Malaysia

Country Name: Malaysia
Currency: Malaysian Ringgit (MYR)
Primary Tax Authority: Inland Revenue Board of Malaysia (Lembaga Hasil Dalam Negeri Malaysia, LHDN)
Key Legislation:

Income Tax Act 1967
Goods and Services Tax (GST) Act (now repealed)
Sales Tax Act 2018
Customs Act 1967
Real Property Gains Tax (RPGT) Act 1976

Fiscal Authority Allocation

Centralized Fiscal System:
Malaysia operates a centralized tax system, with the Inland Revenue Board of Malaysia (IRB) responsible for collecting and administering taxes, including corporate income tax (CIT), personal income tax (PIT), sales tax, service tax, and real property gains tax (RPGT).

Corporate Income Tax (CIT)

Standard Rate: 24%
Malaysia imposes a corporate income tax rate of 24% on the net taxable income of both resident and non-resident companies. Small and medium-sized enterprises (SMEs) benefit from a lower rate of 17% on the first MYR 600,000 of taxable income, with the balance taxed at 24%.

Corporate Forms and Taxation:

Resident Companies: Subject to CIT on worldwide income.
Non-Resident Companies: Taxed on Malaysia-sourced income only.

Exemptions and Incentives:

Pioneer Status and Investment Tax Allowance (ITA): Available for companies in promoted industries, offering a 70% exemption on statutory income for five years under pioneer status or tax allowances on qualifying capital expenditure.
Principal Hub Incentive: Offers a 10% CIT rate for regional and global headquarters in Malaysia for five to 10 years.
R&D Incentives: Companies engaged in research and development (R&D) activities can benefit from double tax deductions or additional allowances.

Goods and Services Tax (GST) / Sales and Service Tax (SST)

Current System: Sales and Service Tax (SST)
Malaysia initially implemented a Goods and Services Tax (GST) at a rate of 6% in 2015, but it was repealed in 2018 and replaced by the Sales and Service Tax (SST). SST is split into two components: sales tax and service tax.

Sales Tax: 5% or 10%, depending on the type of goods.
Service Tax: 6% on taxable services, including hospitality, telecommunications, and professional services.

Exemptions:
Essential goods such as certain food products, healthcare services, and exports are exempt from sales tax. Some professional services are also exempt from service tax.

Personal Income Tax (PIT)

Progressive Rates:
Malaysia imposes a progressive personal income tax on residents’ worldwide income and non-residents’ Malaysia-sourced income.

Resident Tax Rates for 2023 (Annual Income):

Up to MYR 5,000: 0%
MYR 5,001 to MYR 20,000: 1%
MYR 20,001 to MYR 35,000: 3%
MYR 35,001 to MYR 50,000: 8%
MYR 50,001 to MYR 70,000: 13%
MYR 70,001 to MYR 100,000: 21%
MYR 100,001 to MYR 250,000: 24%
MYR 250,001 to MYR 400,000: 24.5%
MYR 400,001 to MYR 600,000: 25%
MYR 600,001 to MYR 1,000,000: 26%
Above MYR 1,000,000: 30%

Non-Resident Tax Rate:
Non-residents are taxed at a flat rate of 30% on Malaysia-sourced income.

Deductions and Allowances:
Residents can claim various deductions and reliefs, including personal and spousal allowances, education, medical expenses, and contributions to approved retirement schemes such as the Employees Provident Fund (EPF).

Additional Mandatory Contributions

Employees Provident Fund (EPF):
Employers and employees must contribute to the Employees Provident Fund (EPF), a mandatory retirement savings scheme.

Employer Contribution: 13% of gross salary (for employees earning MYR 5,000 or less), 12% for those earning more.
Employee Contribution: 11% of gross salary.

Withholding Taxes

Dividends: 0% (Malaysia does not impose withholding tax on dividends paid to non-residents).
Interest: 15% on interest paid to non-residents.
Royalties: 10% on royalties paid to non-residents.
Withholding tax rates may be reduced under Malaysia’s double taxation agreements (DTAs).

Transfer Pricing Rules

Malaysia follows OECD guidelines for transfer pricing. Companies must comply with the arm’s-length principle for related-party transactions and maintain transfer pricing documentation to support their pricing arrangements.

Special Tax Regimes

Labuan International Business and Financial Centre (IBFC): Companies operating in the Labuan IBFC, a tax-friendly offshore financial center, can choose to be taxed at either 3% on audited profits or a fixed MYR 20,000 annual tax. Income from certain qualifying activities may also be exempt from withholding taxes.
Islamic Finance Incentives: Malaysia offers tax exemptions and deductions for Islamic finance activities, including sukuk issuance and Sharia-compliant financial services.

Other Taxes

Real Property Gains Tax (RPGT): A tax on the gains from the disposal of real property in Malaysia. The rates depend on the holding period, ranging from 5% to 30%. Gains on properties held for more than five years are taxed at 10% for companies and 5% for individuals.
Stamp Duty: Stamp duty is levied on property transfers and share transactions. The rate for property transfers ranges from 1% to 3% of the property value.
Excise Duties: Excise duties are imposed on alcohol, tobacco, motor vehicles, and other specified goods.

Double Taxation Agreements (DTAs)

Malaysia has signed over 70 double taxation agreements (DTAs) with countries such as Singapore, the United Kingdom, Japan, and Australia. These agreements provide tax relief on cross-border income and reduce withholding tax rates on dividends, interest, and royalties.

Local Taxes

In addition to federal taxes, local governments may impose minor local taxes such as quit rent and assessment taxes on property owners. However, these taxes are relatively small compared to national taxes.

Compliance and Reporting

Annual Filing:
Corporate tax returns must be filed within seven months of the company’s financial year-end. Personal income tax returns for residents are generally due by April 30th of the following tax year, while non-residents must file by June 30th. SST returns are filed either quarterly (sales tax) or monthly (service tax).

Penalties for Late Filing:
Penalties for non-compliance or late filing include fines, interest, and additional charges. Failure to submit accurate or timely returns may result in penalties of up to 300% of the tax payable.

Recent Developments

Introduction of Digital Tax:
Malaysia introduced a 6% service tax on imported digital services in 2020, aimed at foreign digital service providers such as software companies, streaming platforms, and cloud service providers. This is part of the government’s efforts to tax the digital economy effectively.

Focus on Green Economy and ESG:
Malaysia is increasingly focused on promoting environmental, social, and governance (ESG) initiatives, providing tax incentives for companies that engage in green technology, renewable energy, and sustainable practices. The government offers tax deductions for companies that adopt green-certified projects.

Revised RPGT Rates:
In 2021, the government revised Real Property Gains Tax (RPGT) rates to curb property speculation, with higher rates for properties sold within the first three years of purchase.

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