Corporate Income Tax Malaysia

Corporate Income Tax Malaysia(CIT) is a taxation mechanism levied on companies, brands, or organizations conducting business operations within a defined geographical region or country. This tax framework is underpinned by corporate legislation and is relevant to all enterprises established within the particular jurisdiction.

Corporate income tax is a critical aspect of running a business in Malaysia, and understanding the intricacies of this taxation system is essential for entrepreneurs and established companies alike.

Malaysia’s corporate income tax system is multifaceted, with varying rates depending on factors such as company size and type. Additionally, the nation’s territorial basis of taxation, tax residency rules, and tax incentives make it crucial for businesses to navigate these regulations effectively.

In this comprehensive guide, we will delve into the various facets of corporate income tax in Malaysia, providing insights into tax residency, deductible expenses, tax rates, and the importance of fulfilling tax obligations. Whether you’re a new startup or an established enterprise, grasping the fundamentals of Malaysia’s corporate income tax system is key to financial success.

With these complexities in mind, follow RS 36 Solutions to delve into the intricacies of Corporate Income Tax Malaysia to help you navigate this financial terrain effectively.

What is Corporate Income Tax in Malaysia?

Malaysia’s Corporate Income Tax System

The corporate income tax system in Malaysia directly applies to corporations and businesses conducting operations within the nation. This encompasses all revenue and income generated throughout business activities, including royalties, dividends, and premiums.

The Inland Revenue Board of Malaysia (IRBM), also known as Lembaga Hasil Dalam Negeri (LHDN) administers and periodically assesses the Malaysian taxation framework. Both resident and non-resident companies are subject to taxation in accordance with the Income Tax Act 1967, and tax rates can vary among different companies.

Territorial Basis of Taxation

Malaysia adheres to a territorial system of income taxation.

Under this system, any company or corporation, regardless of its residency status, is subject to taxation on income earned within or derived from Malaysia. Income originating from sources outside Malaysia and repatriated by a resident company is typically exempt from tax, with certain exceptions applicable to banking and insurance operations, as well as sea and air transport enterprises.

Effective from 1 July 2022, foreign-sourced income received in Malaysia by Malaysian residents, including companies and individuals, may be subject to taxation. For more detailed information, please consult the Malaysian Taxation of Foreign-Sourced Income guidelines or find more about tax planning services from RS36 Solutions.

Tax Residency

In Malaysia, a company is deemed to be tax resident for a given basis year if its management and control are exercised within Malaysia at any point during that basis year.

The pivotal factor for determining a company’s tax residence status in Malaysia hinges on the concept of “management and control.” This encompasses the authoritative body responsible for establishing the company’s operational policies.

The location where the directors convene to oversee the company’s operations and affairs is where management and control are considered to be exercised, irrespective of the company’s place of incorporation. How a company conducts its business is pivotal in determining where its management and control lie.

If, during the basis year of a specific year of assessment, at least one meeting of the board of directors takes place in Malaysia to address matters related to the management and control of the company, the company is regarded as a tax resident in Malaysia for that basis year, even if all other meetings occur outside of Malaysia.

Branches of foreign corporations operating in Malaysia are typically treated as non-residents in Malaysia unless it can be established that the management and control of their affairs, business operations, or any of their businesses is conducted within Malaysia.

Tax Residency of a Company and Basis of Taxation in Malaysia

In Malaysia, a company is classified as a tax resident if, at any point during the basis period of the year of assessment, its affairs are managed and controlled within Malaysia or if at least one meeting of the Board of Directors occurs in Malaysia.

Malaysia operates under a territorial tax system, subjecting both resident and non-resident companies to taxation on income originating from Malaysia.

Under this system, income derived from foreign sources is typically exempt from taxation, with specific exceptions applicable to companies engaged in business activities within the banking, insurance, air transport, or shipping sectors.

Determining Tax Residency

Tax residency for a company in Malaysia is established when the majority of its management and control activities take place within the borders of Malaysia. This determination hinges on the location where meetings related to the company’s management and control are conducted.

Year of Assessment and Corporate Tax Return Filing

What is the year of assessment in Malaysia?

The year of assessment in Malaysia spans from 1 January to 31 December.

For companies, the basis period corresponds to the financial year concluding within the year of assessment.

Malaysia follows a current year basis of assessment, where a company is taxed based on income earned in its financial year concluding during the calendar year that aligns with the specific assessment year.

When to Submit Corporate Income Tax Return in Malaysia

Companies operating in Malaysia are required to submit their corporate income tax returns within seven months of the financial year-end.

The tax payable must be remitted by the last day of the seventh month following the financial year-end.

Companies must provide estimates of their tax payable for a year of assessment no later than 30 days before the commencement of the basis period. The estimate of a company’s tax payable for a Year of Assessment (YA) should be furnished to the Director General of Inland Revenue (DGIR) within this timeframe. There are exceptions for the following scenarios:

Newly established companies with paid-up capital of RM 2.5 million or less are exempt from providing estimates of tax payable for two assessment years. Companies with paid-up capital of RM 2.5 million or less are exempted from this requirement for 2 to 3 YAs, beginning from the YA in which the company commences operations, subject to certain conditions.
Companies commencing operations in a year of assessment are not required to provide an estimate of tax payable or make instalment payments if the basis period for the year of assessment when the company starts operations is less than six months.

The estimate of tax payable is usually settled in 12 equal monthly instalments, commencing from the second month of the company’s basis period.

The remaining tax payable, as determined from the return submitted, must be paid by the due date for the submission of the return.

In general, tax for non-resident companies on all income except income from a business source is collected through withholding tax. According to the law, withholding tax is to be paid within one month of crediting or disbursing funds to the non-resident company.

Corporate Income Tax Deductible Expenses

Deductible expenses for corporate income tax are incurred solely and exclusively in the process of income generation. Generally, tax deductions are allowed for all expenditures and costs wholly and exclusively connected to gross income production.

Profit Distribution - Single Tier System

In the single tier system, the tax imposed on a company’s profits is considered a final tax, and dividends disbursed to shareholders are granted tax-exempt status. Essentially, under this system, the income tax payable on a company’s chargeable income serves as a definitive tax in Malaysia. Consequently, any dividends distributed by the company are exempt from taxation in the hands of the shareholder

Losses

Business losses are eligible for offset against income from all sources within the current year. Any remaining unutilized losses can be carried forward for a maximum period of 10 consecutive Years of Assessment (YAs) and employed against income from any business source. Unutilized losses accumulated until the Year of Assessment 2018 can be carried forward for 10 consecutive YAs, with any remaining balance being disregarded by Year of Assessment 2029.

In the case of a dormant company, unutilized losses will be disregarded if there is a substantial change in shareholders.

Group Relief

Under the group relief provision, a company has the option to relinquish a maximum of 70% of its adjusted loss for a Year of Assessment (YA) to one or more related companies. This option is available for the first three consecutive YAs after the completion of the initial 12-month basis period from the commencement of operations. Specific conditions must be met by both the claimant and surrendering companies, including:

Residency and incorporation in Malaysia.
Possession of paid-up capital in ordinary shares exceeding RM2.5 million at the beginning of the basis period.
Matching accounting periods of 12 months.
Meeting the criteria for being “related companies” as defined by the law, with a continuous “related” status throughout the relevant basis period and the preceding 12 months.

Companies currently benefiting from specific incentives such as pioneer status (PS), investment tax allowance (ITA), reinvestment allowance, etc., or holding unutilized ITA or unabsorbed pioneer losses after the expiration of ITA or PS incentives under the Promotion of Investments Act 1986, are not eligible for group relief.

Avoidance of Double Taxation in Malaysia

Malaysia has entered into more than 70 tax treaties with various regions across the globe, including the recent addition of the OCED Multilateral Instrument (MLI). The legal framework governing these arrangements is primarily anchored in the Income Tax Act 1967 and Customs Act of 1967, as well as the more recent Sales Tax Act 2018 and Service Tax Act 2018.

Companies operating in Malaysia may also be entitled to a foreign tax credit for the same profits, with the credit typically extending to the entire tax paid in a foreign jurisdiction (subject to treaty provisions), although in the absence of a treaty, the credit may be limited to 50% of the tax paid abroad. However, it’s essential to note that this credit cannot surpass the amount of Malaysian tax payable on the foreign income.

Transfer Pricing

Malaysia has implemented a Transfer Pricing mechanism in line with the provisions of Section 140A of the Income Tax Act 1967 and the Transfer Pricing Rules 2012. This mechanism adheres to the “arm’s length principle,” which applies to transactions involving related parties, as stipulated by the Inland Revenue Board (IRBM).

Legislation

Malaysia’s Transfer Pricing (TP) legislation adopts the arm’s length principle as advocated in the OECD Transfer Pricing Guidelines.
Under the Income Tax Act 1967 (ITA 1967), the Director General of Inland Revenue (DGIR) is empowered to make adjustments to controlled transactions of goods, services, or financial assistance based on the arm’s length principle or to disregard structures that are commercially irrational.
The definition of ‘control’ entails common shareholding of 20% or more, and operations dependent on the proprietary rights of the 20% shareholder or its affiliate, or the ability to influence decisions relating to the business activities of the company.
Various rules and guidelines have been issued by the Inland Revenue Board (IRB), including the Income Tax (Transfer Pricing) Rules 2023, Malaysian Transfer Pricing Guidelines 2012, Income Tax (Advance Pricing Arrangement) Rules 2012, and Advance Pricing Arrangement Guidelines 2012. The same definition of control is applied under the Labuan Business Activity Tax Act 1990 (LBATA).

Documentation Requirements

Taxpayers engaged in intercompany transactions are obligated to prepare Transfer Pricing (TP) documentation contemporaneously.
TP documentation must be in place before the tax return filing deadline and dated upon completion. It should be submitted within 14 days of a request from tax authorities.
The TP Rules establish specific documentation requirements, complemented by additional guidance in the Malaysian Guidelines. An index referencing items in the TP Rules is mandatory.
Malaysian TP documentation includes:

1. Multinational Enterprise (MNE) Group information, similar to an OECD master file, is part of Malaysian TP documentation. Failure to include this information or submission at a later date is considered non-compliance.
2. Local business information, encompassing standard elements of an OECD local file, and supporting documents referred to in preparing the TP analysis.
3. Prescriptive disclosure requirements for taxpayers with intragroup Cost Contribution Arrangements (CCA).

Thresholds

There is no de minimis rule in Malaysian TP legislation.
The TP Guidelines allow taxpayers to opt for limited documentation if they fall below certain thresholds (not applicable to permanent establishments):

1. Gross income exceeding RM25 million, and total related party transactions exceeding RM15 million.
2. For financial assistance, the threshold is RM50 million.

Companies not assessable to tax due to incentives or losses are encouraged to prepare documentation if their related party transactions exceed the specified thresholds.
The TP Guidelines do not apply to controlled transactions between companies both assessable and chargeable to tax in Malaysia, and where it can be proven that adjustments made under the TP Guidelines won’t alter the total tax payable by both companies.

Data for the same basis period as the Year of Assessment (YA) of the Malaysian taxpayer should be used to assess the arm’s length range.
Malaysia defines an arm’s length range, spanning from the 37.5th percentile to the 62.5th percentile.
The DGIR may make adjustments to the midpoint of the arm’s length range if intercompany transaction results fall outside this range.

Non-Compliance	Penalties
Submission of documentation beyond 14 days from IRB’s request	Breach of contemporaneous requirement under TP Rules
Failure to comply	Fines ranging from RM20,000 to RM100,000 per YA, imprisonment not exceeding six months, or both
Audits prior to 1 January 2021 without TP documentation	Penalties up to 50% of additional tax payable from TP adjustments
Lack of comprehensive documentation	30% penalty on additional tax payable, determined subjectively
Surcharge for audits commencing on or after 1 January 2021	Up to 5% of TP adjustment made by IRB, mutually exclusive from penalties

Tax Incentives in Malaysia

Malaysia offers a range of tax incentives to encourage economic growth and investment. These incentives cover various sectors and activities:

Pioneer Status and Investment Tax Allowance

Companies engaged in agricultural, hotel and tourism, manufacturing, or other industrial and commercial sectors that participate in a promoted activity or produce a promoted product are eligible for either pioneer status (PS) or investment tax allowance (ITA).

Pioneer Status: Companies granted PS enjoy a five-year exemption from corporate income tax on 70% of statutory income (SI). The remaining 30% is taxed at the standard rate.
Investment Tax Allowance: ITA provides a 60% allowance on qualifying capital expenditure (QCE) incurred within five years. This allowance is utilized against 70% of SI, with the remaining 30% taxed at the regular corporate income tax rate.

Reinvestment Allowance

Malaysian companies with 36 months or more of operation, and that have invested in capital expenditure to expand, automate, or modernize their existing manufacturing or agricultural business, are entitled to the reinvestment allowance incentive:

The allowance is granted for 15 years from the first year of claim.
It covers 60% of QCE incurred, which can be utilized against 70% of SI. The remaining 30% is taxed at the standard rate.
The Ministry of Finance may withdraw the allowance if the company fails to comply with taxation rules.

Approved Service Projects

Companies operating in sectors related to transportation, communication, utilities, and services subsectors approved by the Ministry of Finance can enjoy the following incentives:

Investment allowance, which covers 60% of QCE sustained within five years and can be used against 70% of SI, or
Income tax exemption of 70% of SI for a period of five years.
Buildings used solely for such projects may qualify for an industrial building allowance.

International Trading Companies

International trading companies are exempted for five years on the income equivalent to 20% of the total export revenue, up to a maximum of 70%. To qualify for this incentive, companies must meet the following conditions:

Incorporation in Malaysia with at least 60% Malaysian ownership
Minimum annual revenue of RM 10 million
Use of local services (banking, financing, and insurance) and infrastructure

Principal Hub

A principal hub is a local organization used as the base for regional and international business activities. These companies are engaged in management, control, and support of key functions like risk management, strategic decisions, finance, and human resources. Principal hubs can enjoy the following incentives:

Corporate income tax rates of 0% or 5% (for new companies) of SI for 5+5 years or 10% of SI (for existing companies) for five years.
No ownership conditions.
Flexible foreign exchange policies.
Customs duty exemption for raw materials, repackaging materials, and other finished produ

Corporate Tax Rates in Malaysia

Malaysia’s corporate income tax rates vary depending on the type of company and its chargeable income. Here’s an overview of the corporate tax rates in the country:

Standard Corporate Income Tax Rate: The standard corporate income tax rate in Malaysia is 24%.
Small and Medium Enterprises (SMEs): Resident companies are taxed at the rate of 24%. However, for SMEs with paid-up capital of RM2.5 million or less and gross business income not exceeding RM50 million, the following scale rates apply for YA 2023:
1. Chargeable income up to RM150,000: 15%
2. Chargeable income between RM150,001 and RM600,000: 17%
3. Chargeable income in excess of RM600,000: 24%

To qualify as an SME, a company must be incorporated in Malaysia with a paid-up capital of ordinary shares not exceeding RM2.5 million. It should not be owned by or own a company with paid-up capital exceeding RM2.5 million directly or indirectly. Additionally, its gross income from business should not exceed RM50 million.

Starting from YA 2024, an additional condition is imposed for the reduced tax rate. Not more than 20% of the paid-up capital in respect of ordinary shares or the total contribution of capital at the beginning of the basis period for a YA should be directly or indirectly owned or contributed by a company or individuals incorporated outside Malaysia or who are not Malaysian citizens.

Corporate Tax Rates

Company Type	Tax Calculation
Resident Company (Paid-up capital ≤ RM 2.5 million, Gross income ≤ RM 50 million)	17% on the first RM 600,000 24% on income in excess of RM 600,000
Resident Company (Not controlled by another company, Paid-up capital > RM 2.5 million)	24% on income exceeding RM 600,000
Non-Resident Company	24% for business income 10% for royalties 10% for rental of movable properties 10% for advice, assistance, or services rendered in Malaysia 15% for interest (interest paid to a non-resident by a bank or finance company in Malaysia is exempt from tax) Exempt for dividends (single-tier) 10% for other income

It’s important to note that if the recipient is a resident in a country that has a double tax treaty with Malaysia, the tax rates for specific sources of income may be reduced.

Conclusion:

Navigating the corporate income tax landscape in Malaysia is a requisite for businesses operating within its borders. The system, characterized by varying tax rates and intricate regulations, has a direct impact on a company’s financial health. By understanding the territorial basis of taxation, determining tax residency, and staying compliant with tax obligations, businesses can thrive and contribute to Malaysia’s dynamic economy.

Additionally, exploring the array of tax incentives, including pioneer status, investment tax allowances, and approved service projects, presents opportunities for cost savings and business growth.

As new companies emerge and established ones expand, this knowledge becomes invaluable. Malaysia’s corporate income tax system is a cornerstone of its economic landscape, and with the right understanding and strategic planning, businesses can navigate it successfully, ensuring financial stability and growth.