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What is the Tax Code for Companies in Malaysia?

What is the Tax Code for Companies in Malaysia

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.

Corporate Tax

  • 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.

Other Taxes Applicable To Companies In Malaysia

  • Capital duty is levied between RM 1,000-70,000
  • PAYE tax is withheld by an employer for forwarding to the IRB
  • Real property taxes differ in different regional authorities as some levy quit rates.
  • Social security by every company hiring Malaysian workers. The employer contributes 1.75% of the employee’s basic salary. There is also the Employees Provident Fund for which the employer contributes 11-13% of the employee’s basic salary.
  • Stamp duty is levied at 1-3% of the value of the property being transferred. There is also a 0.3% levy on the value of shares being transferred.

Tax Compliance

This is strictly enforced in Malaysia with companies expected to follow some basic principles.

  • Tax returns must be filed each financial year. The returns should be made by the company secretary within 7 months of the end of the financial year. Advance corporate tax is to be paid in 12 monthly installments in the case that the company estimates a profit.
  • Consolidated returns cannot be done even for group companies. Each company must file separate returns. However, in some cases, companies are allowed to have up to 70% of their losses offset by profit from a related entity.
  • A company can request for a ruling on a specific transaction regarding tax issues on that tax transaction.

Goods And Services Tax

Companies with a turnover of RM 500, 000 in Malaysia are required to have a Goods and Services Tax number.  The Goods and Services tax applies for some goods and services at a flat rate of 6%. The GST must be submitted within 1 month of the fiscal year if the turnover was RM 5 million and more. If the turnover was less than this, the GST must be paid within 3 months of the taxable period.

Hiring A Tax Agent

Many companies in Malaysia opt to hire a licensed tax agent to deal with tax related matter. Generally, the tax agent takes on the duties of:

  • Ensuring tax returns of the company are submitted at the required time after the company secretary has verified and signed.
  • Acting on behalf of the company in any tax related communications with the IRB.
  • Acting on behalf of the company in legal matters related to tax like tax appeals.

The benefits of hiring a tax agent include but are not limited to:

  • Accuracy

A tax agent ensures that the correct returns are filed without overestimation or underestimation of the taxable income which 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.

  • Tax Benefits

The tax agent advises the company on taking advantage of the various tax incentives offered so that the company has a lower tax burden.

  • Experience

The tax agent helps negotiate the tax bureaucracy in at national and regional levels.

  • Legal Troubles

The tax agent helps the company steer clear of legal troubles by ensuring all documents are filed properly and that all information is accurate.