2024 Malaysian Corporate Income Tax Booklet
In the ever-evolving landscape of corporate taxation, staying abreast of regulatory changes and compliance requirements is paramount for businesses to navigate the complexities of fiscal governance successfully. The release of the 2024 Malaysian Corporate Income Tax Booklet heralds a significant resource for corporations operating within Malaysia, offering comprehensive insights into tax regulations, rates, and procedural guidelines.
This article serves as a detailed overview and analysis of key provisions outlined in the booklet, providing invaluable clarity to businesses, tax professionals, and stakeholders alike. From residency status determinations to advanced pricing arrangements and global minimum tax implications, each section delves into crucial aspects essential for understanding and adhering to Malaysian corporate tax laws. With these complexities in mind, follow RS 36 Solutions to delve into the intricacies of Malaysia’s tax landscape to help you navigate this financial terrain effectively.
Residence Status
In Malaysia, a company’s tax residency hinges on the location where its management and control are predominantly exercised. Typically, this is determined by the venue of directors’ meetings focusing on the company’s management and control. If these meetings take place within Malaysia’s borders, the company is regarded as a tax resident of Malaysia. This criterion serves as a fundamental aspect of corporate taxation, establishing the jurisdiction under which a company falls within the Malaysian tax regime.
Income Tax Rates
Tax Rates for Resident Companies
Resident companies in Malaysia are subject to a standard tax rate of 24%. However, there are exceptions for companies meeting specific criteria. Those with paid-up capital not exceeding RM2.5 million and gross business income below RM50 million are taxed at scale rates as follows:
Chargeable income:
- The first RM150,000: 15%
- RM150,001 to RM600,000: 17%
- In excess of RM600,000: 24%
It’s important to note that to qualify for these scale rates, companies must meet certain conditions. They must not be part of a group where any related companies have a paid-up capital exceeding RM2.5 million. Additionally, as of YA 2024, no more than 20% of their paid-up capital should be owned (directly or indirectly) by companies incorporated outside Malaysia or non-Malaysian citizens. These regulations are crucial factors determining the applicable tax rates for resident companies in Malaysia.
Tax Rates for Non-Resident Companies
Non-resident companies operating in Malaysia are subject to specific tax rates based on the type of income they generate:
- Business income: Taxed at 24%
- Royalties: Taxed at 10%
- Rental of moveable properties: Taxed at 10%
- Advice, assistance, or services rendered in Malaysia: Taxed at 10%
- Interest: Taxed at 15% (with exceptions*)
- Dividends (single-tier): Exempt from tax
- Other income: Taxed at 10%
- Film production by foreign companies: Taxed at rates ranging from 0 to 10%
It’s important to note that tax rates may be reduced for certain types of income if the recipient is a resident in a country with a double tax treaty with Malaysia. Additionally, interest paid to a non-resident by a bank or a finance company in Malaysia is exempt from tax, providing a notable exception to the standard tax rate.
Note: The details provided here offer insights into the taxation framework applicable to non-resident companies operating in Malaysia, emphasizing the significance of understanding tax obligations for businesses engaging in cross-border activities.
Collection of Tax
Efficient collection of tax is a cornerstone of Malaysia’s fiscal system, ensuring compliance and funding essential public services. Here’s a breakdown of key procedures and considerations:
- Tax Estimation: Companies are required to estimate their tax payable for a Year of Assessment (YA) and furnish it to the Director General of Inland Revenue (DGIR) no later than 30 days before the beginning of the basis period. However, exemptions apply:
- Newly established companies with paid-up capital of RM2.5 million or less may be exempt from this requirement for 2 to 3 YAs, subject to specific conditions.
- Companies commencing operations in a YA with a basis period of less than 6 months are exempt from furnishing tax estimates or making instalment payments.
- Instalment Payments: Tax payable is generally settled in 12 equal monthly instalments, starting from the second month of the company’s basis period.
- Balance Payment: The remaining tax payable, based on the return submitted, must be settled by the due date for submission of the return.
- Withholding Tax: For non-resident companies, tax on all income other than business income is collected through withholding tax. Under the law, withholding tax must be paid within one month of crediting or paying the non-resident company. This mechanism ensures timely collection of taxes on income earned by non-residents within Malaysia’s jurisdiction.
Understanding these tax collection procedures is essential for companies to meet their tax obligations promptly and maintain compliance with Malaysian tax laws.
Tax Deductions
Tax deductions play a vital role in reducing a company’s taxable income, thereby lowering its overall tax liability. Here’s a closer look at the principles and limitations surrounding tax deductions in Malaysia:
Allowable Deductions: Generally, deductions are permitted for all outgoings and expenses that are wholly and exclusively incurred in the production of gross income. This encompasses various expenses essential for business operations and revenue generation.
Disallowed Expenses: Despite the broad scope of allowable deductions, certain expenses are specifically disallowed for tax purposes. These include:
- Domestic, private, or capital expenditure, which are not directly related to business activities.
- Lease rentals for passenger cars exceeding specified thresholds, with exceptions for certain electric vehicles during specific tax years.
- Contributions to unapproved pension, provident, or saving schemes beyond prescribed limits.
- Non-approved donations and a portion of entertainment expenses.
- Employee leave passages, subject to exceptions.
- Payments to non-residents subject to Malaysian withholding tax, where the withholding tax was not paid.
- Payments made to Labuan entities, with specified percentages of non-deduction for different types of payments, irrespective of substantial activity requirements.
Understanding the distinction between allowable and disallowed expenses is crucial for companies to optimize their tax positions while ensuring compliance with Malaysian tax regulations. By leveraging allowable deductions effectively and avoiding disallowed expenses, companies can maximize their tax efficiency and mitigate potential tax risks.
Profit Distribution
In Malaysia, profit distribution is subject to specific taxation regulations designed to streamline the process and ensure fairness for both companies and shareholders. Here’s a concise overview of the key principles:
Final Taxation: Taxation on a company’s profits is considered final, simplifying the tax treatment for distributed earnings. Once profits are taxed at the corporate level, dividends paid, credited, or distributed to shareholders are not subject to further taxation in the hands of the shareholders.
Tax Exemption for Dividends: Dividends received by shareholders are typically tax exempt. This exemption encourages investment and incentivizes shareholders to participate in the growth and success of Malaysian companies.
Understanding the final tax treatment of profits and the tax exemption for dividends provides clarity for companies and shareholders alike, fostering a conducive environment for investment and economic growth in Malaysia.
Losses
In Malaysia, businesses encounter losses due to various factors, and understanding the treatment of losses is crucial for financial planning and tax management. Here’s an overview of how losses are handled:
Set-off Against Income: Business losses incurred in a given year can be set off against income from all sources in that year. This provision helps businesses mitigate their tax liabilities during periods of financial difficulty.
Carryforward of Losses: Any unutilized losses can be carried forward for up to 10 consecutive Years of Assessment (YAs) to offset against income from any business source. However, losses accumulated as of the Year of Assessment 2018 can only be utilized for 10 consecutive YAs, and any remaining balance will be disregarded from the Year of Assessment 2029 onwards.
Treatment for Dormant Companies: For dormant companies, any unutilized losses may be disregarded if there is a substantial change in shareholders. This provision aims to prevent misuse of accumulated losses by companies with significant changes in ownership.
Understanding the treatment of losses is essential for businesses to optimize their tax positions and effectively manage their financial resources. By leveraging loss provisions and planning strategically, businesses can navigate through challenging times and position themselves for long-term success.
Group Relief
Corporate tax planning is a vital aspect of business management in Malaysia, offering opportunities for businesses to optimize their tax positions and manage their financial resources efficiently. By implementing strategic tax planning strategies tailored to their financial positions and specific business needs, companies can minimize tax liabilities, enhance cash flow, and achieve long-term financial sustainability.
As the regulatory landscape evolves, businesses must remain vigilant and proactive in managing their tax obligations to ensure compliance and maximize tax efficiency.
Transfer Pricing
Transfer pricing regulations in Malaysia are crucial for ensuring fair taxation practices in cross-border transactions. Here’s an in-depth look at the legislative framework, documentation requirements, thresholds, determination of arm’s length range, and penalties for non-compliance:
Legislation
Malaysia’s transfer pricing (TP) legislation adheres to the arm’s length principle outlined in the OECD Transfer Pricing Guidelines.
The Income Tax Act 1967 (ITA 1967) empowers the Director General of Inland Revenue (DGIR) to adjust controlled transactions based on the arm’s length principle or to disregard commercially irrational structures.
The definition of ‘control’ encompasses various scenarios related to shareholding, operational dependencies, and influence on business activities.
Several rules and guidelines have been issued by the Inland Revenue Board (IRB), including the Income Tax (Transfer Pricing) Rules 2023 (“TP Rules”), Malaysian Transfer Pricing Guidelines 2012, Income Tax (Advance Pricing Arrangement) Rules 2012, and Advance Pricing Arrangement Guidelines 2012.
Documentation Requirements
Taxpayers engaging in intercompany transactions must maintain contemporaneous TP documentation.
Documentation must be prepared before the tax return’s due date and submitted within 14 days upon request by tax authorities.
Prescriptive documentation requirements are outlined in the TP Rules, including Multinational Enterprise (MNE) Group information, local business information, and cost contribution arrangements (CCA).
Thresholds
Malaysian TP legislation does not include a de minimis rule.
Taxpayers may opt for limited documentation if they fall below specific thresholds, such as gross income and total related party transactions.
Companies benefiting from tax incentives or facing losses are encouraged to prepare documentation if related party transactions exceed specified thresholds.
Determination of Arm’s Length Range
Data from the same basis period as the Year of Assessment (YA) should be used to assess the arm’s length range.
Malaysia’s arm’s length range extends from the 37.5 percentile to the 62.5 percentile.
The DGIR may adjust the midpoint of the arm’s length range for transactions falling outside this range.
Penalties for Non-compliance
Taxpayers failing to submit documentation within 14 days of the IRB’s request face penalties.
Penalties range from fines to imprisonment for non-compliance with TP documentation requirements.
Audits initiated prior to 1 January 2021 may subject taxpayers without TP documentation to penalties on additional tax payable.
Taxpayers with incomplete documentation face penalties on additional tax payable, and a surcharge applies to TP adjustments made post-January 2021 audits.
Advance Pricing Arrangement (APA)
Taxpayers engaging in cross-border transactions have the option to seek an Advance Pricing Arrangement (APA) under the ITA 1967, provided they meet certain criteria:
The taxpayer must be a company assessable and chargeable to tax under the ITA 1967, including Permanent Establishments (PEs).
The turnover value should exceed RM100 million.
The value of the proposed covered transaction must meet specific thresholds:
- For sales, it should exceed 50% of turnover.
- For purchases, it should exceed 50% of total purchases.
- For other transactions, the total value should exceed RM25 million.
If the counterparty is from a country with a double tax agreement with Malaysia, the taxpayer may apply for a bilateral or multilateral APA. Unilateral APAs are reserved for transactions with counterparties in jurisdictions without a double tax agreement.
Covered transactions must pertain to chargeable income rather than exempted income.
In cases involving financial assistance, a threshold of RM50 million applies.
Earnings Stripping Rules (ESR)
The Earnings Stripping Rules (ESR) target interest expenses exceeding RM500,000 within a basis period, related to financial assistance provided in controlled transactions, whether directly or indirectly, to an individual. The ESR guidelines specifically focus on cross-border controlled transactions.
These rules dictate that the maximum allowable interest deduction is 20% of the Tax-EBITDA (Earnings Before Income Tax, Depreciation and Amortisation) from each source of income attributed to a business. Any interest expenses surpassing this limit can be carried forward indefinitely for deduction against future income. However, in cases of substantial changes in a company’s shareholders, the carry forward of such interest expenses would be disallowed.
Country-by-Country Reporting (CbCR)
The Country-by-Country Reporting (CbCR) mandates, outlined in the Income Tax (Country-by-Country Reporting) Rules 2016 and Labuan Business Activity Tax (Country-by-Country Reporting) Regulations, require Malaysian multinational corporation (MNC) groups with total consolidated group revenues exceeding RM3 billion in the preceding financial year to compile and submit CbC Reports to the Inland Revenue Board (IRB) within 12 months following the close of each financial year.
Typically, Malaysian entities within foreign MNC groups are not obligated to prepare and file CbC Reports, as this responsibility falls upon the ultimate holding company in its tax-resident jurisdiction. However, Malaysian entities within such foreign MNC groups must inform the IRB if they function as the holding or surrogate holding company. Otherwise, they must notify the IRB of the entity tasked with preparing the CbC Report.
Non-compliance with CbC Rules may lead to penalties ranging from RM20,000 to RM100,000 or imprisonment for up to 6 months. For Labuan entities, failure to comply could result in fines up to RM1 million or imprisonment for up to 2 years, or both.
Global Minimum Tax (GMT)
As part of the OECD Inclusive Framework, over 140 jurisdictions have agreed upon a two-pillar solution to tackle the challenges posed by the digitalization of the economy. Pillar Two introduces a global minimum Effective Tax Rate (ETR), whereby multinational groups with consolidated revenue surpassing EUR 750 million will be subjected to a minimum ETR of 15% on income generated in low-tax jurisdictions.
In Budget 2024, the Government announced the forthcoming implementation of the Global Minimum Tax (GMT) in 2025. Draft legislation has been released, encompassing provisions of the Global Anti-Base Erosion (GloBE) rules, including the Qualified Domestic Top-up Tax (QDTT) rules, into Malaysian tax laws, namely the Income Tax Act 1967, Petroleum (Income Tax) Act 1967, and Labuan Business Activity Tax Act 1990. These draft provisions closely adhere to the OECD Model Rules, comprising:
The Multinational Top-up Tax under the Income Inclusion Rule and QDTT applied to qualifying multinational enterprises (MNEs) starting from January 1, 2025.
A substance-based income exclusion amount for all top-up taxes.
A minimum tax rate set at 15%.
Conclusion: 2024 Malaysian Corporate Income Tax Booklet
In conclusion, the 2024 Malaysian Corporate Income Tax Booklet provides a comprehensive overview of the tax landscape for corporations operating in Malaysia. Covering essential aspects such as residence status, income tax rates, collection of tax, tax deductions, profit distribution, and various regulatory frameworks like transfer pricing, APAs, ESR, CbCR, and the impending implementation of the Global Minimum Tax (GMT), this booklet serves as an invaluable resource for companies navigating the complexities of Malaysian tax laws.
By offering clarity on tax obligations, compliance requirements, and incentives available, the booklet facilitates informed decision-making and strategic planning for businesses in Malaysia. As the tax landscape continues to evolve, staying abreast of these regulations is crucial for companies to maintain compliance and optimize their tax positions in a dynamic and globally interconnected economy.
Frequently Asked Questions (FAQs)
What is the corporate income tax rate in Malaysia?
The corporate income tax rate in Malaysia is 24% for resident companies.
Are there any special tax rates for small businesses in Malaysia?
Yes, small resident companies with paid-up capital of RM2.5 million or less and gross business income not exceeding RM50 million are taxed at scale rates ranging from 15% to 24%.
How is tax collected from companies in Malaysia?
Companies typically furnish estimates of their tax payable to the Director General of Inland Revenue, with payment made in 12 equal monthly installments.
What expenses are tax-deductible for Malaysian companies?
Generally, expenses wholly and exclusively incurred in the production of gross income are tax-deductible, except for specific disallowed expenses such as private or capital expenditure.
Are dividends paid by Malaysian companies taxable?
No, dividends paid, credited, or distributed by Malaysian companies are tax-exempt in the hands of shareholders.
Can business losses be carried forward in Malaysia?
Yes, business losses can be carried forward for a maximum of 10 consecutive years to offset against future income.
What is group relief in Malaysia?
Group relief allows a company to surrender up to 70% of its adjusted loss to related companies for the first 3 consecutive years after completing its first 12-month basis period.
What are the transfer pricing regulations in Malaysia?
Malaysia follows the OECD Transfer Pricing Guidelines and requires taxpayers with cross-border transactions to prepare contemporaneous documentation to support arm’s length pricing.
What are the penalties for non-compliance with transfer pricing rules in Malaysia?
Failure to comply with transfer pricing documentation requirements may result in fines ranging from RM20,000 to RM100,000 per year of assessment.
What is Country-by-Country Reporting (CbCR) in Malaysia?
CbCR requires Malaysian multinational corporation groups with total consolidated group revenues exceeding RM3 billion to prepare and submit reports to the Inland Revenue Board within 12 months after the close of each financial year.
