Every company operating in Malaysia must file tax returns every year. This is for resident companies i.e. those that have their management and control based in Malaysia, and non-resident companies i.e. companies that have more than 50% in foreign shareholding. The Inland Revenue Board is the tax agency to which these returns are made.
- Effective rates
For Small and Medium Enterprises the rate is 19% for the first RM 500,000 and 24% for any amount beyond that was effective 2016. SMEs in Malaysia are defined as companies with a paid-up capital of less than RM 2.5 million. This company should not be part of a company group that has a company with a paid up capital of this amount.
The standard tax rate is 24% for other companies.
- Labuan companies or representative offices are allowed to choose a minimum tax rate of 3% on any amount of profits or pay a flat rate of RM 20,000 per financial year. All income derived from doing business in Malaysia is taxed. Income from foreign sources is not taxed unless the company is in banking, insurance, shipping and air transport.
- Taxable income is calculated as all income that is accrued from doing business in Malaysia which includes gains and profits, rents, interests, dividends, premiums, royalties and any other income. Companies are required to adopt the Single-Tier System (STS) and companies that do so are exempt from tax on dividends.
- Capital gains are tax exempt except when the gains are realized through the sale of real property, or when a shareholder sells shares in a real property company at a profit. The tax rate is 30% for selling in less than 3 years after the acquisition, 20% in the 4th year, 15% in the 5th year and 5% in the 6th year and beyond.
- Losses are permitted to be carried forward indefinitely and offset with income from the same company.
- Foreign tax credit
If the company has paid a foreign tax, the same tax may be credited against the Malaysian tax on the same profit. Note that,this is limited to 50% if the tax jurisdiction has a tax treaty with Malaysia. This tax credit is only applicable to foreign income. Domestic dividends are also tax exempt.
- Tax for holding companies
An investment Holding Company is defined as one that is involved in holding investments and derives a minimum of 80% of its gross income from such investments. Such a company is only permitted expenses that are tax deductible.
- Tax incentives
Industries that enjoy tax incentives include IT, Islamic Finance, biotechnology, environmental protection and energy conservation. Pioneer status investments enjoy up to 10 years’ tax holiday. This can be 60-100% investment tax allowance, accelerated capital allowance, and reinvestment allowance up to 60% of invested capital.
- Withholding tax
There is no withholding tax on dividends. Interest paid to a non-resident is subject to 15% withholding tax unless there is a tax treaty. However, interest paid by a Malaysian bank to a non-resident is exempt unless that interest forms part of income accruing at the non-resident’s place of business in Malaysia, or is part of networking funds.
Royalties to a non-resident are subject to 10% withholding tax unless there is a tax treaty with the non-resident’s tax jurisdiction.
Technical services payments to non-residents for work done in Malaysia are subject to 10% withholding tax. This rate also applies to payments of rental of movable property or installation fees paid to non-residents unless there is a tax treaty in place.