Malaysia Corporate Income Tax Guide
Territorial basis of taxation
Malaysia adopts a territorial system of income taxation.
A company or corporate, whether resident or not, is assessable on income accrued in or derived from Malaysia. Income derived from sources outside Malaysia and remitted by a resident company is exempted from tax, except in the case of the banking and insurance business, and sea and air transport undertakings.
A company is tax resident in Malaysia for a basis year if the management and control is exercised in Malaysia at any time during that basis year.
Management and control is the key factor used to ascertain the residence status of a company in Malaysia. The management and control refers to the controlling authority which determines the policies to be followed by the company. The management and control is considered to be exercised where the directors meet to conduct the company’s business / affairs irrespective of where the company might be incorporated. The management and control of a business of a company would depend upon how the business is managed.
If, at any time during the basis year for a year of assessment at least one meeting of the board of directors is held in Malaysia concerning the management and control of the company, even though all other meetings are held outside Malaysia, then the company is resident in Malaysia for that basis year.
Branches of foreign corporations in Malaysia are generally treated as non-residents in Malaysia unless it can be established that the management and control of its affairs or of its businesses or of any one of its businesses is exercised in Malaysia.
Resident companies are taxed at the rate of 24%.
For small and medium enterprise (SME), the first RM500,000 Chargeable Income will be tax at 17% (with effective from YA 2019) and the Chargeable Income above RM500,000 will be tax at 24%.
In Budget 2020, it is proposed that the first chargeable income which is subject to the concessionary income tax rate of 17% be increased from RM500,000 to RM600,000. The government has also included a new condition whereby this concessionary income tax rate of 17% will only give to a Company having gross business income from one or more sources for the relevant year of assessment of not more than RM50 million, in addition to the ordinary share capital requirement.
The SME company means company incorporated in Malaysia with a paid up capital of ordinary share of not more than RM2.5 million. It must not owned by or owned a company having paid up capital of more than RM2.5million directly or indirectly.
Single Tier System
Under the single tier system, income tax payable on the chargeable income of a company is a final tax in Malaysia. Any dividends distributed by the company will be exempt from tax in the hands of the shareholders.
Generally, tax deduction is allowed for all outgoings and expenses wholly and exclusively incurred in the production of income.
Here is a list of common allowable items. However, please note that business expenses vary among types of business and industries and IRB may assess based on common industry practices and examine the object of the expenses and their correlation with the income generating activity.
- Employment costs to employees such as salary, allowance, EPF, SOCSO
- Business insurance
- Rental of premises
- Advertisement to promote sales
- Lease rental on plant and machinery
- Electricity, water, telephone and internet charges
- Renewal of license
- Repair and maintenance
- Promotional gift of trading product
- Promotional samples
- Gift with company logo
- Printing and stationery
- Travelling allowance to employees
- Travelling for carrying on a business
- Petrol or mileage claims by employees
- Legal fees for recovery of trade debts
- Commission to secure sales
- Repainting of premises
- Entertainment to employees
- Specific trade debt written off (subject to meeting conditions)
- Staff training
Certain expenses have often been refused a tax deduction even though, for businessman, they are regarded as necessary business costs. Knowing what expenses are not tax deductible might help company to minimise such expenses.
The following are more common non-allowable expenses.
Expenses that are not incurred:
- Provision of expenses
- General provision of bad debt
- Depreciation and loss on disposal capital assets
- Unrealised foreign exchange loss
- Pre-commencement expenses
- Costs including incidental costs, of acquiring, improving or altering capital assets
- Costs of protecting, preserving or defending the title of capital assets
- Renovation or construction cost of premises
- Acquisition repair
- First painting on premises
- Licensing and registration expense
- Income tax, tax penalties and cost of tax appeals
- Fines and penalty
- Legal fees for bank loan or premises acquisition
- Entrance fees to club
- Registration of trademark
- Fees for designinig company logo
- Expenses not wholly and exclusively incurred in the production of income
- Domestic, private or capital expenditure (The Company can claim capital allowance for capital expenditure incurred)
- Lease rentals for passenger cars exceeding RM50,000 or RM100,000 per car, the latter amount being applicable to vehicles costing RM150,000 or less which have not been used prior to the rental
- Employer’s contributions to unapproved pension, provident or saving schemes
- Employer’s contributions to approved schemes in excess of 19% of employee’s remuneration
- Non-approved donations
- Employee’s leave passages
- Interest, royalty, contract payment, technical fee, rental of movable property, payment to a non-resident public entertainer or other payments made to non-residents which are subject to Malaysian withholding tax but where the withholding tax was not paid
- Input tax incurred by the person if the person is liable to be registered under GST but is not registered
- Input tax incurred by the person and the input tax is claimable by that person
- Output tax which is borne / absorbed by a person who is GST registered or liable to be GST registered
- Entertainment to potential customers
- Entertainment to existing customers (50% allowable)
- Entertainment to suppliers (50% allowable)
Malaysia offers a wide range of tax incentives for the promotion of investments in selected industry sectors, which include the traditional manufacturing and agricultural sectors, as well as other sectors such as those involved in Islamic financial services, ICT, education, tourism, healthcare as well as research and development. Through tax incentives, the Government aims to attract foreign direct investments (FDIs) as investors from abroad need to be incentivised to relocate or set up their operations in Malaysia.
These tax incentives appear in various forms, such as exemption on income, extra allowances on capital expenditure incurred, double deduction of expenses, special deduction of expenses, preferential tax treatments for promoted sectors, exemption of import duty and excise duty, etc.
Although Malaysia is neither a tax haven nor a low tax jurisdiction, for companies which are eligible for the tax incentives, the effective tax rates may be significantly below the normal corporate tax rate of 24%. For instance, a manufacturing company with a pioneer status tax incentive pays an effective tax at the rate of 7.2% as only 30% of its profits are subject to tax. Some of the major tax incentives available in Malaysia are the Pioneer Status (PS), Investment Tax Allowance (ITA) and Reinvestment Allowance (RA).