On 5 July 2019, the Inland Revenue Board of Malaysia has published new guidance on restrictions to the deductibility of interest expenses. The restriction is provided under Section 140C of the Income Tax Act 1967 (hereinafter referred to as the Act) and Income Tax (Restriction on Deductibility of Interest) Rules 2019 to restrict deductions for interest expenses or any other payments which are economically equivalent to interest, to ensure that such expenses commensurates with the business income.

The objective of these Restriction on Deductibility of Interest Guidelines (after this referred to as “the Guidelines”) is to explain the determination of the amount deductible and restricted in relation to business interest expenses; and other payments which are economically equivalent to interest for the basis period beginning on or after July 1, 2019 and subsequent basis periods.

Under the rules the maximum amount of interest expense referred to in section 140C of the Act shall be an amount equal to twenty per cent (20%) of the total amount of the Tax-EBITDA of that person consisting of a business source for the basis period for a year of assessment as ascertained in the Rules. Interest expense which is in excess of the maximum amount which is ascertained in the Rules, shall be carried forward to be utilized in the subsequent year which is subject to the maximum amount of interest allowable for that year.

The interest restriction under section 140C of the Act is not applicable to a person where the total amount of any interest expense for all financial assistance from all business sources is equal to or less than RM500,000 in the basis period for a year of assessment. The restriction on deductibility of interest under Section 140C of the Act and the Rules will only be applicable on a business source where the basis period of a person start on or after 1 July 2019. In a scenario where the basis period of a person begins prior to 1 July 2019, the interest restriction under Section 140C of the Act and the Rules will not be applicable.