Income tax is levied under the Income Tax Act 1967. The rules for determining taxable income are the same for corporations and individuals except that individuals are entitled to certain personal reliefs and are taxed on graduated rates of tax. The tax treatment for an LLP is similar to that of a company.
The Malaysian income tax system works on a territorial basis. Generally, income accruing in or derived from Malaysia or received in Malaysia from outside Malaysia is subject to tax unless there are special provisions to the contrary made in a double taxation agreement with the country in which the source is derived.
Malaysia has adopted the single tier company income tax system since the year of assessment 2008, where the tax on the profits of a company is a final tax and dividends distributed will be exempted from tax in the hands of shareholders.
Income is chargeable to income tax on current year basis. Malaysia is adopting the self-assessment system where taxpayers are obliged to self-assess their taxes and pay the assessment accordingly.
A company is treated as resident in Malaysia if its management and control is exercised in Malaysia. Generally, management and control are taken to be exercised at the place where the directors’ meetings are held. An individual generally is treated as a resident for tax purposes if they are physically present in Malaysia for 182 days or more in a year of assessment.
A Small or Medium Enterprise (“SME”) is defined as a company incorporated and resident in Malaysia with a paid-up capital of RM2.5 million ordinary shares or less at the beginning of its basis period for a year of assessment. SMEs are taxed at 19% on their chargeable income for the first RM500,000, and the remaining amount of the chargeable income is taxed at 24%.
However, a company is not considered an SME if:
“Related company” in this context is defined as a company which has a paid-up capital exceeding RM2.5 million, in respect of ordinary shares, at the beginning of its basis period for a year of assessment.
Companies not defined as SMEs are taxed at 24% on their chargeable income.
For resident individuals, income is taxed at graduated rates ranging from 1% to 28%. Non-resident individuals are taxed at 28% on their chargeable income.
Income is determined in accordance with generally accepted accounting principles but adjusted in accordance with specific rules in the taxing statute. A partnership is not a separate legal entity; thus, each partner is assessed on his share of partnership income individually, unlike an incorporated company.
Losses can be carried forward to be set off against a company’s future business income from any source, subject to the following conditions:
Real Property Gains Tax is charged on gains arising from the disposal of real property situated in Malaysia, or interest, options, or other rights in or over such land, as well as the disposal of shares in real property companies at a rate of tax ranging from 0% to 30% as follows:
|Disposal||Companies||Individuals (Citizens & Permanent Residents)||Individuals (Non-Citizens)|
|Within 3 years||30%||30%||30%|
|In the 4th year||20%||20%||30%|
|In the 5th year||15%||15%||30%|
|In the 6th year and subsequent years||5%||0%||5%|
Effective from 1 April 2015 onwards, the sales tax and service tax were abolished and replaced with the Goods and Services Tax (“GST”).
Effective from 1 April 2015, GST of 6% is due on the taxable supply of goods and services utilised for business in Malaysia by a taxable person. GST is also charged on the importation of goods and services.
A taxable supply is a supply which is standard rated or zero rated. Exempt and out of scope supplies are not taxable supplies.
GST is to be levied and charged on the value of the supply.
GST can only be levied and charged if the business is registered under GST. A business is not liable to be registered if its annual turnover of taxable supplies is below RM500,000. Therefore, such businesses cannot charge and collect GST on the supply of goods and services made to their customers. Nevertheless, businesses can apply to be registered voluntarily.
Excise duties are levied on selected products, namely, cigarettes, liquors, playing cards, mahjong tiles, petrol, diesel and motor vehicles.
Import duties are levied on many imported goods. Under the ASEAN Common
Effective Preferential Tariff (CEPT), import duties imposed on most goods from ASEAN countries may be reduced to 0-5%.
The transfer pricing guidelines adopted in Malaysia are largely based on the governing standard for transfer pricing which is the arm’s length principle as set out under the Organization for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines. Henceforth, all methodologies and supporting rationale will be based on these principles.