What’s Deductible and What’s Not: An Ultimate Deep Dive into Malaysian Corporate Tax Expenses

Overview

Tax deductions are often underestimated by foreign investors who may not fully grasp the sophistication of Malaysia’s tax system. The Inland Revenue Board (IRB) has developed a detailed framework that rivals those of long-established economies, potentially catching investors off guard who were expecting a laxer environment.

It’s therefore crucial that international companies operating in Malaysia need to understand their specific deductions and compliance requirements. While some may find unexpected benefits, others could face surprising challenges. Given that choices made here can substantially impact financial performance (often in ways that are not immediately apparent), you should be as informed as possible and ideally have a trusted tax optimisation partner at your side.

This article is your essential guide to understanding Malaysia’s corporate tax landscape. We’ll cover what expenses are deductible, the differences between revenue and capital expenditures, various types of deductions, and what expenses are non-deductible. By the end of this article, you will have the knowledge needed to optimise your tax benefits and ensure compliance for smoother and, ultimately, more profitable operations in Malaysia.

Revenue Expenditure vs. Capital Expenditure

In Malaysia, it’s important to understand the difference between revenue expenditure and capital expenditure, as this directly affects how your expenses are treated for tax purposes and the overall tax liability of your business.

Revenue Expenditure Definition

Revenue expenditure refers to costs incurred in the ordinary course of your business operations. These expenses are usually short-term, recurring, and directly related to the daily functioning of your business. Because they are directly necessary for generating revenue, these costs can be fully deductible in the year they are incurred.

Examples of revenue expenditure include:

• Repairs and Maintenance: Costs for maintaining your equipment, buildings, and other assets to ensure smooth operation.
• Promotional Gifts: Items given to clients or potential customers as part of your marketing efforts.
• Office Supplies: Everyday small items such as stationery, printing materials, and other consumables necessary for office operations.

Capital Expenditure Definition

Capital expenditure, on the other hand, refers to costs incurred to acquire, improve, or extend the life of your fixed assets. These expenses are long-term investments in the business, providing benefits over many years. Unlike revenue expenditure, capital expenditure is not immediately deductible. Instead, these costs are generally written off over the life of the asset through depreciation.

Examples of capital expenditure include:

• Acquisition of Property: Purchasing land, buildings, or other real estate for business use.
• Renovation Costs: Expenses related to improving or altering existing properties to improve their functionality or value.
• Purchase of Equipment: Costs for buying machinery, vehicles, computers, and other important assets that are used in the business over an extended period of time.

Qualifying Assets for Capital Allowances

*Restrictions apply on maximum qualifying capital expenditure.

Key Differences: Revenue Expenditure vs Capital Expenditure

• Timing of Deduction: Revenue expenditures are fully deductible in the year they are incurred, while capital expenditures are depreciated over the asset’s useful life.
• Nature of Expense: Revenue expenditures are generally frequent and short-term, whereas capital expenditures are one-time, long-term investments.
• Impact on Financial Statements: Revenue expenditures are recorded as expenses in the profit and loss account, reducing your taxable income in the year they are incurred. Capital expenditures are recorded as assets on the balance sheet and expensed over time through depreciation.

Tax Deductible Expenses in Malaysia

To determine which expenses qualify as tax-deductible in Malaysia, business owners should refer to Section 33 of the Income Tax Act 1967. An expense must be “wholly and exclusively incurred in the production of income” to qualify as a corporate tax deduction. This rule ensures that only costs directly tied to generating business revenue are deductible.

The IRB assesses each expense based on industry standards and the specific context of the business. The nature and purpose of the expense are examined to confirm its necessity in income generation.

Examples of Allowable Expenses

Here is a comprehensive list of common allowable expenses in Malaysia:

Employment Costs:

• Salaries and Wages: Payments to employees for their services.
• Allowances: Additional payments such as housing, travel, or meal allowances.
• Contributions to EPF and SOCSO: Employer contributions to the Employees Provident Fund and Social Security Organisation.

Operational Costs:

• Business Insurance: Premiums for policies protecting the business against risks.
• Rent of Premises: Costs for renting office space, factories, or other operational facilities.
• Utilities: Payments for services like electricity, water, telephone, and internet.
• Advertisement to Promote Sales: Costs incurred to advertise and promote the business.
• Lease Rental on Plant and Machinery: Costs for leasing machinery and equipment used in the business.
• Renewal of License: Fees for renewing business-related licenses.

Maintenance and Supplies:

• Repair and Maintenance: Costs for maintaining and repairing business equipment and premises.
• Promotional Gifts and Samples: Items given to clients or potential customers as part of marketing efforts.
• Office Supplies: Everyday small items such as stationery and printing materials.
• Repainting of Premises: Costs associated with repainting business premises to maintain a professional appearance.

Travel and Training:

• Employee Travel Allowances: Expenses for business travel, including transportation, lodging, and meals.
• Travelling for Carrying on a Business: Costs related to business trips undertaken for operational purposes.
• Petrol or Mileage Claims by Employees: Reimbursements for employees’ travel expenses.
• Staff Training: Expenses incurred in training employees to improve their skills relevant to business operations.

Legal and Professional Services:

• Legal Fees for Recovery of Trade Debts: Costs incurred in recovering outstanding trade debts.
• Commission to Secure Sales: Payments made to agents or employees for securing sales.

Specific Trade Costs:

• Specific Trade Debt Written Off: Bad debts written off after meeting specific conditions.
• Entertainment to Employees: Costs incurred for events and activities intended to boost employee morale and engagement.

General, Special, and Double Tax Deductions in Malaysia

Understanding the different types of tax deductions available can hugely benefit your business by reducing taxable income and optimising financial performance. In Malaysia, deductions are broadly categorised to address various business expenses and incentivise specific activities.

General Deductions

General deductions apply to common expenses that most businesses incur. These are expenses directly related to running your business and generating income.

Examples of general deductions include:

• Travel Allowances: Expenses for business travel, including transportation, lodging, and meals.
• Legal Fees: Costs incurred for legal services directly related to business operations, such as trade debt recovery.

Special Deductions

• Donation to the disabled employee (OKU): Expenditure incurred in providing equipment for the disabled employee (OKU)

Double Deductions

Double deductions allow businesses to deduct certain expenses twice, effectively providing double the tax relief. This incentive is often used to promote activities with high economic or social value in Malaysia.

Examples of double deductions include:

• Research and Development (R&D) Expenditures: Costs associated with R&D activities under Sections 34A and 34B of the Income Tax Act​​.
• Sponsorship of Scholarships: Expenses for sponsoring students’ education.
• Employment of Disabled Employees: Wages for certified disabled employees qualify for double deductions.
• Provision of Child Care Centers: Expenses related to providing child care facilities for employees.
• Employment of Senior Citizens, Ex-Convicts, Parolees, Supervised Persons, and Ex-Drug Dependents: Wages for these groups are eligible for double deductions.

Expenses Explicitly Prohibited from Deduction in Malaysia

Understanding which tax deductions are available in Malaysia starts with Section 33 of the Income Tax Act 1967. An expense must be “wholly and exclusively incurred in the production of income” to qualify as a tax deduction. This rule ensures that only costs directly tied to generating business revenue are deductible.

The IRB assesses each expense based on industry standards and the specific context of the business. The nature and purpose of the expense are examined to confirm its necessity in income generation.

1. Expenses Not Incurred

• Provision of Expenses: General provisions for anticipated costs.
• General Provision for Bad Debt: Setting aside funds for potential bad debts, not specific or realised.
• Depreciation and Loss on Disposal of Capital Assets: These are non-deductible; instead, capital allowances are provided.
• Unrealised Foreign Exchange Loss: Losses due to exchange rate fluctuations that haven’t been realised through actual transactions.

2. Capital Expenditure

• Pre-commencement Expenses: Costs incurred before the business starts operations.
• Acquisition Costs: Including incidental costs of acquiring, improving, or altering capital assets.
• Costs of Protecting, Preserving, or Defending the Title of Capital Assets.
• Renovation or Construction Costs of Premises.
• Acquisition Repair: Initial repairs to make assets operational.
• First Painting on Premises.
• Licensing and Registration Expenses.
• Income Tax, Tax Penalties, and Costs of Tax Appeals.
• Fines and Penalties.
• Non-Approved Donations.
• Legal Fees for Bank Loan or Premises Acquisition.
• Entrance Fees to Clubs.
• Registration of Trademark.
• Fees for Designing Company Logo.

3. Prohibited Expenses

• Expenses Not Wholly and Exclusively Incurred in the Production of Income: Any expense not directly related to income generation.
• Domestic, Private, or Capital Expenditure: Costs that are personal in nature or related to home use. Capital expenditure can claim capital allowance instead.
• Lease Rentals for Passenger Cars Exceeding RM50,000 or RM100,000 Per Car: The latter amount applies to vehicles costing RM150,000 or less which haven’t been used prior to the rental.
• Employer’s Contributions to Unapproved Pension, Provident, or Saving Schemes.
• Employer’s Contributions to Approved Schemes Exceeding 19% of Employee’s Remuneration.
• Non-Approved Donations.
• 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: These are subject to Malaysian withholding tax if 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 Borne/Absorbed by a Person Who Is GST Registered or Liable to Be GST Registered.
• Entertainment to Potential Customers: Such expenses are generally not deductible.
• Entertainment to Existing Customers and Suppliers: Only 50% of these expenses are allowable.

4. Deductibility of Illegal Payments

As part of Malaysia’s commitment to maintaining a transparent and fair business environment, illegal payments such as bribes and kickbacks are strictly non-deductible. This includes any payments violating laws or public policy.

Understandably, fines and penalties for legal violations are also non-deductible. Engaging in these practices can result in severe penalties and damage to the company’s reputation as a good corporate citizen of Malaysia.

Where to Next With InCorp

We understand that Malaysia’s tax regulations can be (sometimes surprisingly) complex, especially for foreign investors. This article provides detailed insights, but fully optimising tax deductions requires deep local knowledge. Partnering with a local expert like InCorp is often the best approach for foreign investors who value on-the-ground experience in maximising tax deductions.

Our team has extensive experience to help you manage these challenges, ensuring your business maximises tax benefits and remains compliant. We strive to genuinely understand the difficulties you face and are here to offer tailored support. Contact InCorp for personalised advice and assistance, making your tax processes smoother and your business operations more efficient in Malaysia.