INLAND REVENUE BO AR D OF MALAYSIA PRE-OPERATIONAL ...

1 INLAND REVENUE BOARD OF MALAYSIA . PRE-OPERATIONAL . business expenditure . PUBLIC RULING NO. 11/2013. Translation from the original Bahasa MALAYSIA text DATE OF ISSUE: 18 NOVEMBER 2013. PRE-OPERATIONAL . business expenditure . Public Ruling No. 11/2013. INLAND REVENUE BOARD OF MALAYSIA Date of Issue: 18 November 2013. Published by INLAND REVENUE Board of MALAYSIA Published on 18 November 2013. First Edition on 18 November 2013. (Issue B of Public Ruling No. 2/2010. dated 3 June 2010 is replaced with the publication of this First Edition). INLAND REVENUE Board of MALAYSIA All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, including photocopying and recording without the written permission of the copyright holder. Written permission from the publisher must be obtained before any part of this publication is stored in a retrieval system of any nature. PRE-OPERATIONAL .

2 business expenditure . Public Ruling No. 11/2013. INLAND REVENUE BOARD OF MALAYSIA Date of Issue: 18 November 2013. CONTENTS Page 1. Objective 1. 2. Summary Of Changes 1. 3. Related Provisions 3. 4. Interpretation 3. 5. Pre-Operation And Pre-Commencement Of business 3. 6. Application Of Tax Law 4. 7. Qualifying PRE-OPERATIONAL business expenditure Incurred For 5. Approved business Venture Outside MALAYSIA 8. Incorporation Expenses 7. 9. expenditure On Approved Training 9. 10. Pre-Commencement business Training Expenses 11. 11. Establishment expenditure Of A Real Estate Investment Trust 12. (REIT) Or Property Trust Fund (PTF). 12. Establishment expenditure Of An Islamic Stock Broking Company 13. 13. Pre-Commencement business Expenses Relating To Employee 15. Recruitment 14. expenditure On Franchise Fee 17. DIRECTOR GENERAL'S PUBLIC RULING. A Public Ruling as provided for under section 138A of the Income Tax Act 1967 is issued for the purpose of providing guidance for the public and officers of the INLAND REVENUE Board of MALAYSIA .

3 It sets out the interpretation of the Director General of INLAND REVENUE in respect of the particular tax law, and the policy and procedure that are to be applied. A Public Ruling may be withdrawn, either wholly or in part, by notice of withdrawal or by publication of a new ruling which is inconsistent with it. Director General Of INLAND REVENUE , INLAND REVENUE Board Of MALAYSIA . PRE-OPERATIONAL . business expenditure . Public Ruling No. 11/2013. INLAND REVENUE BOARD OF MALAYSIA Date of Issue: 18 November 2013. 1. Objective This Public Ruling explains the deductions allowed for certain expenditure incurred prior to the commencement of a business . 2. Summary Of Changes This Public Ruling replaces the Public Ruling No. 2/2010 issued on 3 June 2010 under the title Allowable PRE-OPERATIONAL And Pre-Commencement Of business Expenses . Significant changes made to that Public Ruling are summarized in the table below: Paragraph Changes In This Public Ruling In Public Ruling No.

4 2/2010 Paragraph Item Reference - - New title 1 Rephrased Editorial changes 2 Summary of changes 1. o (A) 401/2009. 3 Rephrased o (A) 76/2012. (New). 2 4. Renumbered Editorial changes - New Clarification Rephrased 3 6. Renumbered Editorial changes 4 7. Page 1 of 20. PRE-OPERATIONAL . business expenditure . Public Ruling No. 11/2013. INLAND REVENUE BOARD OF MALAYSIA Date of Issue: 18 November 2013. Rephrased Clarification Paragraph and Example 2 are rephrased 5 8 Renumbered (ii) - Deleted Editorial changes - Renumbered 6 9. Example 6 rephrased Clarification (i) (a) Rephrased 7 10 Renumbered Editiorial changes Rephrased 8 11. Example 8 replaced Renumbered and rephrased 9 12. Example 9 rephrased Clarification Renumbered 10 13 Example 12 rephrased New Example 13. Rephrased 11 - Deleted Editorial changes New (A) 76/2012. - 14. (New). Page 2 of 20. PRE-OPERATIONAL . business expenditure . Public Ruling No. 11/2013. INLAND REVENUE BOARD OF MALAYSIA Date of Issue: 18 November 2013.

5 3. Related Provisions The provisions related to this Public Ruling are - Schedule 4B of the Income Tax Act (ITA) 1967, and the Rules issued by the Minister of Finance: (a) (A) 61/1992. (b) (A) 111/1995. (c) (A) 160/1996. (d) (A) 475/2003. (e) (A) 472/2005. (f) (A) 135/2006. (g) (A) 65/2007. (h) (A) 361/2008. (i) (A) 401/2009, and (j) (A) 76/2012. 4. Interpretation The words used in this Public Ruling have the following meaning: Resident means resident in MALAYSIA for the basis year for a year of assessment by virtue of section 7 or section 8 of the ITA 1967. Person includes a company, a body of persons, a limited liability partnership and a corporation sole. Adjusted income , statutory income , aggregate income and total income refer to income as determinded under Chapters 4, 5 and 6 in Part III of the ITA 1967. 5. Pre-Operation And Pre-Commencement Of business PRE-OPERATIONAL has the meaning as defined in Schedule 4B of the ITA.

6 1967 and any reference to PRE-OPERATIONAL or prior to the commencement of operations should be interpreted subject to the conditions imposed under the provision. Page 3 of 20. PRE-OPERATIONAL . business expenditure . Public Ruling No. 11/2013. INLAND REVENUE BOARD OF MALAYSIA Date of Issue: 18 November 2013. Pre-commencement of business has the meaning as defined in the Rules. The determination of the date of commencement of a business requires consideration of all the circumstances and facts of each case. Generally, commencement of business means the commencement of activities undertaken in the course of business or activities that are part of the income producing process as distinguished from activities that are preparatory to the carrying on of a business . Subject to the specific circumstances and facts of the case, the following examples may be indicative of the commencement of a business if the act or activity constitutes part of a series of acts or activities that are actively carried out or undertaken in the course of the business : (a) the purchase of raw materials in the case of manufacturing, (b) the purchase of goods for resale in the case of retailing, or (c) the first planting of seedlings or buying of animal stocks in the case of agriculture.

7 However, any reference to pre-commencement or prior to the commencement of business may only be so interpreted if it is consistent with the relevant conditions imposed under the specific Rules. 6. Application Of Tax Law Generally, expenses incurred by a person prior to the commencement of his operations or business would not be allowable as a deduction against the gross income of his business as they are not wholly and exclusively incurred in the production of the income. However, Schedule 4B of the ITA 1967 and the Rules as mentioned in paragraph above allow for the deduction of certain expenses that are incurred prior to the commencement of operations or business . This Public Ruling gives general guidelines on the PRE-OPERATIONAL and pre-commencement business expenses that are allowable to a person as a deduction against - (a) the gross income in arriving at the adjusted income of the business , or (b) the aggregate income in arriving at the total income of the business .

8 Page 4 of 20. PRE-OPERATIONAL . business expenditure . Public Ruling No. 11/2013. INLAND REVENUE BOARD OF MALAYSIA Date of Issue: 18 November 2013. 7. Qualifying PRE-OPERATIONAL business expenditure Incurred For Approved business Venture Outside MALAYSIA Schedule 4B of the ITA 1967 provides that, with effect from the year of assessment 1992, certain PRE-OPERATIONAL business expenditure in relation to a proposal to undertake investment in a business expansion venture in a country outside MALAYSIA can be claimed if - (a) the company is resident in MALAYSIA , and (b) the business venture has been approved by the Minister of Finance. The PRE-OPERATIONAL business expenses in connection with an approved business venture which qualify for deduction are - (a) expenses which are directly attributable to the conduct of feasibility studies, (b) expenses which are directly attributable to the carrying out of market research or survey or the obtaining of market information, (c) expenses incurred on fares for travel to a country outside MALAYSIA by a representative of the company for purposes of conducting feasibility study or market survey, and (d) actual expenses not exceeding RM400 per day for accommodation and sustenance for the whole period commencing with the representative's departure from MALAYSIA and ending with his return to MALAYSIA .

9 Expenses as mentioned in paragraphs (a) and (b) above include consultation cost for conducting feasibility studies, market research or market survey. Example 1. Ansel Sdn Bhd, a company resident in MALAYSIA , produces household electrical equipment. It proposes to build a factory in China. Before embarking on this venture, the company sends its marketing director to China to conduct a survey. The following expenses are incurred: Page 5 of 20. PRE-OPERATIONAL . business expenditure . Public Ruling No. 11/2013. INLAND REVENUE BOARD OF MALAYSIA Date of Issue: 18 November 2013. Details Of Expenses Amount (RM). Market research by a Chinese consultant 5,000. Travel and other expenses: Air fare 3,000. Hotel RM200 x 10 days 2,000. Food allowance RM100 x 10 days 1,000 6,000. Total 11,000. While the expenses incurred appeared to be within the prescribed limits, deduction cannot be allowed under Schedule 4B of the ITA 1967 unless the venture has been approved by the Minister of Finance.

10 Qualifying PRE-OPERATIONAL business expenses shall be allowed as a deduction against the defined aggregate in arriving at the total income. The defined aggregate means the aggregate income after deducting . (a) the amount of any adjusted loss from business for the basis period for the relevant year of assessment under subsection 44(2). of the ITA 1967, and (b) the amount of prospecting operations expenditure , if any, under Schedule 4 of the ITA 1967. Any unabsorbed qualifying PRE-OPERATIONAL business expenses can be carried forward to the following years of assessment until the whole amount of the deduction has been made. Example 2. The facts are the same as in Example 1 and the venture has been approved by the Minister of Finance. The company has the following position for the year of assessment 2012: Amount Details (RM). Adjusted loss of business 1 (Retail) (5,000). Statutory income of business 2 (Electrical Equipment) 20,000.