Types of Taxes for Companies in Malaysia

Malaysia is one of the countries that implements a territorial tax system. In layman’s terms, any income accrued in or derived within Malaysia is liable to corporate tax.

Any resident or non-resident organisations doing business and generating taxable income in Malaysia will be taxed on income from Malaysia.

For resident organisations carrying out the business of air transport, sea transport, insurance and banking will be taxable on their global income. That said, there are exemptions for resident banks, insurance companies and Takaful companies but is subject to specified conditions.

However, any Company, be it a private limited Company, Public Limited Company, Limited Liability Partnership, or any other type of business entity, that runs a business and derives income from outside Malaysia but receives the funds within Malaysia is normally exempted from tax. The more exciting part is that Malaysia has signed double tax agreements with multiple countries, thus companies and individuals can avoid from being double taxed.

Malaysia Corporate Tax Rate

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

Basis of Taxation in Malaysia

Malaysia is adopting a territorial tax system. All resident and non-resident Companies are tax payable on incomes from Malaysia.

In general, there are at least 5 different types of Companies available in Malaysia which are:

• Sole proprietor
• Partnership
• Private Limited Company (Sdn. Bhd.)
• Public Limited Company (Berhad)
• Limited Liability Partnership (LLP)

Some countries may impose different types of tax systems based on each type of Companies registered in the country. However, such a case is not what Malaysia is practising:

• Sole proprietor tax
• Investment holding tax
• Partnership tax
• Enterprise tax

For any of the mentioned companies above, if they run their business and income is derived from Malaysia, then it is taxable between the rate of 17% to 24 %. As for foreign-sourced income, it is exempted from taxation unless the Company runs a business relating to banking, insurance, sea transportation or air transportation industries.

A Company, be it private limited Company, Public Limited Company, Limited Liability Partnership etc. is considered to be a resident in Malaysia if the management and control of its affairs or Board of Directors meeting is exercised once in Malaysia at any time during the basis period for the year assessment.

Some countries may impose different types of tax systems based on each type of Companies registered in the country. However, such a case is not what Malaysia is practising. There is no such a thing called:

Types of Tax Liable by Companies Registered in Malaysia

To ensure a smooth corporate tax filing process, it is important for business owners to understand each tax requirement that exists in Malaysia.

Corporate Tax

A corporate tax is imposed by Inland Revenue Board Malaysia (LHDN) and is governed by the Income Tax Act 1967. As mentioned, this applies to all Malaysian registered Companies regardless the type of Company they are running. All incomes derived from Malaysia are deem taxable under the law.

Withholding Tax

This type of tax is only for Companies who have the obligation to pay non-resident (Company or Individual) for the services engaged where a certain percentage of payment is deducted and paid as their income tax to LHDN. Each payment type will have different tax rates.

Malaysia tax rates for withholding tax are as follows:

Basically, it is part of every employer’s responsibility to retain a percentage of the employee’s total monthly remuneration and pay off monthly tax deductions (MTD). This deduction will be made visible in the employee’s payslips inclusive of EPF, SOCSO and EIS.

Stamp Duty

A stamp duty is required when an entity engages in services such as drafting legal documentation, and commercial as well as financial documents. For example, a partnership agreement or mortgage agreement.

Sales & Service Tax (SST)

This type of tax is basically a single-stage tax charged on taxable goods manufactured in or imported into Malaysia by a taxable person and is due when the goods are sold, disposed of, or first used with a total sale value of more than MYR 500,000 within 12 months. There are exemptions available for certain goods manufactured or imported.

SST is charged on taxable services available in Malaysia such as accommodations, gaming, telecommunications, services etc. provided by a taxable person with total value more than MYR 500,000 within 12 months. However, in the F&B industry, the threshold is a total value of more than MYR 1,500,000 within 12 months. Credit card services have no threshold and are charged using different rates.

Malaysia tax rates for SST are down below:

Real Property Gains Tax (RPGT)

Real property gains tax (RPGT) is only applicable if the Company disposes of chargeable assets such as house, commercial buildings, farms, vacant land as well as shares in real property companies, gaining profit from the disposal.

The calculation of chargeable gain is (disposal price – acquisition price). Tax rate differs according to holding period of chargeable assets.

After all the Malaysia tax rates of RPGT down below:

Sole Proprietor and Partnership Tax in Malaysia

Normally, sole proprietors and partnerships are not charged on a corporate tax basis. They commonly will charge on a gradual scale to apply to Malaysia income tax from 2% to 26%.

Hence, it is common for business owners and partners to file everything in their income tax filing. Although, there will not be a separate filing for the income they received from their business.

Investment Holding Company (IHC) Tax in Malaysia

Recently on 12 December 2020, LHDN released Practice Note: 4/2020 to clarify the investment holding company tax rate from 17% to 24%.

Investment holding companies can enjoy tax rebates amounting to MYR 20,000 for the next 3 years and also the tax rate applied is only 17% if they meet the terms and conditions.

Accordingly, the investment holding Company will not enjoy the 17% rate if:

1. No business source in investment holding Company (not listed in Bursa Malaysia)
2. Ceased business operation but receiving income from rental or interest gain

Income Tax Deductible Expenses in Malaysia

However, some may feel that by expanding their business in Malaysia, they are liable to a high tax rate equal to the high tax payable. Also, Malaysia offers a lot of tax incentives and reliefs that allow a resident and non-resident to reduce their tax payable.

A corporate income tax deduction will allow for expenses wholly and exclusively incurred in the production of income. Expenses include:

• Salary and wages
• Business Insurance
• Advertisement and promotion expenses
• Employee travelling expenses
• Entertainment expenses
• Repair and maintenance
• Lease rental on plants and machinery
• Recruitment expenses
• Incorporation expenses

The non-deductible expenses are:

• Fines and penalties
• Registration of trademarks
• Non-approved donations
• Domestic, private, or capital expenditure
• Employee’s contribution to unapproved pensions, provident or saving schemes
• Interest, royalty, contract payment, technical fees, rental of movable property, payment to a non-resident public entertainer or other payments made to non-residents are subject to withholding tax, but the tax was not paid