Malaysia has more than 70 tax treaties in force, but until lately it has not defined “permanent establishment” (PE) in its domestic law.
Presumably as a consequence of the anti-BEPS initiative, Malaysia amended domestic tax law, effective 1 January 2019, to include a definition of “place of business” (PoB), as follows:
(1) Physical PoB:
- place of management
- branch
- office
- factory
- workshop
- warehouse
- farm or plantation
- mine, oil or gas well, quarry or any other place of extraction of natural resources
(2) Project PoB:
- building site
- construction project
- installation or assembly project
- supervisory activities in connection with a building or work site, or a construction, an installation or an assembly project
(3) Agency PoB: has another person acting on their behalf who
- habitually concludes contracts or habitually plays the principal role leading to the conclusion of contracts that are routinely finalised without material modification;
- habitually maintains a stock of goods or merchandise in that place of business from which such person delivers goods or merchandise; or
- regularly fills orders on their behalf.
At first glance, the new definition appears consistent with BEPS Actions. So is it just a formality or a total revamp? This depends on a few things – the most important of which is whether a tax treaty is applicable to the case.
Where there is no tax treaty applicable (for example, the business operator is a tax resident in the United States), the new definition may constitute a revamp, or at least introduce some uncertainty. For example, the definition of PoB includes installation or assembly projects but does not state any minimum time they may take.
Where a tax treaty is applicable, the new definition in the domestic tax law may be just a formality, i.e. no difference to the final tax exposure as it is widely acknowledged that the definition in the tax treaty supersedes the definition in domestic tax law (note: from a broader perspective, the tax treaty itself may change when the multilateral instrument comes into effect).
However, there may be specific cases where the new PoB definition in domestic tax law makes a difference, or leads to uncertainty despite application of a tax treaty. For example, some tax treaties entered into by Malaysia recognise “service PE”, which is not expressly provided for in the domestic tax law.
Foreign businesses with a business presence in Malaysia are advised to reassess their tax exposure in Malaysia in the light of the new definition of PoB. Businesses may also want to plan ahead by simulating the potential exposure once the multilateral instrument comes into effect.
Malaysian businesses that make payments to foreign businesses are also advised to reassess their withholding tax obligations in the light of the recently enacted PoB definition.
