Special Tax Treatment of Malaysian REITs
The taxation of a Real Estate Investment Trust (REIT) in Malaysia depends on the amount of income that is distributed to shareholders.
Two different important conditions affect a Malaysian REITs’ tax treatment:
- If a Malaysian REIT distributes at least 90% of its taxable income, it will not be subject to corporate income tax;
- If the 90% threshold is not met, the REIT would be subjected to the prevailing corporate tax of 24%.
As such, Malaysian REITs generally always pay out at least 90% of its taxable income in dividends. And as a dividend investor, REITs are especially attractive to me and feature heavily in my portfolio.
Tax Credits for Resident Shareholders
I’ve received numerous queries regarding a REIT’s withholding tax as well as tax credits applicable to resident Malaysian unit holders. Firstly, you have to be a tax resident for any tax credits to be applicable.
The withholding tax is a final tax and it comes into play when Malaysian REITs reach that 90% threshold in distribution (Condition 1 above). Individuals and non-corporate investors are not required to declare REIT dividend income in their tax filing/returns. And no, you have no tax credits to claim if the REIT doesn’t pay any corporate tax. Distribution made to shareholders will only be subjected to a final withholding tax. For residents and individuals, that rate is 10%.
So when do you get tax credits? When Condition 2 is in effect and the REIT doesn’t meet the 90% payout requirement. This is when you are allowed to set off those tax credits against your own payable tax. However, a REIT almost always pays out at least 90% of their income (this is when tax transparency is achieved) to take advantage and not pay any corporate tax.
So, the short answer to whether or not we as individual investors are entitled to tax credits: almost (99%) never. No sensible REIT manager would miss out on the huge corporate tax cut.
I would actually like some feedback from you guys if you know of any Malaysian REITs that have opted not to distribute that 90% income.
For a more comprehensive understanding of Malaysian REITs, please divert yourself to The Complete Guide to REITs in Malaysia.