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Tax in Malaysia | Overview Of Malaysia Taxation

Malaysia is increasingly becoming a center for international Islamic finance. It is also emerging as a regional hub for not just financial services, but also information and communications technology (ICT) and logistics services. And of course, the country has been for the past decades a primary oil, gas and palm oil exporter. Many entrepreneurs and companies are interested in doing business in Malaysia. If you are one of them, it is important that you orient yourself on the different factors affecting businesses in Malaysia, including how the tax in Malaysia will influence your net income.

As in other countries, Malaysia has various taxes you need to consider when planning to relocate or do business here. Looking over the tax in Malaysia is important to prepare for the necessary filing, and to get a rough estimate of your net salary or income. It is best to get to know the taxes in Malaysia to be ready for any contingencies. Here are the common taxes in Malaysia.

Corporate Tax

The general corporate tax rate in Malaysia is 24%. However, resident companies that meet the SME criteria are eligible for a preferential tax rate of 15% on the first RM150,000 of chargeable income, 17% on the next RM450,000, and the standard rate of 24% applied to the balance.

From Year of Assessment (YA) 2024, there is an introduction of an additional shareholding condition in which the SME companies with more than 20% foreign ownership [companies incorporated outside of Malaysia or individuals who are not Malaysian citizens (direct or indirect)] will no longer qualify for the preferential SME tax rate.

As a result, companies with foreign ownership exceeding 20% will be subject to the standard tax rate of 24% and will not qualify for the preferential SME tax rate (previously 15% on the first RM150,000 and 17% on the next RM450,000 of chargeable income). There is no difference whether the company is owned by company or individual.

Personal Tax

Similar to corporate entities, individuals earning income in Malaysia are required to file and pay taxes, with tax rates differing between tax residents and non-residents. Tax residents are subject to a graduated tax system with rates ranging from 1% to 30%, while non-residents are taxed at a flat rate of 30% on their chargeable income.

Several preferential tax incentives are available to specific groups of individuals. Qualified knowledge workers residing in Iskandar Malaysia and employed in qualifying activities are taxed at a preferential rate of 15%. Similarly, knowledge workers, including Malaysian citizens and foreign nationals, residing within the Malaysia-China-Kuantan Industrial Park (MCKIP) in the East Coast Economic Region (ECER) and employed by designated companies are also taxed at 15%.

Under the Returning Expert Programme (REP), approved individuals are taxed at a flat rate of 15% on employment income for a period of 5 years. This incentive aims to encourage Malaysian professionals abroad to return and contribute to the nation’s economy.

Additionally, non-citizen professionals holding C-suite or key positions in companies relocating to Malaysia under approved schemes are taxed at a flat rate of 15%, provided they earn a monthly salary of RM25,000 or more, hold the position for at least 5 consecutive years, and maintain tax residency in Malaysia during the incentive period.

These targeted incentives demonstrate Malaysia’s commitment to attracting talent, promoting regional development, and stimulating foreign investment to drive economic growth.

Foreign-Sourced-Income

Foreign-sourced income received in Malaysia by Malaysian tax residents, including both individuals and companies, is generally taxable. However, certain types of foreign-sourced income may qualify for a tax exemption if specific conditions are met.

For resident individuals, all categories of foreign-sourced income may qualify for an exemption, subject to meeting the required conditions. For resident companies and Limited Liability Partnerships (LLPs), only dividend income received in Malaysia from abroad may qualify for the exemption, provided the prescribed conditions are satisfied.

Sales and Service Tax (SST)

SST comes into effect in Malaysia on 1 September 2018, after the Goods and Services Tax (GST) was zero-rated on 1 June 2018. Governed by the Sales Tax Act 2018 and the Service Tax Act 2018, the Sales Tax was a federal consumption tax imposed on a wide variety of goods while the Service Tax was levied on customers who consumed certain taxable services.

Companies (Manufacturer or Sub-contractor) with a sales value of taxable goods exceeded RM500,000 for 12 months period are liable to be registered under the Sales Tax Act 2018. The Sale Tax rate is at various rates (5% to 10%) prescribed. Companies shall prepare their SST return in accrual basis for Sale Tax purposes.

Services provider is liable to be registered under the Service Tax Act 2018 when the value of taxable services provided for a period of 12 months that exceeds a threshold of RM500,000. The Service Tax rate is fixed at 6% or 8%. Companies shall prepare their SST return in payment basis for Service Tax purposes.

Withholding Tax

Withholding tax in Malaysia is the amount withheld by the payer on income earned by a non-resident payee to the Inland Revenue Board (IRB). The payer is required to withhold tax on specific types of payments, particularly for services rendered or the use of moveable property, as prescribed under Malaysian tax laws.

Examples of transactions requiring withholding tax include interest, royalties, technical or management fees, contract payments, rental for moveable property, and other payments specified under Malaysian tax regulations. All withholding tax payments must be accompanied by the relevant withholding tax forms and supporting documentation, to confirm that the payments are made to a non-resident. These payments must be remitted to the IRB within one month from the date of payment or crediting to the non-resident payee.

Captain Gains Tax (CGT)

Starting in 2024, CGT will be imposed on companies and limited liability partnerships for gains arising from disposal of shares in unlisted companies incorporated in Malaysia and disposal of shares in foreign incorporated companies deriving value from real property in Malaysia (effective from 1 March 2024), and disposal of capital assets situated outside Malaysia that are remitted into Malaysia (effective from 1 January 2024).

For disposal of shares in unlisted companies and disposal of shares in foreign incorporated companies deriving value from real property in Malaysia, the CGT rate is 10% of chargeable income or 2% of gross disposal price (acquisition date of capital asset before 1 January 2024) or 10% of chargeable income (acquisition date of capital asset on or after 1 January 2024).

For disposal of capital assets situated outside Malaysia, gains remitted into Malaysia are subject to the prevailing rate of tax. The prevailing rate of tax is currently 24%.

Sales Tax on Low Value Goods (LVG)

Effective from 1 January 2024, sales tax on LVG will be imposed.

Sellers from Malaysia or outside Malaysia who sell LVG on an online platform or operates an online marketplace for the sale and purchase of LVG are required to be registered and charge sales tax of 10% if meeting the registration threshold (total sale value of LVG brought into Malaysia exceeds RM500,000 in 12 months).

Sales Tax due and payable is to be declared in the LVG-02 return for a period of every 3 months, and to be submitted via MyLVG.

Dividend Tax on Individual Shareholders

Starting from 1 January 2025, a 2% dividend tax will be imposed on individual shareholders, both residents and non-residents, including individuals holding shares through nominees. This tax applies to chargeable dividend income.

However, only individual shareholders with annual dividend income exceeding RM100,000 will be subject to this 2% dividend tax.

Implementation of E-Invoicing

An e-Invoice is a digital representation of a transaction between a supplier and a buyer. e-Invoice replaces paper or electronic documents such as invoices, credit notes, and debit notes.

The Malaysian Government intends to implement e-Invoice in stages in an effort to enhance the efficiency of Malaysia’s tax administration management. e-Invoice will be implemented in phases to ensure smooth transition. The implementation date commences from 1 August 2024 to 1 July 2025 for targeted taxpayers. From 1 July 2025 onwards, e-invoice will become mandatory for all businesses.

Transfer Pricing

Transfer pricing regulations require taxpayers engaged in controlled transactions to maintain contemporaneous transfer pricing (TP) documentation. This documentation serves as evidence that the pricing of related-party transactions complies with the arm’s length principle, ensuring that profits are not shifted to reduce tax liabilities.

While TP documentation does not need to be submitted with the annual tax return, it must be readily available and submitted to the IRB upon request, typically within a specified timeframe. Maintaining accurate and comprehensive TP documentation is crucial for demonstrating compliance and mitigating the risk of disputes with tax authorities.

Failure to provide contemporaneous TP documentation upon request may result in significant penalties. Many jurisdictions, including Malaysia, have implemented stringent measures to enforce TP compliance, with penalties ranging from financial fines to legal consequences for non-compliance. As transfer pricing regulations evolve, businesses must stay informed and ensure proper documentation to meet regulatory requirements.

Stamp Duty

Stamp duties are taxes imposed on instruments, rather than transactions. The rates of stamp duties in Malaysia vary depending on the nature of instruments and amount of transacted values. Transfers of properties, shares, and service and loan agreements are the usual events that give rise to stamp duties. The rates imposed on the instruments of these transfers are usually tiered.

Furthermore, the state also offers reliefs, exemptions and remissions to stamp duties in Malaysia. These include relief on the transfer of assets between associated parties, exemption on all financing instruments relating to professional service funds, and exemption on loan agreement instruments for the purchase of a first residential property.

Conclusion

Malaysia remains one of the most open economies globally, with policymakers continuously introducing measures to stimulate economic growth through tax and policy reforms. Recent years have seen significant updates to the tax system, with new provisions, incentives, and adjustments aimed at benefiting taxpayers and fostering investment.

While these changes present opportunities, they can also create complexities for taxpayers navigating the updated regulations. If you need assistance with understanding and applying for tax incentives, or support in filing your taxes accurately under the latest rules, 3E Accounting Malaysia can help. Our tax experts can guide you with any tax issues and concerns you have. Contact us today and get in touch with our tax professionals!

Overview of Malaysia Taxation