Relief from Double Taxation: Understanding the Updated Rules on Bilateral and Unilateral Credit

Public Ruling No. 3/2026: Bilateral Credit and Unilateral Credit, issued by the Inland Revenue Board of Malaysia (IRBM) on 22 May 2026, replaces the earlier Public Ruling No. 11/2021. The updated ruling restates and refreshes the framework through which a Malaysian resident who has been taxed on the same income both in Malaysia and abroad may obtain relief from double taxation. For taxpayers with cross-border income — and for the practitioners who advise them — the ruling is a timely reminder that relief is available, but only within clearly defined limits and time frames.

Why double taxation relief matters

Double taxation arises when two countries impose income tax on the same income earned by the same person. To soften this burden on residents earning income abroad, Malaysia, like many jurisdictions, relies on two complementary mechanisms anchored in the Income Tax Act 1967 (ITA): bilateral credit under section 132, available where Malaysia has concluded an Agreement for the Avoidance of Double Taxation (DTA) with the other country, and unilateral credit under section 133, available where no such DTA exists. The ruling draws on sections 7, 8, 131, 132, 132A and 133, together with Schedules 6 and 7 of the ITA.

Bilateral credit: relief where a DTA applies

Where a DTA is in force and the same income is taxed in both countries, relief is given by way of bilateral credit. The ruling sets out the governing rules with precision:

• Eligibility. The claimant must be a person resident in Malaysia for the basis year of the relevant year of assessment.

• Cap on the credit. Bilateral credit for a year of assessment cannot exceed the Malaysian tax payable on that foreign income, and total credits cannot exceed the total Malaysian tax payable on chargeable income for that year (computed before any credit).

• Allowed only once. Credit is given once for the foreign tax suffered; it cannot be re-claimed in another year of assessment.

• Time limit. A claim must be made in writing to the Director General within two years after the end of the relevant year of assessment. As Example 1 illustrates, a claim falling even weeks outside that window is forfeited.

• No carry-forward. Unutilised bilateral credit cannot be carried forward to future years.

A notable feature concerns adjustments. Where the credit allowed turns out to be excessive or insufficient because the Malaysian or foreign tax was later adjusted, the ordinary five-year limit for raising assessments does not apply. Instead, an application for relief or notice of appeal may be made within two years after the relevant assessment, adjustment or determination (paragraph 10, Schedule 7). A taxpayer aggrieved by the Director General's decision may, within six months of being informed, request that the matter be forwarded to the Special Commissioners of Income Tax (paragraph 9, Schedule 7; subsection 131(5)).

The ruling also reaffirms the post-2007 expansion of “foreign income” for bilateral credit purposes: from the year of assessment 2007, income derived from Malaysia that has nonetheless suffered foreign tax qualifies for relief. Example 4 demonstrates this through a Malaysian consultancy whose Malaysian-sourced service fee was subjected to Indian withholding tax — relief that would not have been available before the amendment.

Computing the credit

The credit is the lower of two amounts: the foreign tax actually charged, or the result of the statutory formula —

(Foreign income [statutory income] ÷ Total income) × Malaysian tax payable before bilateral credit

Worked examples make the mechanics concrete. In Example 5, Mega Sdn Bhd's formula amount of RM15,496 exceeded the RM7,500 of Indian withholding tax, so the credit was limited to RM7,500. In Example 6, BBB Insurance Bhd's formula produced RM240,000 against RM100,000 of UK tax on its interest income, again capping the credit at the lower figure of RM100,000. The “whichever is lower” rule is therefore decisive in practice.

Unilateral credit: relief without a DTA

Where Malaysia has no DTA with the source country, unilateral credit under section 133 applies. The rules largely mirror those for bilateral credit, with two important distinctions. First, unilateral credit is available only for income derived from outside Malaysia — income derived from Malaysia but taxed abroad does not qualify. Second, the credit is restricted to the lower of one-half of the foreign tax payable on the foreign income, or the Malaysian tax chargeable on that income. The ruling also confirms, under paragraph 15 of Schedule 7, that an employee taxed in both Malaysia and abroad on employment exercised outside Malaysia may claim unilateral credit whether or not he is a Malaysian tax resident. In Example 7, an engineer seconded to Belarus received a unilateral credit of RM5,293 (YA 2022) and RM5,250 (YA 2023), each being the formula amount rather than the higher one-half-of-foreign-tax figure.

Foreign-sourced income: the shifting landscape

The ruling situates these credits within Malaysia's evolving treatment of foreign-sourced income (FSI). Before 1 January 2022, FSI received in Malaysia was generally exempt except for residents in banking, insurance and sea or air transport. From 1 January 2022, FSI received in Malaysia by a resident became taxable, subject to exemptions granted by the Minister of Finance — making double taxation relief far more widely relevant. From 1 January 2024, the introduction of capital gains tax extended the same logic to gains on the disposal of foreign capital assets received in Malaysia; where such gains have suffered foreign tax, bilateral or unilateral credit may likewise be claimed.

Substantiating the claim

To support a credit, taxpayers must be able to evidence the foreign tax suffered. The ruling accepts either a notice of assessment or receipt for tax paid from the foreign tax authority, or a statement from that authority setting out the particulars normally recorded on such documents. Maintaining this documentation contemporaneously is, in practice, essential — as Example 1 shows, missing paperwork can defeat an otherwise valid claim.

Practical takeaways

Public Ruling No. 3/2026 does not reinvent the relief framework, but its consolidation and refresh carry real practical weight in the post-2022 FSI environment. Three points deserve emphasis for advisers and taxpayers: the strict two-year claim window leaves little margin for delay; the “whichever is lower” cap, particularly the half-credit ceiling for unilateral claims, frequently determines the actual relief obtained; and robust foreign tax documentation is the foundation of any successful claim. With more foreign income now within the Malaysian tax net, a disciplined approach to claiming these credits has never been more valuable.

Disclaimer: This article is a general summary of Public Ruling No. 3/2026 for informational purposes and does not constitute tax advice. Readers should refer to the full ruling and consult a qualified tax professional regarding their specific circumstances.