Corporate Tax in Malaysia – A Complete Guide for Businesses

Corporate Tax Malaysia – A Guide for Businesses

Compliance with the corporate tax regime is a necessary requirement for any Malaysian business. The Inland Revenue Board (LHDN), which operates under the Income Tax Act 1967, oversees the regime, which has a multi-level rate regime, exclusive incentives, and a mandated compliance process. Knowing your requirements—whether registration and advance payments, completing returns every year and claiming deductions—is crucial to good standing and optimizing your tax position. This comprehensive guide establishes the straightforward framework of Malaysia's business tax system so that businesses of any size are able to do so with ease and efficiency, without facing significant financial loss.

Recent Amendments

Malaysia's tax landscape is dynamic. Recently, one important development is the Cukai Makmur (Prosperity Tax) on the Year of Assessment (YA) 2022. This was a one-off tax imposed on companies with chargeable income exceeding RM100 million, at a rate of 33% on the portion of chargeable income above RM100 million. From the YA 2023 onwards, the normal rates have been reinstated. Companies should keep an eye on the annual Budget announcements as LHDN frequently implements new incentives, revises protocols for double taxation agreements, and modifies compliance requirements.

A Complete Guide to Corporate Tax in Malaysia: Who Needs to Pay?

A company is considered a tax resident in Malaysia if at any time in a given basis year, its management and control are exercised in Malaysia. This is typically determined by the location where the company's board of directors holds its meetings and makes its decisions.

• Tax Residents: Companies that fall within the definition of Malaysian-resident are subject to income tax on their income from all sources, wherever earned (taxed when remitted into Malaysia).

• Non-Residents: Taxable income for non-resident companies is limited solely to Malaysian-sourced income.

 

All incorporated entities (regardless of being a private or public limited company) are classified for income tax purposes.

 

Company Registration with LHDN

A company must register with LHDN immediately after incorporation with the Companies Commission of Malaysia (SSM). This process involves:

• Obtaining a Tax Identification Number (TIN).

• Registering for an e-Filing account on the LHDN portal for all digital submissions.

• Determining the company's financial year-end.

Understanding Chargeable Income & Tax Computation

Corporate tax is not levied on gross revenue. It is calculated on chargeable income, which is essentially your taxable profit.

The formula is:

Chargeable Income = Statutory Income - Allowable Deductions - Unabsorbed Losses & Capital Allowances

1. Statutory Income: Aggregate income of all sources (e.g., business, rental, dividends) after adjusted losses and special exemptions are allowed.
2. Gross Income: Income of all sources.
3. Allowable Deductions: Expenditures which are incurred wholly and exclusively in the creation of income. Common examples include:

• Rental of business premises
• Employee salaries and bonuses
• Utilities and office supplies
• Marketing and advertising costs
• Travel expenses (within stipulated limits)
• Depreciation (claimed as Capital Allowances - see below)
• Interest on business loans

4. Non-Deductible Expenses: Expenses that cannot be claimed against income include:

• Personal expenses of directors/shareholders
• Provisions for bad debts (specific bad debts written off are allowable)
• Donations to non-approved organizations
• Entertainment expenses for non-clients (strict rules apply)
• Fines and penalties paid to any authority

Capital Allowances (CAs)

Under the Income Tax Act 1967, capital allowances (CAs) provide relief from capital expenditure incurred on qualifying plant, machinery, and assets, as tax depreciation is not permitted.

• Initial allowance (IA): This is usually 20% of the total qualifying capital expenditure when the qualifying capital asset is first available to use.

• Annual allowance (AA): The annual allowance is calculated based on the asset's economic life (i.e., a computer's economic life in general is 10% so AA is 10% for 10 years). The LHDN will set the AA rate. Unabsorbed CAs can be carried forward to offset future business income with no time limitations.

Tax Rates & Incentives

Malaysia has a tiered tax rate structure to encourage small businesses to start.

Company Type	Chargeable Income Tier	Tax Rate
Small Company (Paid-up capital ≤ RM2.5m)	First RM150,000	15%
	Next RM850,000	17%
	Above RM1,000,000	24%
Other Companies	All chargeable income	24%

Tax Benefits: Malaysia offers numerous incentives, which facilitate the advancement of specific sectors and areas of endeavor as follows:

• Pioneer Status: Provides income tax relief to the extent of 70% exemption of statutory income for 5-10 years.
• Investment Tax Allowance (ITA): Provides an offset against an allowance of statutory income of qualifying capital expenditure up to 60-100%.
• Reinvestment Allowance (RA): For the manufacturing sector, allows for an allowance of 60% used on qualifying capital expenditure for modernization and expansion. These are typically applied for through the Malaysian Investment Development Authority (MIDA).

Compliance Process & Deadlines

Malaysian corporate tax compliance is an ongoing annual cycle.

1. Estimated Tax Payment (CP204): Companies must estimate their taxable income for the upcoming year and submit Form CP204 to LHDN before the beginning of the basis year. This form determines the schedule for monthly installment payments (CP204A). Undervaluation may be subject to penalties.
2. Record-Keeping: Retain all business accounting records, receipts, invoices, and back-up documentation for at least 7 years. LHDN has the right to audit these records.
3. Filing the Annual Return (Form C): The audited financial statements and tax computations for the year must be prepared. Form C, schedules, and financial statements are to be e-filed within seven months from the date the financial year closes.
4. Balance Tax Payment: The balance tax, if any, after deducting the monthly installments, must be paid when Form C is filed.

Penalties for Non-Compliance

 

LHDN has strict penalties regarding non-compliance:

• Late Filing of Form C: RM200 - RM20,000 and a possible increase in tax assessment.
• Understated Income: 45% to 100% undercharged tax.
• Tax: Penalty for Late Payment - An annual interest rate of 10% on overdue taxes. 
• Tax: Recordkeeping Defaults - A fine ranging from RM300 to RM10,000, a term of imprisonment, or both.

FAQs

1. How is a tax resident company different from a non-resident company? 

Tax resident companies (which are essentially managed and controlled in Malaysia) will pay tax on all income regardless of where it is earned. Non-resident companies are taxable only on income sourced from Malaysia. Non-resident companies typically have a flat tax rate of 10% on free royalty income, for example. 

2. Can I carry forward my tax losses?

Yes, unabsorbed business losses can be carried forward indefinitely to be used against future business income from the same source. However, there are strict shareholding test rules that must be met to utilize these losses.

3. Are dividends received from another Malaysian company taxable?

No, Malaysia operates a single-tier tax system. Tax is payable on profits at the company level, with no further tax on dividend distributions to shareholders.

4. What is the difference between Capital Allowances and Depreciation?

Depreciation is an accounting concept and is not allowable against tax. Capital Allowances are a statutory tax allowance for capital expenditure, effectively “tax depreciation.”

5. How does the Small Company tax rate apply?

If your paid-up capital is RM2.5 million or less, you can enjoy preferential rates. You will be taxed 15% for the first RM150,000 of chargeable income, 17% for the next RM850,000, and the current 24% rate for any income exceeding RM1 million.

Conclusion

Engaging with Malaysia's corporate tax framework is a vital and achievable obligation for any business. This code is primarily driven by the Income Tax Act 1967 report and managed by LHDN. It is important to have a firm understanding of residency status, calculation of chargeable income, deductible expenses, and the necessary steps of estimated payments and yearly filing. By getting involved in the requirements – conducting due diligence on record-keeping, taking advantage of incentives available to them, and adhering to deadlines – companies can comply with the requirements, avoid hefty financial fines, and be prepared to make informed decisions regarding tax efficiency. Full understanding of these requirements is not only a legal matter but a sound approach to long-term financial management and business growth in the Malaysian business landscape.

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