Crowe Chat Vol.5/2026

Tax Edition

Welcome to our Crowe Chat Vol.5/2026. In this issue, we will cover the following topics:

Public Ruling (PR) 3/2026 - Bilateral Credit and Unilateral Credit
Income Tax (Deduction for the Costs of Implementation of Flexible Work Arrangements) Rules 2026
Income Tax (Income of Approved Individual) (Women Returning to Work After Ceasing from Employment Temporarily) (Exemption) Order 2026
Customs Public Ruling 1/2026 – Foreign Exchange Rates For Invoices Issued under Sales Tax and Service Tax
Updated Guide on completing the SST-02 Return (Manual/Amendment)
Service Tax Policy 2/2026 – Service Tax Treatment on Construction Works Services carried out on Completed Residential Buildings issued by the Royal Malaysian Customs Department (RMCD)

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PR 3/2026

Bilateral Credit and Unilateral Credit

Introduction

Double taxation arises when the same income is taxed by two countries in the hands of the same taxpayer. To alleviate the burden of double taxation on residents earning income from foreign sources, many countries, including Malaysia, have entered into Agreements for the Avoidance of Double Taxation (DTAs). Under a DTA, where the same income is taxed in both jurisdictions, relief is generally granted through a foreign tax credit, commonly referred to as bilateral tax credit relief. In the absence of a DTA between Malaysia and the foreign jurisdiction, relief may instead be available in the form of unilateral tax credit relief.

Previous PR

The previous PR11/2021 - Bilateral Credit and Unilateral Credit was issued on 31 December 2021.

New PR

The Inland Revenue Board of Malaysia (IRBM) issued an updated PR3/2026 - Bilateral Credit and Unilateral Credit on 22 May 2026.

Details of the Updated PR:

PR 3/2026 replaces and updates PR11/2021 with some changes, including:

The definitions of the terms foreign tax and foreign income have been updated.
The updated PR specifies that a unilateral tax credit can only be claimed in Malaysia in respect of income derived from outside Malaysia that has been subjected to foreign tax. This means that income earned outside Malaysia but derived from Malaysia is not eligible for a unilateral credit claim.
The updated PR also includes new paragraphs regarding the introduction of the taxation of foreign-sourced income with effect from 1 January 2022 and the introduction of capital gains tax (CGT) with effect from 1 January 2024. The updated PR provides that a bilateral credit or unilateral credit may be claimed in respect of foreign-sourced income received in Malaysia and gains or profits from disposal of capital assets, provided that such income, gains or profits have also been subjected to foreign tax.

Deduction Rules

Income Tax (Deduction for the Costs of Implementation of Flexible Work Arrangements) Rules 2026

Introduction

In Budget 2025, it was proposed that an additional 50% tax deduction be given on expenses borne by employers for capacity building and software acquisition to implement flexible working arrangements (FWA).

Exemption Order

To legislate the above proposals, the Income Tax (Deduction for the Costs of Implementation of Flexible Work Arrangements) Rules 2026 was gazetted on 16 June 2026.

Details of the Deduction Rules

The Rules is effective from the year of assessment (YA) 2025.
The term “flexible work arrangements” has been defined to mean flexible arrangements for place of work, scheduling of working hours or number of hours worked.
An additional 50% deduction is allowed on qualifying expenditure incurred for implementing FWAs.
The implementation of FWAs must be verified by Talent Corporation Malaysia Berhad (TalentCorp).
The employer’s application for FWA implementation must be received by TalentCorp between 1 January 2025 and 31 December 2027.
The total qualifying expenditure allowed under these Rules is capped at RM500,000 and can only be claimed once.
The qualifying expenditure incurred for implementing FWAs are in relation to the following categories:

Cost of capacity development

Cost of acquisition of software

Fees for training courses or programmes.
Fees for internal trainers.
Costs for training materials.
Costs for rental of training space.
Fees for examination.
Travelling expenses incurred by the employees and trainers in relation to training, limited to:
- economy class airfare for international travel;
- economy class airfare (for air travel) or actual costs incurred (for land or water travel) for domestic travel;
- accommodation costs of up to RM300 per day; and
- meal costs of up to RM150 per day.

Cost of acquisition of software used to support the implementation of FWAs.

Exemption Order

Income Tax (Income of Approved Individual) (Women Returning to Work After Ceasing from Employment Temporarily) (Exemption) Order 2026

Introduction

It was proposed in the 2024 Budget announcement that exemption from income tax of up to 12 months for women returning to work after a career break of not less than two (2) years, be extended.

Exemption Order

To legislate the above proposals, the Income Tax (Income of Approved Individual) (Women Returning to Work After Ceasing from Employment Temporarily) (Exemption) Order 2026 was gazetted on 9 June 2026.

Details of the Exemption Order

The exemption is effective from the YA 2024 to the YA 2028.
Income tax exemption is granted on employment income received for a maximum period of 12 consecutive months for women who:
- have previously been employed;
- ceased employment temporarily; and
- subsequently returned to work.
Applications must be made to the Minister of Finance through Talent Corporation Malaysia Berhad between 1 January 2024 and 31 December 2027.
The tax exemption is available to a woman who:
- is a Malaysian citizen and resident of Malaysia;
- has a minimum of three (3) years of full-time working experience prior to taking a career break;
- has ceased employment and has not derived any employment income for a consecutive period of at least 24 months on or after 28 October 2017;
- has not attained the age of 58 years on the date of submission of the application;
- has signed a full-time employment contract in Malaysia with a qualifying employer for a period of at least 24 months;
- has worked for at least 12 consecutive months from the employment contract with the same qualifying employer, and the period of employment is between 1 January 2023 until 31 December 2028; and
- has received a minimum gross salary of RM5,000 per month from the qualifying employer.

Customs Public Ruling 1/2026

Foreign Exchange Rates For Invoices Issued under Sales Tax and Service Tax

The RMCD has issued Customs Public Ruling No. 1/2026 to clarify the exchange rates that should be used when Service Tax or Sales Tax invoices are issued in a foreign currency. The salient points are as follows:

1. Issuance of invoice by Registered Person for Taxable Services and Taxable Goods

Where a person registered for Sales Tax or Service Tax issues an invoice in a foreign currency, the amount must also be stated in Malaysian Ringgit (RM).
The conversion must be based on the selling exchange rate applicable in Malaysia at the time:
- the taxable services are provided; or
- the taxable goods are sold.
The exchange rate may be based on sources such as:
- Bank Negara Malaysia (BNM);
- Licensed commercial banks in Malaysia or other banks regulated by BNM;
- International financial information providers (e.g., Bloomberg, Reuters, OANDA, etc.); or
- Foreign central banks (e.g., European Central Bank, the Federal Reserve Bank of New York, etc.).
The selected exchange rate source must be applied consistently for at least one accounting year.
Prior written approval from the Director General of RMCD is required if a registered person wishes to use an exchange rate source other than those specified in the Customs Public Ruling.

2. Importation of Goods

For the importation of taxable goods, the conversion of foreign currency into Malaysian Ringgit (RM) for the calculation of:
- import duty;
- excise duty; and
- sales tax on imported goods
shall follow the foreign currency exchange rate determined by the Director General of RMCD at the time of importation.

3. Imported Services

For imported taxable services, the foreign currency amount must be converted into RM using the selling exchange rate applicable in Malaysia at the time the taxable service is provided.

Revised Guide on Completing the SST-02 Return

The RMCD has issued a revised Guide on Completing the SST-02 Return dated 31 May 2026. The revised guide provides several clarifications on the completion of specific fields in the SST-02 Return.

Field	Key Clarification
Field 13(a) – Tax Deduction From Credit Note	Clarifies that this field is used to report credit notes issued to adjust or reduce Service Tax that was previously declared and paid in an SST-02 Return for an earlier taxable period. Such credit notes may be claimed as a tax deduction in the SST-02 Return for the subsequent taxable period.
Field 18(a) – Export / Special Areas / Designated Areas	Clarifies that this field is applicable only to Sales Tax registered persons.
Field 18(c)(2) – Group Relief	Clarifies that this field is used to report services qualifying for group relief under Group G (Professional or Skills Services) and Group K (Rental or Leasing Services).
Field 18(c)(3) – Other Exemptions	Clarifies that this field is applicable only to Service Tax registered persons.
Field 18(e) – Total Value of Sales Tax Exempted under Subsection 25(3) and/or Section 61A of the Sales Tax Act 2018	Clarifies that this field is applicable only to Sales Tax registered persons.

Service Tax Policy No 2/2026

Service Tax Treatment on Construction Works Performed on Completed Residential Buildings

The RMCD has issued Service Tax Policy No. 2/2026 dated 18 June 2026 to provide guidance on the Service Tax exemption granted by the Ministry of Finance for construction works performed on completed residential buildings.

The exemption applies retrospectively with effect from 1 July 2025.

Construction work services performed on completed residential buildings are exempted from the imposition and payment of Service Tax.

The exemption is available to owners or occupants of completed residential buildings and the construction service providers provided that the prescribed conditions are met.

Conditions for The Service Tax Exemption

The Service Tax exemption is subject to the following conditions:

The service provider must be a registered person for Service Tax under Group L.
The construction service provider must obtain supporting documents from the occupants or owners of residential building, such as:
- A strata title or individual title;
- A Sale and Purchase Agreement under the Housing Development (Control and Licensing) Act 1966;
- Utility bills of the residential building;
- Residential building plans approved by the relevant local authority; or
- Any other recognised document proving that the building is a residential building.
The name and address of the residential building of the service recipient must be stated on the invoice.
This exemption may be applied on a self-compliance basis.
The service provider must comply with any general rulings issued by the Director General of RMCD.

Refund of Service Tax

Registered persons for Service Tax who have previously charged, collected, declared, and paid Service Tax on construction works performed on completed residential buildings may apply for a refund of the Service Tax, subject to the following conditions:

The Service Tax has been declared in an SST-02 Return and paid to RMCD.
The refund application must be submitted on or before 30 June 2026.
The construction service provider must first refund the full amount of the Service Tax collected to the recipient of the construction services before submitting the refund claim.

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