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Income Tax on Profit Distributions Received by Individual Partners (Effective 1 January 2026)

Under the current tax framework, Limited Liability Partnerships (LLPs) are taxed at the entity level at corporate rates of 15%, 17%, or 24%. Profit distributions made to individual partners are currently exempt from income tax under Paragraph 12C, Schedule 6 of the Income Tax Act 1967.

However, effective from 1 January 2026, a 2% income tax will be imposed on profit distributions received by individual partners, including both resident and non-resident individuals.

This new rule aims to create a fairer and more progressive tax system by expanding Malaysia’s tax base.

 

Tax Applicability

The 2% income tax applies to chargeable profit distribution income received by individual partners of an LLP.

The tax is determined based on the date the profit distribution is received by the individual partner — corresponding to the date of payment by the LLP. The declaration date of the distribution will not be used to determine tax applicability.

Example: If a profit distribution is declared in 2025 but paid in 2026, the distribution will be subject to the 2% tax.

 

Threshold for Taxation

Only individual partners whose annual profit distributions exceed RM100,000 will be subject to the 2% income tax.
Profit distributions below the RM100,000 threshold remain exempt from tax.

 

Formula to Determine Chargeable Income

When an individual partner earns both profit distributions and other income, the chargeable portion attributable to LLP profit distributions will be determined using the following formula:

 

 

 

A – Profit distributions received from LLP (deemed statutory income)
B – Aggregate income of the partner
C – Chargeable income of the partner
D – Chargeable income attributable to profit distributions from LLP

 

Exemption from Income Tax

The following income and entities remain exempt from the 2% tax:
• Corporate partners (as the tax only applies to individual partners)
• Profit distributions below RM100,000 per year
• Other income received from the LLP, such as salary or interest, which will continue to be taxed at normal progressive rates

 

Tax Planning Considerations

With the introduction of this new 2% income tax, LLPs and their partners should evaluate their distribution policies. The following strategies may help mitigate potential tax exposure:

1. Distribute Profits Before 31 December 2025
Distribute accumulated profits to individual partners on or before 31 December 2025 to fully utilise the current tax exemption. Any distributions paid after this date will be subject to the new 2% rule.

2. Manage Annual Distributions
Consider keeping annual distributions per partner below RM100,000 where feasible to remain within the exempt threshold.

3. Admit Corporate Partners
Since corporate partners are not subject to the 2% income tax, LLPs may consider introducing a corporate partner to receive profit distributions. However, this approach should be evaluated carefully, as it may affect the LLP’s SME status and eligibility for the 17% preferential tax rate, especially if more than 20% ownership is held by a foreign entity. Additionally, if the corporate partner is foreign, the distributions may be taxable in the foreign jurisdiction, and double taxation relief may not always apply, making this option potentially less favourable overall.

4. Timing of Payment
Plan the timing of declaration and payment carefully — for example, declare and pay distributions before 31 December 2025 to avoid the new tax.

5. Maintain Solvency and Proper Documentation
Before declaring any distribution, ensure the LLP remains solvent for at least 12 months after payment.
Prepare the latest management accounts or audited financial statements for review prior to any declaration.