All companies operating in Malaysia must file tax returns regardless of their resident status. The Income Tax Act (1967) requires that tax returns be filed within 7 months of the end of a company’s financial year. A foreign owned Sdn Bhd will be needed to engage the services of a licensed tax agent who files the returns on its behalf according to the Year of Assessment. This information is submitted to the Inland Revenue Board.
Taxation for foreign owned Sdn Bhd
Starting the Year of Assessment 2016, resident Sdn Bhd, i.e. companies operating in Malaysia (resident status) are under the following corporate tax rates:
For a net profit up to RM 500,000- 19%
For every additional RM 1 in net profit – 24%
For non-resident Sdn Bhd companies, i.e. companies having more than 50% shareholding by foreigners, the effective rate is a flat rate of 24%.
What is the tax rate for SME Sdn Bhd Companies?
A company is considered small and medium enterprise classified has a paid-up share capital of less than RM 2.5 million at the beginning of the Year of Assessment. The chargeable tax is as follows for these companies:
For the first RM500, 000, chargeable Income tax rate is 19% in YA 2016 (18% in YA 2017)
Above RM500, 000 chargeable Income tax rate is 24% in YA 2016 (in Budget 2017)
There is a proposal for a reduced tax rate for increasing chargeable income in the YA 2017/2018.
If the Sdn Bhd financial year ran from 1 Jan 2016 to 31 December 2016, the tax rate is 19% for net profit (chargeable income) below RM 500,000. If the Sdn Bhd had the financial year as 1 Jan 2016 to 31 Jan 2017, the tax rate was 18% net profit (chargeable income) below RM 500,000.
An assessment of tax payable can also be altered by the declaration of investment holding. For example, in terms of selling land or company, property could be considered selling of capital assets instead of disposals of stock in trade. The chargeable income could be considerably higher in this case.
A company is allowed to revise the estimates of payable tax in the 6th and 9th months of the financial year. This is done with Form CP 204A. This is helpful in avoiding underestimation of tax which can attract penalties.
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What Happens When A Sdn Bhd Experiences A Loss?
Taxation regulations allow business losses to be offset against income in the current financial year.
Non-utilized losses can also be carried forward indefinitely and get offset when income is available. For a dormant company, loss offsetting is only allowed when the shareholders meet conditions of continuity.
The tax code also allows unabsorbed capital allowances be carried forward and get utilized against income indefinitely when the income is from the same business source. Again, for a dormant company, this is only allowed if shareholders meet the continuity conditions.
What About Companies In A Tax-Paying Position?
The tax code allows capital allowances be utilized to reduce chargeable income. If the arrangement
Contractor/director fees can be declared if this contributes to potential tax savings
Debt financing can be considered instead of equity financing to take advantage of the tax deductible interest expenses when monies are borrowed for business purposes.
Irrecoverable outstanding debts can be reviewed for write off
Bonus expenses are tax deductible. This is the annual bonus offered to the employees. However, the actual amounts must be stated and the employees must be aware of this bonus.
Omitted accrual accounts can be reviewed and included in the revised estimates of chargeable income.
What About A New Company?
A new company does not need to pay income tax before commencing trade. However, the requirements for taxation are:
Tax estimations have to be submitted within 3 months of the first sale. This is done on Form CP 204 submitted to the Inland Revenue Board (LHDN)
If the company has paid up capital of less than RM 2.5 million, Form CP204 should be submitted in the first year.
A tax installment is to be paid to the LHDN every month if there is the company’s financial forecasts predict a profit.
A new company has to file income tax Form C to the IRB within 7 months of the end of the financial year
All unpaid taxes have to be paid within 7 months of the financial year after correct calculation of the tax payable.
Who Can Submit Tax Returns?
While some companies make submissions to avoid paying tax agency fees, many opt to use tax agents to avoid the following costly mistakes:
Improperly filled tax return Form C
Overlooking submission of crucial documents like CP 204 and CP204A
Late filing taxes
Will Hiring A Tax Agent Be Beneficial?
Foreign-owned companies are advised to seek the services of a licensed tax agent. The tax agent takes on tax related duties like:
Submitting tax returns on behalf of the company. The company has to sign on the returns
Representing the company in any tax related communications with the IRB.
Representing the company in legal matters related to tax like tax appeals.
A tax agent will charge differently for dormant, semi-dormant and an active company. As of 2016, the charges were:
RM 1,000 for a dormant company
RM 1500-3000 for a semi-dormant company
RM 3000 and above for an active company
There are numerous benefits of engaging the services of a licensed tax agent in Malaysia:
This is very crucial when filing tax returns as underestimation can lead to penalties while overestimation loses the company money. Wrongful classification of income and expenses can also have a big change in the tax liability of the company.
Malaysia has various tax benefits and incentives. Using a tax agent can make the company enjoy these benefits and have a lower tax burden.
For a foreign company, navigating the Malaysian bureaucracy can be a challenge. Engaging a tax agent clears this headache and leaves the directors to concentrate on business.
Simple oversight can be costly. Having a tax agent ensures that all documents are filed properly and that all information is accurate.