Malaysian Tax System

Malaysian Tax System: How It Works

Venturing into the heart of Southeast Asia, Malaysia’s economic landscape is as diverse as its culture. But before you indulge in the delights of Penang’s street food or the bustling markets of Kuala Lumpur, understanding the Malaysian tax system is crucial for every expat and entrepreneur. Don’t worry! We’ve got you covered for this!

From personal income tax to corporate responsibilities, let’s unravel the intricacies of Malaysia’s tax obligations, ensuring your financial journey is as smooth as the country’s famous teh tarik.

Let’s dive in!

Corporate Income Tax

Malaysian Tax System 1

Corporate income tax in Malaysia is a direct levy remitted to the government, applicable to both resident and non-resident companies earning revenue within the country. 

The tax rate imposed on corporations fluctuates depending on the company’s classification.

Corporate Tax Rates In Malaysia 

The usual corporate income tax rate in Malaysia stands at 24%

Additional corporate tax rates are as follows:

Type Of CompanyTax Rates
A resident company with a paid-up capital of RM 2.5 million or less, and gross income from the business not exceeding RM 50 million.YA 2022First RM 600,00017%
Remaining balance – 24%YA 2023First RM 100,00015%
RM 100,001 to RM 600,00017%
Remaining balance – 24%
A resident company that does not exercise control, either directly or indirectly, over another company with a paid-up capital exceeding RM 2.5 million.
A resident company that is not under the control, either directly or indirectly, of another company with a paid-up capital exceeding RM 2.5 million.
Non-resident company24%

What Is the Process For Determining Tax Residency And Taxation Principles In Malaysia?

Malaysian Tax System 2

In Malaysia, a company is recognized as a tax resident if, at any point during the assessment year’s basis period, its management and control, or at least one Board of Directors meeting, takes place within the country.

The taxation framework in Malaysia operates under a territorial system, wherein both resident and non-resident companies are liable for taxes on income generated within Malaysia.

Exceptions to this rule include foreign-sourced income, which is typically not subject to taxation unless the company conducts business in specific sectors such as banking, insurance, air transport, or shipping.

Individual Income Tax

Malaysian Tax System 3

Individual income tax in Malaysia pertains to the taxes levied on various forms of earnings, including salaries, dividends, and other sources of income received by a tax resident over the duration of a year. 

This tax is an essential component of the Malaysian fiscal system, contributing to government revenue and funding public services and infrastructure.

Determining tax residency status in Malaysia relies on specific criteria, with an individual being recognized as a tax resident if they stay in Malaysia for 182 days or more within a calendar year. This criterion helps establish the individual’s fiscal ties and obligations within the country.

The scope of taxable income in Malaysia is broad and encompasses diverse sources of earnings.

 These include income from employment, profits or gains derived from business activities, dividends, interest, or discounts earned from investments or financial instruments.

Moreover, rental income from property, royalties from intellectual property rights, premiums from insurance policies, and income from pensions or annuities received.

Additionally, certain fringe benefits or perquisites provided by employers are also considered taxable income.

These can range from reimbursement claims for business expenses, the usage of company credit cards, loans extended by the company, sponsorship of tuition fees for employees’ children, to any other benefits offered by employers that can be converted into cash equivalents.

Understanding the nuances of taxable income and tax residency status is crucial for individuals in Malaysia to comply with tax regulations and fulfill their obligations to the tax authorities accurately. 

It also enables individuals to leverage available tax reliefs, deductions, and exemptions effectively, thereby optimizing their tax liabilities and financial planning strategies.

Individual Income Tax Rates

Individual income tax rates in Malaysia for YA 2023 are as follows:

Taxable income (RM)TaxTax on the excess (%)
5,00001
20,0001503
35,0006008
50,0001,80013
70,0004,40021
100,00010,70024
250,00046,70024.5
400,00083,45025
600,000133,45026
1 million237,45028
Exceeding 2 million517,45030

Non-residents are taxed at a flat rate of 30% of taxable income.

Deductions For Individual Income Tax

Malaysian Tax System 4
ReliefsRM
Self9,000
Spouse (under joint assessment)4,000
Children under the age of 182,000
Children over the age of 18 who are receiving full-time instruction at an establishment of higher education in Malaysia or outside Malaysia8,000
Disabled: Self6,000
Spouse5,000
Child:
Each physically or mentally handicapped child
6,000
Additional relief if that child is over 18 and receiving higher education8,000

Filing Individual Income Tax Returns

Malaysian Tax System 5

In Malaysia, individuals are required to calculate their chargeable income and taxes owed under a self-assessment system.

 Taxpayers must submit their tax returns by 30 April for those earning non-business income and by 30 June for those with business income for the subsequent calendar year.

Sales And Service Tax (SST)

The Sales and Service Tax (SST) system in Malaysia functions as a consumption-based taxation mechanism, aiming to collect revenue from the consumption of goods and services within the country. 

It comprises two main components:

Sales Tax

This tax is levied on products manufactured domestically, produced locally, or imported into Malaysia. It is essentially a single-stage tax imposed on the sale of goods. 

When a manufacturer or importer sells a taxable product, they must include the sales tax in the selling price.

The rate of sales tax varies depending on the type of goods. Basic food items, building materials, electronics like personal computers and mobile phones, as well as certain consumer goods like watches, are subject to a 5% sales tax rate. 

Other goods, except for those specifically exempted or subject to different rates, are taxed at a rate of 10%.

Service Tax

Unlike the sales tax, which is applied to goods, the service tax is imposed on taxable services provided within Malaysia. 

It applies to a wide range of services such as hospitality, telecommunications, professional services, and other service-related industries. 

Service providers who are registered with the Malaysian tax authority and are conducting business operations are obligated to charge and collect service tax from their customers. The standard rate for service tax is 6% of the value of the taxable service provided.

It’s important to note that certain services, particularly those involving international transactions, are exempted from service tax obligations.

The SST system is designed to capture revenue from both the production and consumption sectors of the economy. 

It provides a source of government revenue while also influencing consumer behavior and encouraging domestic production and consumption. 

Understanding the intricacies of the SST framework is essential for businesses operating in Malaysia to ensure compliance with tax regulations and fulfill their tax obligations accurately.

Which Businesses Are Required To Register For SST In Malaysia? 

Businesses that offer taxable goods and services need to apply for SST registration if they satisfy the following criteria:

Sales Tax:

  • Engaged in the manufacturing of taxable goods.
  • Achieved a total sales value exceeding RM 500,000 in the past 12 months.

Service Tax:

  • Providing taxable services.
  • Exceeded the total value of taxable services over the preceding 12 months, surpassing the prescribed threshold, typically set at RM 500,000, although specific services may have differing thresholds.
Additional Thresholds
Taxable service providerThreshold
Operators of restaurants, bars, snack bars, canteen, coffee houses, or any place providing food and drinks whether eat-in or takeawayRM 1.5 million
Persons who are regulated by Bank Negara Malaysia and provide credit card or charge card servicesNo threshold
Approved customs agentsNo threshold

Withholding Tax

Malaysian Tax System 6

Withholding tax is a mechanism employed by tax authorities, including the Inland Revenue Board of Malaysia, to collect taxes on income earned by non-residents.

In Malaysia, withholding tax is applied when a resident entity, such as a company or individual, makes payments to a non-resident individual or entity for certain types of income.

The payer, which could be an individual or a business operating in Malaysia, is responsible for withholding a portion of the payment and remitting it to the tax authorities on behalf of the non-resident payee.

This withholding tax is deducted at the time of payment and serves as an advance payment of the non-resident’s tax liability in Malaysia.

The types of income subject to withholding tax in Malaysia include payments for services rendered, royalties, interest, dividends, and payments for the use of movable property. 

For example, if a Malaysian company hires a foreign consultant to provide services, the company is required to deduct withholding tax from the consultant’s fees before paying them.

The payer is obligated to ascertain whether withholding tax applies to the payment and, if so, to deduct the tax at the prescribed rates. 

These rates may vary depending on the nature of the payment and the tax treaty agreements between Malaysia and the country of residence of the non-resident payee.

The payee, typically a non-resident individual or entity, receives the net payment after withholding tax has been deducted. 

However, the payee may be eligible to claim a refund or credit for the withholding tax deducted when filing their tax returns in Malaysia or their home country, depending on the applicable tax laws and regulations.

Overall, withholding tax serves as a mechanism to ensure that non-residents contribute their fair share of taxes on income earned from Malaysian sources, while also facilitating tax compliance and revenue collection for the Malaysian government.

Withholding Tax Rates

When a payer is obligated to make payments to a non-resident individual or entity, they are required to withhold tax at the specified rates:

Payment typeWithholding tax rates
Contract payment3%, 10%
Interest15%
Royalties10%
Technical fees, service payments, rent for movable property usage10%
Interest disbursed by authorized financial institutions5%
Earnings of non-resident public performers15%
Real Estate Investment Trust (REIT)Apart from a domestic corporationForeign corporationOverseas investment entity10%
25%
10%

Real Property Gains Tax (RPGT)

Malaysian Tax System 7

Real Property Gains Tax is a levy imposed on the taxable profits generated by individuals and businesses from the sale of their properties in Malaysia. If the property is sold at a loss, there is no obligation to pay Real Property Gains Tax.

Rates Of Real Property Gains Tax

The applicable rates for Real Property Gains Tax are as follows:

DisposalCitizens/permanent residentsForeignersCompanies
Year 1 – 330%30%30%
Fourth-year20%30%20%
Fifth year15%30%15%
Sixth year and onwardsN/A10%10%

Real Property Gains Tax Exemption

Exemptions that apply to real property gains tax are:

ExemptionExemption amountEligible persons
One-time exemption for any taxable profit from selling a private home.RM 10,000 or 10% of the chargeable gain, whichever is higherMalaysian citizens and permanent residents
Exemption for profits when transferring property within family members (spouses, parents to children, or grandparents to grandchildren). Exceptions apply to transfers between siblings.100% exemption on the chargeable gainMalaysian citizens and permanent citizens
Exemption for selling low-cost residential properties valued at RM 200,000 or less in the 6th year onwards.100% exemption on the chargeable gainMalaysian citizens only

Payment Schedule For Real Property Gains Tax

Malaysian Tax System 8

Upon selling or disposing of a property in Malaysia, individuals and businesses are obligated to settle the Real Property Gains Tax (RPGT). 

This tax applies to any chargeable gains made from the sale of the property. The payment process involves submitting the real property gains tax return within a stipulated timeframe.

 Specifically, individuals must ensure that this return is filed within 60 days from the date of property disposal. It’s crucial to adhere to this timeline to avoid penalties.

In the event of failing to meet the deadline for real property gains tax submission, a penalty of an additional 10% may be imposed. Therefore, prompt and accurate filing is essential to avoid unnecessary financial penalties.

Stamp Duty

Stamp duty serves as a taxation mechanism on various legal documents in Malaysia. It is divided into two main categories:

  • Fixed Duties: This entails a predetermined charge, typically covering stamps for individual policies or copies. The fixed duties remain constant regardless of the value of the transaction.
  • Ad Valorem Duties: Ad valorem duties are variable costs that depend on the value of the transaction represented by the legal document. The duty amount fluctuates based on the transaction’s value.

Documents Subject To Stamp Duty

Numerous legal documents are subject to stamp duty requirements in Malaysia.

 These include agreements and transactions such as property transfers, share transfers, business transfers, rental or lease agreements, security agreements, sale of annuities, general stamping, company duty payments, repayments, and appeals.

Digital Services Tax

Since January 1, 2020, the Malaysian government has introduced a digital services tax (DST) of six percent applicable to foreign digital service providers (FSPs) operating in Malaysia.

Definition Of Digital Services

According to the guidance provided by the Royal Malaysian Customs Department (RMCD), digital services refer to any services accessed or delivered via the Internet or electronic networks with minimal human intervention from the service provider.

Examples of digital services outlined in the guide include:

  • Online software licensing
  • Firewalls
  • Mobile apps and video games
  • Provision of e-books, films, music, streaming services, and subscription-based media
  • Search engines and social networks
  • Website hosting and cloud storage services
  • Online advertising platforms
  • Internet-based communications
  • Online learning platforms

Furthermore, FSPs are defined as:

  • Individuals or entities selling digital products directly to consumers in Malaysia
  • Those selling digital products through intermediaries
  • Online platforms facilitating the sale of digital products on behalf of overseas providers

Revenue Threshold

Foreign digital service providers achieving an annual turnover of 500,000 ringgit (approximately US$120,000) must register for the six percent service tax collection and remittance. The registration process commenced on October 1, 2019.

Registered FSPs must issue invoices and file tax returns quarterly, with the deadline falling on the last day of any month within a calendar year.

Consumers

As per the RMCD guidelines, consumers are defined as businesses or individuals fulfilling at least two of the following criteria:

  • Making payments to an FSP via a credit card or debit facility provided by a financial institution under the Ministry of Finance
  • Residing in Malaysia
  • Accessing digital services through an internet protocol (IP) address registered in Malaysia

To ascertain whether the consumer resides in Malaysia, FSPs are advised to consider factors such as the billing address and home address of the consumer.

Conclusion

As we draw the curtains on our exploration of the Malaysian tax system, remember that navigating these fiscal waters is key to leveraging Malaysia’s economic opportunities. Armed with this knowledge, you’re ready to embark on your Malaysian adventure or business venture with confidence.

Keep this guide handy, and let Malaysia’s dynamic economy be the backdrop for your success story. Here’s to financial savvy in the heart of Southeast Asia!

Tax Mastery!

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