Corporate tax in Malaysia

Summary

Corporate Income Tax Rate (%) 24 (a)
Real Property Gains Tax Rate (%) 30 (b)
Branch Tax Rate (%) 25 (a)
Withholding Tax (%)
Dividends 0
Interest 15 (c) (d)
Royalties from Patents, Know-how, etc. 10 (c)
Distributions by Real Estate
Investment Trusts and Property Trust Funds
10 / 25 (e)
Payments to Nonresident Contractors 13 (f)
Payments for Specified Services and
Use of Movable Property
10 (g)
Other Income 10 (h)
Branch Remittance Tax 0
Net Operating Losses (Years)
Carryback 0
Carryforward Unlimited (.i)

a) Effective from the 2016 year of assessment, the main rate of corporate tax decreases by 1% from 25% to 24%, while the rates for resident companies that have paid-up capital in respect of ordinary shares of MYR2,500,000 or less and that satisfy specified conditions are also reduced by one percentage point; that is, the rates are 19% on the first MYR500,000 of chargeable in­come and 24% on the remaining chargeable income. The above rates do not apply to petroleum companies, which are taxed at a rate of 38%.

b) Real property gains tax is imposed on gains derived from disposals of real property or shares in real property companies. The maximum rate is 30% (see Section B).

c) This is a final tax applicable only to payments to nonresidents.

d) Interest on approved loans is exempt from tax (see footnote [b] to Section F). Bank interest paid to nonresidents without a place of business in Malaysia is exempt from tax. Interest paid to nonresident companies on government securities and on Islamic securities is exempt from tax.

e) The 25% withholding tax is imposed on distributions to nonresident corpo­rate unit holders by Real Estate Investment Trusts (REITs) and Property Trust Funds (PTFs) that have been exempted from Malaysian income tax as a result of meeting certain distribution conditions. Distributions by such REITs and PTFs to individuals, trust bodies and other non-corporate unit holders are subject to withholding tax at a rate of 10%.

f) This withholding tax is treated as a prepayment of tax on account of the final tax liability.

g) This is a final tax applicable to payments to nonresidents for specified ser­vices rendered in Malaysia and to payments for the use of movable property excluding payments made by Malaysian shipping companies for the use of ships under voyage charter, time charter or bare-boat charter. The rate is re­duced under certain tax treaties.

h) Withholding tax is imposed on “other income,” which includes, among other payments, commissions and guarantee fees.

i) See Section C.

Taxes on corporate income and gains

Corporate income tax. Resident and nonresident companies are tax ed only on income accruing in or derived from Malaysia. Res-i dent companies engaged in banking, insurance, shipping or air transport are taxable on their worldwide income. A company is resident in Malaysia if its management and control is exercised in Malaysia; the place of incorporation is irrelevant.

Rates of corporate tax. Resident companies that have paid-up capital in respect of ordinary shares of MYR2,500,000 or less are taxed at a rate of 19% on their first MYR500,000 of chargeable income with the balance taxed at 24%. This concessionary tax rate does not apply if the company controls, or is controlled di­rectly or indirectly by, another company that has paid-up capital in respect of ordinary shares of more than MYR2,500,000 or is otherwise related directly or indirectly to another company that has paid-up capital in respect of ordinary shares of more than MYR2,500,000.

Special rates apply to nonresident companies on income from interest (15%) and from royalties, specified services rendered in Malaysia and payments for the use of movable property (10%). Rental payments for ships made by Malaysian shipping compa­nies (as defined) for voyage charter, time charter or bare-boat charter are exempt from withholding tax. Withholding tax (10%) is imposed on “other income” derived by nonresident companies from Malaysia, which may include, among other payments, com­missions and guarantee fees, to the extent that these payments are not business income to the recipient. For treaty withholding tax rates applicable to interest and royalties, see Section F.

For resident and nonresident companies carrying on petroleum operations, petroleum income tax is charged at a rate of 38% in­stead of the above rates.

Tax incentives. Malaysia offers a wide range of incentives such as tax holidays or investment allowances, which are granted to pro­mote investments in selected industry sectors and/or promoted areas.

Labuan international business and financial center. In 1990, the Malaysian government enacted legislation that created a business and financial center on the island of Labuan with a separate and distinct tax and regulatory regime.

Except for companies intending to engage in banking, insurance or the provision of fund management services, government ap – proval is not required to establish a Labuan company. A Labuan company is required to have one director that may be a foreign corporation and at least one secretary who must be an officer of a Labuan trust company.

Labuan companies may transact business with Malaysian resi­dents and may hold shares, debt obligations or other securities in domestic companies. However, Labuan companies that transact with Malaysian residents may not benefit from the preferential Labuan tax regime (with certain exceptions).

Labuan companies are subject to tax at a rate of 3% on their net audited profits derived from their Labuan trading activities (as defined).

Labuan trading activities include banking, insurance, trading, management, licensing and shipping operations. Instead of pay­ing tax at the 3% rate, Labuan companies may elect to pay a fixed annual tax of MYR20,000 on their Labuan trading activities. In come derived from wholly non-trading activities, such as divi­dends, interest and rent, is exempt from tax.

Labuan companies may alternatively elect to be taxed under the Income Tax Act, 1967 (ITA). If they make such election, the rules described above in Corporate income tax and Rates of corporate tax apply. Labuan companies are generally exempt from the obli­gation to withhold tax on payments made to nonresidents.

Labuan companies may open and maintain bank accounts in for­eign currency in Malaysia or abroad. No restrictions are imposed on the movement of funds through these accounts.

Real property gains tax. Real property gains tax is levied on capital gains derived from disposals of real property located in Malaysia and shares in closely controlled companies with substantial real property interests. The tax applies to gains derived by residents and nonresidents. The following rates apply to disposals by com­panies, effective from 1 January 2014.

Time of disposal Rate (%)
Disposal within 3 years after the acquisition date 30
Disposal in the 4th year after the acquisition date 20
Disposal in the 5th year after the acquisition date 15
Disposal in the 6th or subsequent year after the acquisition date 5

Different rates apply to disposals by persons other than companies.

Purchasers of real property located in Malaysia or shares in real property companies must withhold tax at a rate of up to 3% of the purchase price, except in limited circumstances. Losses incurred on disposals of real property may be carried forward indefi­nitely to offset future real property gains. Losses on the disposal of shares in real property companies are disregarded.

Administration. The year of assessment is the calendar year, but companies may adopt their accounting year as the basis period for a year of assessment. Income tax is chargeable in the year of assessment on the income earned in the basis period for that year of assessment.

Malaysia has a self-assessment regime under which companies must file their tax returns within seven months after the end of their accounting period. A tax return is deemed to be an assess­ment made on the date of filing the return. Effective from the 2014 year of assessment, the tax return must be filed electroni­cally and based on audited accounts.

Companies must provide an estimate of their tax payable no later than 30 days before the beginning of their basis period. The esti­mated tax is payable in 12 equal monthly installments by the 15th day of each month beginning in the second month of the basis period. Small and medium enterprises (SMEs: companies that havepaid-up capital inrespect ofordinary shares ofMYR2,500,000 or less and are controlled directly or indirectly by another com­pany that has paid-up capital in respect of ordinary shares of less than MYR2,500,000 or are otherwise related directly or indirectly to another company that has paid-up capital in respect of ordinary shares of less than MYR2,500,000) that begin their operations during a year of assessment are exempt from the requirement of submitting an estimate of tax and paying their tax by installments in the year of assessment in which they commence business and in the immediately following year of assessment. SMEs are not required to furnish an estimate of tax payable for two years of assessment beginning from the date of commencement of opera­tions. They are required only to settle the tax due when they file their income tax returns. All companies may revise their estimate of tax payable in the sixth and ninth months of their basis period. Effective from the 2018 year of assessment, estimates and revised estimates may only be filed electronically.

Companies must pay any balance of tax due by the tax filing deadline.

Dividends. Effective from the 2008 year of assessment, a single-tier system of taxation replaces the full imputation system. Under the single-tier system, dividends paid, credited or distributed by a company are exempt from tax in the hands of the shareholders. How ever, a six-year transitional rule (which has expired) allowed companies to continue to pay franked dividends to their share­holders up to 31 December 2013 under the prior imputation sys­tem by using corporate income tax that has been paid or deemed paid up to 31 December 2007. Any balance remaining in the dividend franking account after 31 December 2013 is disregarded. However, at any time during the transitional period, a company

could have made an irrevocable election to proceed to the single-tier system and forego the dividend franking credit balance.

Foreign tax relief. Malaysian law allows both bilateral and unilat­eral foreign tax relief. However, because Malaysia generally does not tax foreign-source income, foreign tax relief is usually not applicable, except for companies engaged in banking, insurance, shipping or air transport. These companies are taxed on their world wide income and may claim foreign tax relief with respect to foreign taxes imposed on their foreign-source income.

Determination of trading income

General. The assessment is based on the audited financial state­ments, subject to certain adjustments. A nonresident company trading in Malaysia prepares the financial statements of its Malay­sian branch in accordance with the Malaysian Com panies Act. This act sets out disclosure requirements for financial statements, but does not prescribe the accounting treatment for specific trans­actions. Malaysian Financial Reporting Standards, which are based on the International Financial Reporting Stan dards (IFRS), govern the accounting treatment for transactions.

Deductions are allowed for expenses incurred wholly and exclu­sively in the production of income and for bad debts. No deduc­tion is allowed for the book depreciation of fixed assets, but statutory depreciation (capital allowances) is granted. In general, the cost of leave passages is not deductible. Limits on the deduct­ibility of entertainment expenses may be imposed. However, a full deduction for entertainment expenses may be claimed in speci­fied circumstances. Double deductions are available with respect to certain expenses relating to the following:

  • Participation at approved trade fairs, exhibitions or trade mis­sions
  • Maintenance of overseas trade offices
  • Research and development

Inventory. Trading inventory is valued at the lower of cost or net realizable value. Cost must be determined under the first-in, first-out (FIFO) method; the last-in, first-out (LIFO) method is not accepted.

Provisions. General provisions and reserves for anticipated losses or contingent liabilities are not deductible.

Capital allowances

Plant and machinery. Depreciation allowances are given on capi­tal expenditure incurred on the acquisition of plant and machinery used for the purposes of trade or business. An initial allowance of 20% and an annual allowance ranging from 10% to 20% are granted for qualifying expenditure.

Industrial buildings. An initial allowance of 10% and an annual allowance of 3% are granted for qualifying expenditure on the construction or purchase of industrial buildings. As a result of these allowances, qualifying expenditure on industrial buildings is fully written off in the 30th year after the year of construction or purchase. Certain buildings may qualify for higher rates of industrial building allowances. For purposes of the allowances, industrial buildings include hotels.

Effective from the 2016 year of assessment, for certain types of buildings, industrial building allowances are available only to tax­payers that own the building and operate the relevant business in the building (that is, lessors may not be eligible to claim indus­trial building allowances with respect to certain buildings).

Child care centers. An annual allowance of 10% is granted for expenditure incurred for the construction or purchase of build­ings used as child care facilities for employees.

Employee housing. An annual allowance of 10% is granted for ex penditure incurred by manufacturers and certain approved ser­vice companies for the purchase or construction of buildings for the accommodation of employees. Buildings occupied by manage ment or administrative staff do not qualify for this allow­ance.

Educational institutions. An annual allowance of 10% is granted for expenditure on the construction or purchase of buildings used as schools or educational institutions or for industrial, technical or vocational training.

Motor vehicles. Capital expenditure incurred on motor vehicles qualifies for an annual allowance of 20%. Qualifying capital ex­penditure onnon-commercial vehicles is restricted to MYR100,000 per vehicle if the vehicle is new and if the total cost of the vehicle does not exceed MYR150,000. Qualifying capital expenditure is restricted to MYR50,000 per vehicle if the vehicle costs more than MYR150,000.

Office equipment. An initial allowance of 20% and an annual allowance of 10% are granted for capital expenditure on office equipment.

Computer equipment. An initial allowance of 20% and an annual allowance of 80% are granted for capital expenditure on computer hardware and software. These accelerated capital allowance rates are a temporary incentive that is available up to the 2016 year of assessment. Certain conditions must be met to benefit from these accelerated capital allowances.

Small value asset. For assets with a value not exceeding MYR1,300, a 100% allowance is given in the year in which the asset is ac­quired. However, the total allowance granted for such assets is capped at MYR13,000 for non-SMEs. Effective from the 2016 year of assessment, the relevant SME definition further specifies that the company must be incorporated in Malaysia.

Agriculture. Annual allowances are given on capital expenditure in curred on new planting (50%), roads or bridges (50%), farm build ings (10%) and buildings for accommodation of farm work­ers (20%). Accelerated allowances may be allowed at the discre­tion of the Minister of Finance.

Forestry. Annual allowances are given on capital expenditure in­curred for purposes of extraction of timber from a forest. Effective the 2015 year of assessment, the capital allowances are available only to persons with a concession or license to extract timber. The rates are 10% for a road or building and 20% for a building for accommodation of employees.

Other matters. Capital allowances are generally subject to recap­ture on the sale of an asset to the extent the sales proceeds exceed the tax value after depreciation. To the extent sales proceeds are less than the tax-depreciated value, an additional allowance is given.

Relief for trading losses. Current-year trading losses may offset all other charge able income of the same year. Unused losses may be carried forward indefinitely for offset against chargeable income from business sources. Excess capital allowances may not be offset against other chargeable income of the same year, but may be carried forward indefinitely for offset against income from the trade that generated the capital allowances.

The carryforward of losses and excess capital allowances is sub­ject to the shareholders remaining substantially (50% or more) the same at the end of the year in which the losses or capital allow­ances arose and on the first day of the year of assessment in which relief is claimed. If the shareholder of the loss company is another company, the loss company is deemed to be held by the share­holders of that other company. Under an administrative conces­sion, the authorities have indicated that they are not enforcing the shareholding test except in the case of dormant companies. In addition, under the concession, the substantial change in share­holder rule only applies to changes in the immediate shareholder of the loss company. As a result, unused losses of non-dormant companies may continue to be carried forward indefinitely even if a substantial change in shareholders occurs.

Losses arising in the 2009 or 2010 years of assessment may be carried back for offset against the defined aggregate income of the immediately preceding year. The losses allowed to be carried back are capped at MYR100,000 or the defined aggregate income of the immediately preceding year, whichever is less.

Groups of companies. Under group relief provisions, 70% of current-year adjusted losses may be transferred by one company to another company in a group. A group consists of a Malaysian-incorporated parent company and all of its Malaysian-incorporated subsidiaries. Two Malaysian-incorporated com panies are mem­bers of the same group if one is at least 70% owned by the other, or both are at least 70% owned by a third Malaysian-incorporated company. To obtain group relief, the recipient of the losses and the transferor of the losses must have the same accounting period and each must have paid-up capital in respect of ordinary shares exceeding MYR2,500,000. Other conditions also apply.

Goods and services tax

Goods and services tax (GST), which is effective from 1 April 2015 (sales tax and service tax were abolished effective from that date), is imposed at a rate of 6%. It is imposed on any supply of goods and services, except an exempt, zero-rated or out-of-scope supply, made in Malaysia by a taxable person. A business making taxable supplies must register for GST if its annual taxable turn­over exceeds MYR500,000.

Miscellaneous matters

Foreign-exchange controls. Over the years, the foreign exchange administration policies have been progressively liberalized and simplified. Nonresidents are now free to make direct or portfolio investments in Malaysia in either ringgits or foreign currency. No restrictions are imposed on the repatriation of capital, profits or income earned in Malaysia.

However, the ringgit may not be traded overseas, and payments outside Malaysia should be made in foreign currency.

Nonresidents may obtain any amount of foreign currency credit facilities from licensed onshore banks and from nonbank residents that do not have domestic credit facilities.

Nonresidents may lend in foreign currency to residents if the resident’s total foreign currency borrowings are within permitted limits. However, no limits are imposed on loans in foreign cur­rency by nonresident entities within its group of entities to resident companies or on loans in foreign currency by nonresident suppli­ers to resident companies to finance purchases from the nonresi­dent suppliers.

Foreign-equity restrictions. Foreign-equity restrictions have been liberalized over the years. As a result, no restrictions are imposed on the ownership of most companies except those in certain regu­lated industries.

Anti-avoidance legislation. Legislation permits the Revenue au­thority to disregard or vary any transaction that is believed to have the effect of tax avoidance.

Transfer pricing. The tax authorities have issued transfer-pricing legislation, rules and guidelines requiring taxpayers to determine and apply an arm’s-length price in their intercompany transac­tions. The transfer-pricing rules also require the preparation of contemporaneous transfer-pricing documentation to substantiate the arm’s-length contention.

The guidelines provide a detailed list of information, documenta­tion and records with respect to related-party transactions that need to be compiled to meet the contemporaneous documenta­tion requirement. The guidelines are based on the arm’s-length principle set forth in the Organisation for Economic Co-operation and Development (OECD) transfer-pricing guidelines and pro­vide several methods for determining an arm’s-length price. The prevailing rules and guidelines contain certain departures in the tax authorities’ interpretation of the arm’s-length standard from the practices set out in the OECD transfer-pricing guidelines.

In addition, companies carrying out cross-border transactions with associated persons may apply for an advance pricing arrangement (APA) from the tax authorities subject to conditions. Specific mea­sures in the tax law also address thin-capitalization adjustments.

Treaty withholding tax rates

The rates reflect the lower of the treaty rate and the rate under domestic tax law.

 

 
  Dividends (a) Interest (b) Royalties
  % % %
Albania 10 10
Australia 15 10
Austria 15 10
Bahrain 5 8
Bangladesh 15 10 (d)
Belgium 10 10
       
Bosnia and Herzegovina (c) 10 8
Brunei Darussalam 10 10
Canada 15 10 (d)
Chile 15 10
China 10 10
Croatia 10 10
Czech Republic 12 10
Denmark 15 10
Egypt 15 10
Fiji 15 10
Finland 15 10 (d)
France 15 10 (d)
Hong Kong SAR 10 8
Hungary 15 10
India 10 10
Indonesia 10 10
Iran 15 10
Ireland 10 8
Italy 15 10 (d)
Japan 10 10
Jordan 15 10
Kazakhstan 10 10
Korea (South) 15 10 (d)
Kuwait 10 10
Kyrgyzstan 10 10
Germany 10 7 (d)
Laos 10 10
Lebanon 10 8
Luxembourg 10 8
Malta 15 10
Mauritius 15 10
Mongolia 10 10
Morocco 10 10
Myanmar 10 10
Namibia 10 5
Netherlands 10 8 (d)
New Zealand 15 10 (d)
Norway 15
Pakistan 15 10 (d)
Papua New Guinea 15 10
Philippines 15 10 (d)
Poland 15 10 (d)
Qatar 5 8
Romania 15 10 (d)
San Marino 10 10
Saudi Arabia 5 8
Senegal (c) 10 10
Seychelles 10 10

 

Singapore 10 8
Slovak Republic (c) 10 10
South Africa 10 5
Spain 10 7
Sri Lanka 10 10
Sudan 10 10
Sweden 10 8
Switzerland 10 10 (d)
Syria 10 10
Taiwan (f) 10 10
Thailand 15 10 (d)
Turkey 15 10
Turkmenistan 10 10
USSR (e) 15 10
United Arab Emirates 5 10
United Kingdom 10 8
Uzbekistan 10 10
Venezuela 15 10
Vietnam 10 10
Zimbabwe 10 10
Non-treaty countries 15 10

a) No dividend withholding tax is imposed in Malaysia. However, for dividends paid under the transitional imputation system, tax would have been deducted at source at the prevailing corporate tax rate for that year of assessment (see Section B).

b) Interest on approved loans is exempt from Malaysian tax. An approved loan is a loan or credit made by a nonresident to the government, state govern­ment, local authority or a statutory body, or guaranteed by the government or state government.

c) These treaties have been ratified, but they are not yet in force.

d) Approved royalties are exempt from Malaysian tax.

e) Malaysia is honoring the USSR treaty with respect to the Russian Federation. Malaysia has entered into separate tax treaties with Kazakhstan, Kyrgyzstan, Turkmenistan and Uzbekistan.

f) This is the income tax treaty between the Taipei Economic and Cultural Office (TECO) in Malaysia and the Malaysian Friendship and Trade Centre (MFTC) in Taipei.

Malaysia has also entered into limited agreements covering only aircraft and ship transportation with Argentina and the United States.