Such refunds may represent an important source of fund for this category of
persons. Tax exempt bodies and non-profit organizations will also lose the right to tax
refunds; and
d. increase cash flow for government as companies may maximize dividend payouts
during the transitional period.