Overview of Malaysia Taxation in Malaysia
Company Income Tax
Income tax in Malaysia is imposed on income accruing in or derived from Malaysia except for income of a resident company carrying on a business of air/sea transport, banking or insurance, which is assessable on a world income scope.
Income is assessed on a current year basis. The YA is the year coinciding with the calendar year, for example, the YA 2015 is the year ending 31 December 2015. The basis period for a company, co-operative or trust body is normally the financial year ending in that particular YA. All income of persons other than a company, co-operative or trust body, are assessed on a calendar year basis.
Income Tax Rates
Generally, resident companies are taxed at the rate of 24%. In Budget 2019, it is announced that the Company with paid-up capital of RM2.5 million or less*, it is subject to the concessionary income tax rate of 17% for the first RM500,000 of chargeable income. This has reduced the existing concessionary income tax rate from 18% to 17% for the first RM500,000 of chargeable income. The reduction of tax rate is come into effective YA 2019.
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 the first RM500,000 to RM600,000 and this concessionary tax rate is only given to a Company which having a business income from one or more sources for the relevant year of assessment of not more than RM50 million in addition to the paid up capital for not more than RM2.5million*.
* The companies must not be part of a group of companies where any of their related companies have a paid-up capital of more than RM2.5 million.
Profit Distribution by Company
Tax on a company’s profits is a final tax and dividends paid, credited or distributed from 1 January 2014 are exempt in the hands of Company’s shareholders.
Business losses can be set off against income from all sources in the current year. With effect from YA 2019, any unutilized losses can only be allowed to carried forward up to maximum of seven (7) years of assessment to be utilized against income from any business source (e.g. unabsorbed losses created in YA 2019 will expire in YA 2026).
For dormant companies, the carry forward of losses is only allowed if the shareholder continuity test is met, i.e. shareholders of the company at the beginning of the basis period for that YA are substantially the same as those at the end of the basis period for the (prior) YA in which the loss was initially ascertained.
Generally, tax deduction is allowed for all outgoings and expenses wholly and exclusively incurred in the production of income.
Certain expenses are specifically disallowed, example:
– 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
– 50% of entertainment expenses with certain exceptions
– 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
Collection of Tax
An estimate of a company’s tax payable for a YA must be furnished by all companies to the Director General not later than 30 days before the beginning of the basis period except for the following:
– A newly established company with paid-up capital of RM2.5 million and less is exempted from this requirement for 2 to 3 YAs, beginning from the YA in which the company commences operation subject to certain conditions.
– A company commencing operations in a YA is not required to furnish estimates of tax payable or make instalment payments if the basis period for the YA in which the company commences operations is less than 6 months.
Tax is generally payable by 12 equal monthly instalments beginning from the second month of the company’s basis period (financial year).
The balance of tax payable by a company based on return submitted is due to be paid by the due date for submission of the return.
Foreign Source Income
With effect from YA 2004, foreign source income received by any person (other than a resident company carrying on the business of banking, insurance or sea or air transport) will be exempted from Malaysian income tax.
In general, foreign source dividend and interest received by individual or company (other than a resident company carrying on the business of banking, insurance or sea or air transport) will be tax exempted.
However, kindly remind that Section 12(1)(a) of the Income Tax Act, 1967 provides:
“so much of the gross income from the business as is not attributable to operations of the business carried on outside Malaysia shall be deemed to be derived from Malaysia.”
Section 12(1)(a) serves as a residual section, to tax whatever gross income that is not attributable to operations of business carried on outside Malaysia would be deemed Malaysian derived income. The scope is wider than merely to treat gross income that is attributable to business operations carried on in Malaysia.
Therefore, if the gross income is related to the work performed outside Malaysia and the taxpayer wishes to treat it as foreign source income, the taxpayer would need to substantiate that it is attributable to operations of business carried on outside Malaysia.
Real Property Gains Tax (RPGT)
Every person whether or not resident in Malaysia is chargeable to RPGT on gains arising from the disposal of real property and shares in real property company (RPC).
Real property is defined as any land situated in Malaysia and any interest, option or other right in or over such land. A RPC is a controlled company holding real property or shares in another RPC as a major asset (i.e. defined value not less than 75% of the value of its total tangible assets).
The RPGT rates (with effective from 1 January 2019) are as follows:
|Holding Period||Malaysian citizen or permanent resident||Company incorporated in Malaysia and a trustee of a trust||Not a citizen or a permanent resident||Company not incorporated in Malaysia|
|Within 3 years||30%||30%||30%||30%|
|In the 4th year||20%||20%||30%||30%|
|In the 5th year||15%||15%||30%||30%|
|Beyond 5 years||5%||10%||10%||10%|
Withholding tax is a tax on payments made to non-residents including employees, business partners and overseas agents. Here is a quick overview of withholding tax and how it affects your business:When you make payments of a specified nature to a non-resident, you must withhold a certain percentage of that payment as “withholding tax“.
For Dividends, Malaysia does not impose withholding tax on it.
Interest paid to non resident is subjected to a withholding tax of 15%, which may be waived or reduced under an applicable tax treaty. However, interest paid to a non resident by banks operating in Malaysia is exempt from tax, except for interest accruing to the non resident’s place of business in Malaysia and interest paid on fund required to maintain “net working funds” as prescribed by the Central Bank. Interest on “approved loans” as specificed in the Income Tax Act 1967, is exempt from tax. Approved loans include those made by a non resident to the government, local authority, statutory body or a person guaranteed by the government.
Malaysia does not levy any tax on branch remittance.
For other types of payments, the withholding tax rate is 10 percent or 15 percent.
Sales and Service Tax (SST) in Malaysia
Malaysia has re-introduce SST on 1 September 2018. Sales tax is an ad valorem tax and different tax rate is applied according to the group of taxable goods. The service tax rate is 6% and specific rate for credit/charged card.
For more information, please see Overview of SST in Malaysia.