Tax treatment

14
Tax Treatment on
Islamic Finance 
in Malaysia
In a nutshell, for Islamic finance transactions, due to the underlying asset within each transaction, 
tax neutrality as well as the tax treatment of profits need to be resolved as tax issues tend to arise in 
most countries. 
Tax neutrality is a form of tax incentives whereby a relief is given to the tax charges that was supposed 
to be imposed onto the Islamic financial transactions. 
In fact, Malaysia was among the first country to accord tax neutrality to Islamic finance instruments 
and transactions to reduce cost of transferring assets in Islamic finance. This measure has promoted 
a level playing field between conventional and Islamic financial products.
Section 2(8) of the Act essentially allows the underlying sale of assets or leases to be ignored for 
tax purposes so that any additional tax as a result of the underlying transaction would not arise. It 
enables Islamic financing to continue without any tax issue relating to asset transfer or lease, as such 
placing the Islamic financing on the same footing as conventional financing.
Approval for the Islamic financing has to be granted by the relevant authorities namely Bank Negara 
Malaysia, Securities Commission and the Labuan Financial Services Authority. 
The impact between no tax neutrality and tax neutrality is tabulated as below: