Malaysia Corporate Tax Rates and Guide
Full Tax Exemption
New start-up companies are eligible for the Start-up Tax Exemption (SUTE) scheme:
To qualify for Start-up Tax Exemption (SUTE):
- Must have no more than 20 individual shareholders
- For corporate shareholders, one individual must hold at least 10% of the issued shares
- Property and investment holding companies are not eligible
Partial Tax Exemptions
All other companies that do not qualify for the SUTE Scheme will be eligible for partial tax exemption.
Single-Tier Income Tax System
Malaysia practices a single-tier corporate income tax system. Tax paid by a company on its income is the final tax and all dividends are exempt in the hands of shareholders from further taxation.
The one-tier corporate taxation system was introduced in Budget 2002. Under this system, profits are taxed at the corporate level and this is a final tax. Malaysia dividends are tax exempt. The one-tier corporate taxation system greatly simplifies the tax code and reduces cost of compliance and administration for companies. It removes restrictions on the distribution of dividends from capital gains and this could result in higher dividend payouts for all shareholders. In addition, the one-tier corporate taxation system has the desirable consequence of allowing the unlimited flow-through of exempt dividends to all tiers of shareholders, regardless of shareholding level.
Tax Residence of a Malaysia company
For Malaysia tax purposes, the tax residence of a company is practically determined by the location where the directors of the company hold their board meetings and exercise de facto control. Management and control, in the context of determining the resident status of a company, does not mean the management or control of day-to-day business operations but refers to the superior directing authority over the fundamental policies and decisions of the company.
Resident and non-resident companies are taxed on income accruing in or derived from Malaysia as well as on foreign income remitted (actual or deemed) into Malaysia. Remittance of specific foreign income (dividends, branch profits, services income) may be tax exempt when remitted by a resident company under certain conditions.
The Malaysia revenue authority has also clarified that the use of foreign income to declare dividends, where such foreign income is not actually brought back to Malaysia, will not trigger the deemed remittance provisions in the tax legislation. This effectively means that foreign income may be used to declare dividends to foreign shareholders without triggering Malaysia income tax. (Conditions apply).
Dividends, branch profits and service income received by a Malaysia resident company from a foreign jurisdiction with headline tax of at least 15% and which has suffered some tax (either by way of withholding tax or a tax on the underlying profits) will not be subject to Malaysia tax.
Income Tax Basis Period
In Malaysia, the statutory Income for the Year of assessment is computed based on the income derived in the preceding calendar year (known as the basis year) from all sources. Malaysia taxes income on territorial basis.
Productivity and Innovation Credit (PIC) Scheme
The Productivity and Innovation Credit (PIC) Scheme has been further enhanced during the 2012 Malaysia Budget. The PIC scheme aims to encourage businesses to upgrade their capabilities along the innovation and productivity value chain by providing participants tax incentives when they do so. The table below outlines the benefits of the PIC scheme:
|Qualifying activities||Gist of qualifying expenditure
under the PIC scheme
|Total deductions under the PIC|
|Acquisition or Leasing of Prescribed Automation Equipment||Costs incurred to acquire/lease prescribed automation equipment. Automation
equipment that are bought on hire purchase and are to be repaid over
2 year-installments or more will be eligible for PIC cash payouts.
|Training Expenditure||Costs incurred on inhouse training (i.e. WDA certified or
ITE certified); as well as all external training. Qualifying inhouse
training expenditure of up to $10,000 per YA will not require certification.Expenses
incurred by training agents may qualify for PIC claims if
they meet stated conditions.
|400% allowance or deduction for qualifying expenditure subject to the expenditure
cap, 100% allowance or deduction for the balance expenditure exceeding the
|Acquisition of Intellectual Property Rights (“IPRs”)||Costs incurred to acquire IPRs for use in a trade or business (exclude EDB
approved IPRs and IPRs relating to media and digital entertainment contents)
|Registration of Intellectual Property Rights (“IPRs”)||Costs incurred to register patents, trademarks, designs and plant variety.|
|Design Expenditure||Costs incurred to create new products and industrial designs where the activities
are primarily done in Malaysia.
|Research & Development (“R&D”)||Costs incurred on staff, costs and consumables for qualifying R&D activities
carried out in Malaysia or overseas, if the R&D done overseas is related
to the taxpayer’s Malaysia trade or business. R&D expenditure on cost-sharing
agreementswill be eligible for PIC claims.The multiple sales
criteria will be removed to facilitate R&D in
software development that is not intended for sale.
|400% tax deduction for qualifying expenditure subject to the expenditure
cap*.For qualifying expenditure exceeding the cap for R&D done in Malaysia,
deduction will be 150%. For balance of all other expenses, including expenses
for R&D done overseas, deduction will be 100%
Total expenditure cap for YA 2011 and YA 2012 – $800,000 for each of the six qualifying activities.
Total expenditure cap for YA 2013 to YA 2015 – $1,200,000 for each of the six qualifying activities.
Malaysia has a comprehensive list of tax incentives and development schemes to attract investments and to assist investors in expanding their businesses. Highlights of key incentives and schemes are summarised below.
The Regional and International Headquarters Awards encourages companies to use Malaysia as a regional or global base. A customized package of tax incentives (such as Pioneer Incentive, Development and Expansion Incentive, Investment Allowances) and grants will be given to qualifying companies.
The Pioneer Incentive encourages the introduction and growth of new industries in Malaysia. A pioneer enterprise is granted full income tax exemption on its qualifying profits for up to 15 years.
Investors undertaking projects that will generate significant economic benefits for Malaysia may apply for the Development and Expansion Incentive. The incentive provides preferential income tax rates on all qualifying profits above a pre-determined base, for a set period.
Companies investing into new equipment that introduces new technology to the industry or contributes to its efficiency can apply for Investment Allowances. This is a capital allowance given to partially offset the costs of acquiring qualifying equipment within a set period and is in addition to the normal tax depreciation.
The Approved Royalties Incentive encourages companies to transfer their cutting edge technology and knowhow to Malaysia by providing full or partial withholding tax exemption for royalty payments or technical assistance fees payable to non-residents. Investors looking into developing or bringing new R&D capabilities can apply for the Research Incentive scheme. The project should result in an increase of hiring and training of research scientists and engineers in Malaysia. The scheme provides grants to partially offset the R&D project costs incurred for manpower training, equipment investment, intellectual property management and professional services.
The Local Enterprise Finance Scheme (LEFS) is designed to assist and encourage companies (with at least 30% local ownership) to upgrade and expand their operations. LEFS loans are available for factories, machinery and working capital.
The Local Enterprise Technical Assistance Scheme (LETAS) encourages and assists companies (with at least 30% local ownership) in seeking external expertise to improve their operations. Generally, assistance provided is up to 50% of the cost of engaging an external expert to implement quality management and IT systems (e.g. ISO certification, upgrading computer systems).
Foreign Tax Relief
Under Malaysia’s network of 64 comprehensive double tax treaties, Malaysia will grant a tax credit for foreign tax suffered in the treaty country. The tax credit granted is limited to the lower of the foreign tax suffered and the Malaysia tax payable on that income. Malaysia also grants a unilateral tax credit for certain income derived from countries that have not entered into tax treaties with Malaysia.
Malaysia Tax Treaties
Avoidance of Double Taxation Agreements (DTAs): For companies operating across borders, the treatment of their income, by the tax authorities of respective jurisdiction is an important factor. A double taxation issue may arise where an income is taxed twice, namely once at the source where it is generated and for a second time where it is received. In order to avoid such double taxation of income, Avoidance of Double Taxation Agreements (DTAs) are concluded between countries. Within the framework of co-operation under a DTA, the country of residence would usually agree to either give credit to its residents for income which is taxed at reduced rates, or exempt such income from tax. The credit or exemption granted by the country of residence is one way whereby double taxation is eliminated on foreign income derived by its residents.
Malaysia has concluded Avoidance of Double Taxation Agreements (DTAs) with many countries. It must be noted that the benefits of DTAs are available only to Malaysia resident companies/individuals and the resident companies /individuals of the treaty partner.
Malaysia endeavors to facilitate companies expand across borders and DTA plays a significant role in this endeavor by reliving companies from double tax burden. So far Malaysia has concluded DTA with over 60 countries and all the DTAs concluded by Malaysia since 1965 to date are classified into 3 main categories
- Comprehensive Avoidance of Double Taxation Agreements covering all types of income -64 countries
- Limited Treaties covering only income from shipping and/or air transport – 7 countries
- Treaties which are Signed but not Ratified hence cannot be lawfully enforced – 14 countries
Some of the important countries with which Malaysia has ratified comprehensive DTAs are Australia, Belgium, Canada, China, Denmark, India, France, Japan, Malaysia New Zealand, and the UK
A DTA clarifies the taxing rights between Malaysia and her treaty partner on different types of income arising from cross-border economic activities by clearly defining the following aspects
- The scope of the DTA
- Taxing rights for all types of income or gains
- Methods of eliminating double taxation
- Special provisions
Credit method and exemption method are the two methods of eliminating double taxation burden.
A Malaysia tax resident company, under sec 13 (8), can enjoy tax exemption on its foreign-sourced incomes such as dividends, foreign branch profits, and foreign-sourced service income that is remitted into Malaysia on or after 1st Jun 2003 if the following conditions are met:
- The highest corporate tax rate (headline tax rate) of the foreign country from which the income was received is at least 15%; and
- The foreign income had been subjected to tax in the foreign country from which they were received.
To entitle for the exemption, a company has to furnish the following information in its Form C and Appendix for Additional Information on Income and Deduction (Form IRIN 301):
- Nature and amount of income received;
- Country from which the income is received;
- Headline tax rate of the foreign country; and
- Confirmation that foreign tax has been paid in the country from which the income was received. Otherwise, company has to prove that income was exempt in the foreign country due to incentive granted for substantive business.
Other Tax Incentives
To encourage foreign capital inflow into Malaysia, there are tax incentives provided to various industries namely in the form of reduced corporate tax rates.
|Name of Company||Tax Rates|
|Finance & Treasury Centre Co.||10%|
|International Commodity Trader||10%|
|Arts & Antique Dealers||10%|
|Asian Currency Unit||10%|
|Insurance & Re-insurance Co.||10%/exempt|
|Members of Commodity Futures Exchange||10%/exempt|
|Financial Sector Incentive Co.||Exempt/Various|
|Commodity Derivatives Trader (New)||10%|
|Insurance & Re-insurance Co.||5%|
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