Types of Corporate Income Tax in Malaysia

In the realm of taxation in Malaysia, understanding the intricacies of various tax systems and obligations is paramount for individuals and businesses alike. From corporate taxes to specific levies on different industries, the Malaysian tax landscape presents a diverse array of regulations and requirements.

This comprehensive guide navigates through the labyrinth of tax structures in Malaysia, shedding light on essential concepts such as territorial taxation, corporate tax rates, and types of taxes applicable to registered companies. Whether delving into the nuances of withholding tax or unraveling the complexities of real property gains tax, this guide serves as a beacon for taxpayers seeking clarity and guidance within Malaysia’s tax framework.

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.

Basis of Taxation in Malaysia

In Malaysia, the basis of taxation revolves around the adoption of a territorial tax system. This means that both resident and non-resident companies are subject to taxation on incomes derived specifically from Malaysia.

Types of Companies in Malaysia

In Malaysia, there are several types of companies, including:

Taxation Structure

Unlike some other countries, Malaysia does not impose different tax systems based on the type of company registered. There are no separate taxes for sole proprietorships, partnerships, investment holdings, or enterprises.

Any of the mentioned company types, if they conduct business and derive income within Malaysia, are subject to taxation at rates ranging from 17% to 24%. However, income sourced from outside Malaysia is typically exempted from taxation, unless the company operates in specific industries such as banking, insurance, sea transportation, or air transportation.

Residency Determination

A company, whether a private limited company, public limited company, limited liability partnership, etc., is considered a resident in Malaysia if its management and control, or board of directors meetings, are exercised in Malaysia at any time during the basis period for the year of assessment.

Malaysia’s Territorial Tax System

Malaysia adopts a territorial tax system, wherein any income accrued within its borders is subject to corporate taxation. In simple terms, income earned or derived within Malaysia is liable to taxation.

Taxation of Resident and Non-Resident Organizations

Both resident and non-resident organizations conducting business and generating taxable income in Malaysia are taxed on income sourced from Malaysia.

Global Income Taxation for Specific Industries

Resident organizations engaged in specific industries such as air transport, sea transport, insurance, and banking are subject to taxation on their global income. However, exemptions are available for resident banks, insurance companies, and Takaful companies, subject to specified conditions.

Exemptions for Income Derived from Outside Malaysia

Companies, including private limited companies, public limited companies, limited liability partnerships, and other types of business entities, that conduct business and derive income from outside Malaysia but receive funds within Malaysia are typically exempted from taxation. Additionally, Malaysia’s signing of double tax agreements with multiple countries allows companies and individuals to avoid double taxation.

Note: Industries such as banking, insurance, sea transportation, or air transportation are not exempted from taxation.

Malaysia Corporate Tax Rate

The maximum corporate income tax rate imposed by the Inland Revenue Board of Malaysia is 24%.

Tax Rates Based on Company Type

Type of Company	Tax Rates
Resident company with a paid-up capital of RM 2.5 million or less, and gross income from business of not more than RM 50 million	– 17% on the first RM 600,000<br>- 24% in excess of RM 600,000
Resident company that does not control, directly or indirectly, another company that has paid-up capital of more than RM 2.5 million	– 17% on the first RM 600,000<br>- 24% in excess of RM 600,000
Resident company that is not controlled, directly or indirectly, by another company that has paid-up capital of more than RM 2.5 million	– 17% on the first RM 600,000<br>- 24% in excess of RM 600,000
Non-resident company	Flat rate 24%

Tax Obligations for Companies Registered in Malaysia

For business owners in Malaysia, comprehending the various tax obligations is crucial to facilitate a seamless corporate tax filing process.

1. Corporate Taxation

Corporate tax in Malaysia, regulated by the Inland Revenue Board Malaysia (LHDN) under the Income Tax Act 1967, is applicable to all companies registered in Malaysia, irrespective of their type. According to the law, all incomes derived from Malaysia are subject to taxation.

2. Withholding Tax

Withholding tax applies to companies obligated to pay non-resident individuals or companies for services rendered, where a certain percentage of the payment is deducted and remitted as income tax to the Inland Revenue Board Malaysia (LHDN). Different payment types attract varying tax rates.

Malaysia’s Withholding Tax Rates

Payment Type	Rate
Contract payment for services done in Malaysia	10%, 3%
Interest	15%
Interest paid by approved financial institutions	5%
Royalty	10%
Special classes of income: Technical fees, payment for services, or payment for use of moveable property	10%
Income of non-resident public entertainers	15%
Real Estate Investment Trust	10%, 25%
Family Fund / Takaful Family Fund / Dana Am	8%, 25%
Others	10%

Employers have a responsibility to withhold a portion of an employee’s total monthly remuneration for Monthly Tax Deduction (MTD). This deduction is reflected in the employee’s payslips, inclusive of EPF, SOCSO, and EIS.

Employees’ Provident Fund (EPF)

The Malaysian EPF is compulsory for all Malaysian citizens and permanent residents working in Malaysia. Contributions are voluntary for expatriates and foreign workers.

Contribution by	Employer	Employee
Malaysian citizens and permanent residents (mandatory)	12.00%	11.00%
Expatriates and foreign workers (voluntary)	MYR 5 per person	11.00%
Age 60 and above (income > MYR 5,000)	4.0% – Malaysian, 6.0% – Permanent resident	0% – Malaysian, 5.5% – Permanent resident
Age 60 and above (income ≤ MYR 5,000)	4.0% – Malaysian, 6.5% – Permanent resident	–

Social Security Organisation (SOCSO)

Malaysia’s Social Security Organisation (SOCSO) administers the Employment Injury Scheme (EIS) and the Invalidity Scheme (IS), covering employees with monthly wages below MYR 5,000. Monthly contributions are mandatory for employers, with varying rates based on the employee’s status and wages.

3. Stamp Duty

Stamp duty is required when entities engage in services such as drafting legal, commercial, and financial documents, including partnership agreements or mortgage agreements.

In Malaysia, stamp duty is levied on chargeable instruments, with the buyer or transferee being responsible for payment. Below are examples of transactions subject to stamp duty:

Transaction Type	Value Chargeable	Stamp Duty Rate (%)
Sale/transfer of properties (excluding stock, shares, or marketable securities)	Consideration paid or market value, whichever is higher	1 to 4
Sale/transfer of stock, shares, or marketable securities	Consideration paid or market value, whichever is higher	0.1 to 0.3
Service/loan agreements	Value of services/loans	0.5

4. Import Duties

Import duties are imposed on goods brought into the country that are subject to such duties. These duties are typically levied either on an ad valorem basis or on a specific basis. Ad valorem rates for import duties range from 2% to 60%. Certain goods, such as raw materials, machinery, essential foodstuffs, and pharmaceutical products, are usually either non-dutiable or subject to lower duty rates.

5. Excise Duties

Excise duties are imposed on a specific range of goods manufactured and imported into Malaysia. These goods subject to excise duty include beer, stout, cider, perry, rice wine, mead, un-denatured ethyl alcohol, brandy, whisky, rum, tafia, gin, cigarettes containing tobacco, motor vehicles, motorcycles, playing cards, and mahjong tiles.

Excise duty rates vary, ranging from a composite rate of MYR 1.10 per litre and 15% of the value for certain types of spirituous beverages, to as much as 105% of the value of motorcars (depending on engine capacity).

6. Sales & Service Tax (SST)

Sales & Service Tax (SST) is a single-stage tax applicable to taxable goods manufactured in or imported into Malaysia, charged when these goods are sold, disposed of, or first used, with a total sale value exceeding MYR 500,000 within 12 months. Certain exemptions apply to specific manufactured or imported goods.

SST is also levied on taxable services provided in Malaysia, such as accommodations, gaming, telecommunications, etc., by a taxable person with a total value exceeding MYR 500,000 within 12 months. However, in the F&B industry, the threshold is a total value exceeding MYR 1,500,000 within 12 months. Credit card services are charged at different rates without any threshold.

Malaysia’s SST Rates

Type of Taxes	Rate
Sales Tax	5% or 10% or specific rate
Service Tax	6%

Sales Tax

Sales tax is applied to taxable goods manufactured locally by a registered manufacturer or imported by any person. It’s generally an ad valorem tax, with specific rates applied only to certain classes of petroleum. The ad valorem rates range from 5% to 10% based on the class of goods.

Service Tax

Service tax is imposed on taxable services provided in Malaysia by a registered person conducting business, with a fixed rate of 6%.

7. Real Property Gains Tax (RPGT)

Real Property Gains Tax (RPGT) is applicable when a company disposes of chargeable assets such as houses, commercial buildings, farms, vacant land, or shares in real property companies, resulting in a profit from the disposal.

The chargeable gain is calculated as the disposal price minus the acquisition price. The tax rate varies based on the holding period of the chargeable assets.

RPGT is levied on gains from disposals of real property, defined as:

Land in Malaysia, including any interest, option, or other right in or over such land, or
Shares in a real property company (RPC), meeting certain criteria.

The following RPGT rates apply to companies:

Disposal Period (after the year of acquisition)	RPGT rate (%)
Incorporated in Malaysia	Incorporated outside Malaysia
Within 3 years	30%
The 4th year	20%
The 5th year	15%
The 6th year and above	10%

Budget 2024 introduces a capital gains tax (CGT) effective from 1 January 2024 (refer to the Income determination section for details). Once CGT is implemented, RPGT will not apply to gains from the disposal of shares in an RPC subject to CGT.

8. Payroll Taxes

Employers are mandated to deduct the designated amount of tax from employees’ salaries each month under the Monthly Tax Deduction scheme. These deductions must be remitted to the tax authorities no later than the 15th day of each calendar month.

9. Human Resource Development Levy

Employers across all industry sectors employing ten or more workers are obligated to contribute to the Human Resource Development Fund (HRDF). This levy amounts to 1% of employees’ monthly wages and must be paid on a monthly basis.

10. Windfall Profit Levy

A levy is imposed on crude palm oil and crude palm kernel oil when the price exceeds MYR 3,000 per ton in Peninsula Malaysia and MYR 3,500 per ton in the states of Sabah and Sarawak.

11. Contract Levy

The Construction Industry Development Board imposes a levy of 0.125% on contract works with a contract sum exceeding MYR 500,000, applicable to every registered contractor.

Taxation of Sole Proprietorships and Partnerships in Malaysia

Sole proprietorships and partnerships in Malaysia are typically not subject to corporate tax. Instead, they are usually taxed based on a progressive scale applied to Malaysian income tax, ranging from 2% to 26%.

As a result, business owners and partners often include all their business incomes in their personal income tax filings. There is usually no separate filing required for the income they receive from their business endeavors.

Investment Holding Company (IHC) Tax in Malaysia

On December 12, 2020, the Inland Revenue Board of Malaysia (LHDN) issued Practice Note: 4/2020, providing clarity on the tax rate for investment holding companies, revised from 17% to 24%.

Investment holding companies can benefit from a tax rebate of MYR 20,000 for the next three years, and the applicable tax rate is reduced to 17% if they meet specific terms and conditions.

However, an investment holding company is not eligible for the 17% rate if:

It lacks a business source (not listed in Bursa Malaysia).
It has ceased business operations but still receives income from rental or interest gains.

Income Tax Deductible Expenses in Malaysia

Expanding business operations in Malaysia may seem daunting due to the perceived high tax rates and resulting tax liabilities. However, Malaysia offers numerous tax incentives and reliefs to help residents and non-residents reduce their tax burdens.

Corporate income tax deductions are permitted for expenses that are wholly and exclusively incurred in the production of income. These deductible expenses include:

Salaries and wages
Business insurance
Advertisement and promotion expenses
Employee travel expenses
Entertainment expenses
Repair and maintenance costs
Lease rental on plants and machinery
Recruitment expenses
Incorporation expenses

However, certain expenses are non-deductible, such as:

Fines and penalties
Trademark registration fees
Non-approved donations
Domestic, private, or capital expenditures
Employee contributions to unapproved pensions, provident, or savings schemes
Interest, royalties, contract payments, technical fees, rental of movable property, and payments to non-resident public entertainers or other payments to non-residents subject to withholding tax, where the tax was not paid

Conclusion: Types of Corporate Income Tax in Malaysia

In conclusion, Malaysia’s tax regime is multifaceted, accommodating various industries and entities while ensuring compliance and fairness in revenue collection. From the imposition of corporate taxes to the levying of excise duties and service taxes, the Malaysian tax system reflects a balance between stimulating economic growth and maintaining fiscal discipline.

As taxpayers navigate through the diverse tax obligations, it is imperative to remain informed and abreast of regulatory updates and changes. With proper understanding and adherence to tax laws, individuals and businesses can optimize their financial strategies while contributing to Malaysia’s socioeconomic development.