Budget 2027 Proposes Lower Income Tax Rates for Malaysia’s MSMEs

Key Takeaways

• Malaysia's Budget 2027, tabled in Parliament on 9 October 2026, proposes cutting the preferential corporate income tax rate for micro, small and medium enterprises (MSMEs) by one percentage point.
• The reduction would lower the 15% band on the first RM150,000 of chargeable income to 14%, and the 17% band on income between RM150,001 and RM600,000 to 16%.
• Chargeable income above RM600,000 would continue to be taxed at the standard 24% corporate rate.
• The measure targets resident companies in Malaysia with paid-up capital of RM2.5 million or less, gross income not exceeding RM50 million, and no more than 20% foreign shareholding.
• The proposal takes effect only once enacted by Parliament, with year of assessment 2027 the expected start; the Inland Revenue Board (LHDN) is expected to issue guidance.

What Has Budget 2027 Proposed for MSMEs?

Could Malaysia's MSMEs benefit from Budget 2027 income tax changes? In this news report, we outline the proposed rates, eligibility conditions and timing. Budget 2027 was tabled in Parliament on 9 October 2026. It proposes a one-percentage-point cut to preferential corporate income tax rates for micro, small and medium enterprises. The national news agency reported the measure as continued support for smaller businesses. Those businesses form the backbone of the domestic economy.

The proposal builds on the tiered MSME rate structure that has applied since year of assessment 2023. The Inland Revenue Board of Malaysia (LHDN) administers the structure under the self-assessment system. As with all Budget measures, the change does not become law unless the relevant Finance Act is enacted. Taxpayers should monitor LHDN guidance before adjusting tax estimates and instalment payments.

Who Qualifies for the Reduced MSME Tax Rate?

The preferential rates apply to qualifying resident Malaysian companies and LLPs that meet the statutory capital, gross business-income and shareholding conditions, including related-company and foreign-ownership restrictions.

• Paid-up capital in respect of ordinary shares of RM2.5 million or below at the beginning of the basis period.
• Gross income from a business source or sources not exceeding RM50 million for the basis period.
• No more than 20% of ordinary paid-up shares held, directly or indirectly, by companies incorporated outside Malaysia or by individuals who are not Malaysian citizens.

The foreign shareholding condition means the reduced rate is aimed at locally controlled enterprises. Multinational companies operating in Malaysia through locally incorporated subsidiaries generally do not qualify where foreign parents hold more than 20% of the shares, and such companies are instead taxed at the standard 24% corporate rate. Companies uncertain about their eligibility should review their shareholding structure with their tax advisers before the new year of assessment begins.

What Would the New MSME Tax Rates Be?

For years of assessment 2025 and 2026, qualifying MSMEs pay tax at 15% on the first RM150,000 of chargeable income, 17% on the band from RM150,001 to RM600,000, and 24% on subsequent chargeable income. These figures are published by LHDN and confirmed in current Malaysian tax reference materials.

A one-percentage-point reduction, if enacted, would change the first two bands as follows:

• First RM150,000 of chargeable income: from 15% to 14%.
• RM150,001 to RM600,000 of chargeable income: from 17% to 16%.
• Chargeable income above RM600,000: unchanged at 24%.

For a qualifying company with RM600,000 of chargeable income, the proposal would reduce annual tax payable from RM99,000 to RM93,000, a saving of RM6,000 each year. Companies with smaller profits would see proportionately smaller but still meaningful savings that support reinvestment and cash flow.

How Should Businesses Respond to the Proposal?

Because the rates apply only once the Finance Act is enacted, companies should not change their tax computations yet. Forward planning is worthwhile. Subject to statutory exemptions, an active company must furnish its estimate of tax payable electronically on Form CP204 no later than 30 days before the beginning of its basis period. Monthly instalments follow from that estimate. A lower rate for year of assessment 2027 would feed directly into these estimates.

Subject to the statutory exemption for qualifying newly commenced companies, a company or LLP with a first basis period of at least six months must furnish Form CP204 within three months of commencing operations. We advise reviewing projected chargeable income before the basis period opens. This helps instalment schedules reflect the new rates once confirmed.

Sole proprietors and conventional partnerships are taxed through their owners at personal income tax rates, whereas a qualifying resident limited liability partnership may access the MSME preferential tax rate. Qualifying resident companies and limited liability partnerships, rather than only Sendirian Berhad companies, can enjoy the MSME preferential corporate rates.

We help clients with Malaysia company registration and manage their ongoing tax filings.

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