Malaysia has a territorial system of taxation. This means a company is considered resident in the country by the Inland Revenue Board of Malaysia (IRBM) if it is managed and controlled from inside the country, and is taxed on all its income derived in Malaysia including profits from a business, dividends, interest, rents, royalties, premiums and other earnings. Note though that all companies in Malaysia adopt the single-tier system, under which dividends paid by it are not taxed. Foreign-sourced income is generally exempt unless the company’s business activities are either in shipping, insurance, air transport, or banking.
The corporate tax rate in Malaysia
The standard rate of corporate taxation in Malaysia is 24%.
But for SMEs (or group with paid-up capital RM2.5 million or less), the rate is reduced to 17% (reduced from 18%) from year-of-assessment (YA) 2019, on the first RM500,000, with the balance being taxed at 24%.
Other taxes on companies in Malaysia
Among other types of taxes, while Malaysia doesn’t levy a withholding tax (WT) on dividends, a 15% WT is applied to interest paid to a non-resident, unless reduced by a tax treaty. This rate is 10% when applied to royalties, technical and non-technical service fees.
The country doesn’t levy any capital gains tax on investments or capital assets. But do note that Malaysia has a “Real Property Gains Tax” of 30%, which is levied on gains arising from the sale of real property including land, buildings, or shares of a real estate company, within three years of acquisition.
It also has a Group Relief Scheme, available for all resident companies, subject to certain eligibility conditions. Under this, a company can claim up to 70 per cent of its adjusted (current year) loss to one or more related companies in the Group. Additionally, adjusted business losses can be off-set against income from all sources in the current taxation year.
There is no capital duty payable; employee’s income is taxed by the employer under a pay-as-you-earn scheme and remitted to IRBM; and a real property tax is levied on “quit” rents by different Malaysian states at varying rates.
Moreover, the country imposes a stamp duty at rates between 1 to 4% of the value of property transfer, and at 0.3% on share transactions.
Social security contributions in Malaysia
Malaysia also has mandatory social security contributions to the Social Security Organization (SOCSO), Employment Insurance System (EIS) and the Employees Provident Fund (EPF) by both employees and employers.
Sales and services tax in Malaysia
Malaysia also levies sales tax on goods manufactured or imported, with certain exemptions like live animals, antibiotics, unprocessed food and vegetables etc. (standard rates are 5%, 10%); and service tax (6%) on domestic air travel, telecommunication, accommodation, food and beverages, health and wellness centres, golf clubs and certain other professional services. While the threshold for registering for sales and service tax for restaurants is RM1 million per annum of taxable goods and services, it is half of that for other sectors. This tax must be paid within one month after the end of the taxable period.
Avoidance of double taxation in Malaysia
Malaysia is also a signatory to over 70 tax treaties with other regions of the world, latest being the OCED Multilateral Instrument (MLI). The source of law laws are the Income Tax Act and Customs Act of 1967, and last year’s Sales Tax Act and Service Tax Act.
Companies are also eligible for the foreign tax credit on the same profits (if there’s no treaty then limited to 50% of the tax paid in a foreign jurisdiction). But this credit can’t exceed the value of the Malaysian tax payable on the foreign income.
Transfer pricing mechanism in Malaysia
The country also has a Transfer Pricing mechanism under the provisions of Section 140A of the Income Tax Act 1967 and the Transfer Pricing Rules 2012. It is based “on the arm’s length principle to be applied on transactions between associated persons”, as notified by the IRBM.
Filing of corporate tax in Malaysia
Malaysia operates a self-assessment regime, and a tax return must be filed within seven months of the company’s fiscal year end (FYE), which is generally the accounting year. Companies can also pay advance corporate tax in 12 monthly installments, but consolidated returns are not permitted. So every company is required to file a separate tax return. But 70% of a company’s adjusted losses maybe off-setted against profits of a related entity, with certain restrictions and conditions.
Companies face penalties if they don’t comply with the tax laws, and can request advance rulings on the tax treatment of specific transactions.
Tax incentives for companies in Malaysia
Among the existing tax incentives, the country gives tax holidays of up to 10 years to pioneer status firms, investment tax allowance of between 60% to 100%, reinvestment allowances of 60% on capital investments, as well as capital reinvestment allowances. Sectors benefiting from these incentives include healthcare, Islamic finance, venture capital, tourism, energy conservation, bio-tech, IT, manufacturing, hospitality, and environment protection.
Among the new incentives proposed, the Government has proposed automation equipment allowances and accelerated capital allowances in IOT, big data, robotics, and other technology drivers.
How can we help
Although Malaysia is not a low-tax jurisdiction, the effective tax rates for companies may be much lower than 24% if they take advantage of the pioneer status (PS) scheme, reinvestment allowance, or investment tax allowance. An example can be a manufacturing firm with a PS status paying as little as just over 7% tax, with only 30% of its profits being taxable.
This is where we can help, as InCorp Global is undoubtedly the leading corporate services provider in Singapore and South-east Asia, with over two decades of domain expertise of providing such services as a group.
Overall, key taxation services we provide in Malaysia include: (though it is not an exhaustive list, so please enquire if you don’t find what you desire below)