Accountancy in Malaysia

>> Taxation in Malaysia

Income tax

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.

Territoriality

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.

Single tier system

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.

Basis of assessment

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.

Residence rules

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.

Rate of tax

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:

  1. 50% of the paid-up capital, in respect of the company’s ordinary shares, is directly or indirectly owned by a related company;
  2. 50% of the paid-up capital, in respect of ordinary shares of the related company, is directly or indirectly owned by the company; and
  3. 50% of the paid-up capital, in respect of ordinary shares of the company and the related company, is directly or indirectly owned by another company.

“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.

Business 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

Losses can be carried forward to be set off against a company’s future business income from any source, subject to the following conditions:

  1. The loss must be on revenue account and incurred in the course of  trade;
  2. Brought forward losses are only allowed to relieve against the current year business income. Current year business loss can be used to relieve against the business and other sources of income;
  3. There is no substantial change in the company’s shareholdings.

Real property gains tax

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%

Sales tax and service tax

Effective from 1 April 2015 onwards, the sales tax and service tax were abolished and replaced with the Goods and Services Tax (“GST”).

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 duty

Excise duties are levied on selected products, namely, cigarettes, liquors, playing cards, mahjong tiles, petrol, diesel and motor vehicles.

Import duty

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%.

Transfer pricing rules

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.


Latest version updated 1st November 2017

Country Breakdown

31.2

Million

Population

RM

Malaysian Ringgit

Currency

$ 296.4

Trillion

GDP

330,803

km2