2024/2025 Malaysian Tax Booklet

Income tax rates

Resident companies are taxed at the rate of 24% while those with paid-up capital of RM2.5 million or less*, and gross business income of not more than RM50 million are taxed at the following scale rates:

^{* The companies must not be part of a group of companies where any of their related companies have a paid-up capital of more than RM2.5 million, and w.e.f YA 2024, no more than 20% of its paid-up capital is owned (directly or indirectly) by companies incorporated outside Malaysia or non-Malaysian citizens.}

Non-resident companies are taxed at the following rates:

<sup>Note: Where the recipient is resident in a country which has a double tax treaty with Malaysia, the tax rates for the specific sources of income may be reduced.
* Interest paid to a non-resident by a bank or a finance company in Malaysia is exempt from tax.</sup>

Profit distribution

Tax on a company’s profits is a final tax and dividends paid, credited or distributed are tax exempt in the hands of shareholders.

Group relief

Under the group relief provision, a company may surrender a maximum of 70% of its adjusted loss for a YA to one or more related companies for the first 3 consecutive YAs after having completed its first 12-month basis period from commencement of its operations. Conditions to be met by the claimant and surrendering companies include the following:

• Resident and incorporated in Malaysia.
• Paid-up capital of ordinary shares exceeding RM2.5 million at the beginning of the basis period.
• Both companies have the same (12-month) accounting period.
• Both companies are “related companies” as defined in the law, and must be “related” throughout the relevant basis period as well as the 12 months preceding that basis period.

Companies currently enjoying certain incentives such as pioneer status (PS), investment tax allowance (ITA), reinvestment allowance, etc. or which have unutilised ITA or unabsorbed pioneer losses upon the expiry of its ITA or PS incentives under the Promotion of Investments Act 1986, are not eligible for group relief.

Transfer pricing

1. Legislation

• Malaysia’s transfer pricing (TP) legislation adopts the arm’s length principle espoused in the OECD Transfer Pricing Guidelines.
• Under the Income Tax Act 1967 (ITA 1967), the DGIR is empowered to make adjustments on controlled transactions of goods, services or financial assistance based on the arm’s length principle or to disregard a structure which is commercially irrational.

• The definition of ‘control’ is common shareholding of 20% of shareholding or more; and

  1. the operations of the affiliate depend on the proprietary rights of the shareholder of 20%, or its affiliate; or
     
  2. the shareholder / affiliate is able to influence decisions relating to the business activities of the company, including the receipt of services, and the pricing of the acquisition of such services; or
  3. one or more of the directors or members of the board of directors of a person are appointed by the shareholder / affiliate. 

• The following rules and guidelines have been issued by the Inland Revenue Board (IRB):

  • Income Tax (Transfer Pricing) Rules 2023 (“TP Rules”)(w.e.f. YA2023);
    
  • Malaysian Transfer Pricing Guidelines 2012 (“TP Guidelines”)
    

  • Income Tax (Advance Pricing Arrangement) Rules 2023; and

  • Advance Pricing Arrangement Guidelines 2024 (“APA Guidelines”).

• The arm’s length requirement is included in the Labuan Business Activity Tax Act 1990 (LBATA 1990). The same definition of control under the ITA 1967 (including the expanded definition which captures entities with common shareholding of 20% or more where certain additional conditions are met) is applied in LBATA 1990.

2.   Documentation requirements

• Taxpayers with intercompany transactions are required to prepare TP documentation on a contemporaneous basis.
• Documentation should be in place prior to the due date of filing the tax return and dated upon its completion. TP documentation needs to be submitted within 14 days of the tax authorities’ request.
• The TP Rules set out prescriptive documentation requirements, supplemented by additional guidance under the Malaysian Guidelines. An index which references the items in the TP Rules is required.

• Malaysian TP documentation comprises the following:

  • Multinational Enterprise (MNE) Group information - Broadly similar to the content of an OECD master file, but now forms part of the Malaysian TP documentation. Non-inclusion of this information in the TP documentation or submission at a later date will be considered as non-compliance. Provides an overview of the multinational group’s business, value drivers, intangibles, financing arrangements, and supply chain, specific to the supply chain in which the Malaysian taxpayer operates. This information is required only if the entity is part of an MNE Group i.e. the Group has entities (including permanent establishments (PE)) that operate in two or more different tax jurisdictions.
  • Local business information - Information on the local taxpayer’s business, including standard components of an OECD local file, and source documents / supporting documents referred to in preparing the TP analysis.
  • Cost contribution arrangements (CCA) - Prescriptive disclosure requirements for taxpayers with intragroup CCAs.

3.   Thresholds

• There is no de minimis rule in Malaysian TP legislation.
• The TP Guidelines allows taxpayers to opt to prepare limited documentation if they fall below the following thresholds*:
  • Gross income exceeding RM25 million, and total amount of related party transactions exceeding RM15 million.
  • For financial assistance, if the principal exceeds RM50 million.

^{*Not applicable to PE. PEs are required to prepare full documentation regardless of revenue or transaction value.}

• Companies that are not chargeable to tax due to tax incentives or losses are encouraged to prepare documentation if their related party transactions exceed the thresholds outlined above.
• The TP Guidelines need not apply to controlled transactions between companies who are both assessable and chargeable to tax in Malaysia, and where it can be proven that any adjustments made under the TP Guidelines will not alter the total tax payable by both companies.

4. Determination of the arm’s length range

• Data for the same basis period as the year of assessment (YA) of the Malaysian taxpayer should be used for assessment of the arm’s length range. 
• Malaysia has a defined arm’s length range, ranging from the 37.5th percentile to the 62.5th percentile.
• The DGIR may make an adjustment to the midpoint of the arm’s length range if the results of the intercompany transaction fall outside the arm’s length range.

5. Penalties for non-compliance

• Taxpayers are required to submit documentation within 14 days of the IRB’s request. The IRB treats failure to submit documentation within the timeframe as non-compliance with the contemporaneous requirement under the TP Rules. Refer to “Offences & penalties” in the Income Tax chapter.
• A fine ranging from RM20,000 to RM100,000 per YA, or imprisonment not exceeding six months, or both, may apply to taxpayers who fail to furnish contemporaneous TP documentation. 
• The IRB may apply a surcharge of up to 5% on TP adjustments. The surcharge and penalties on additional tax payable under section 113 are mutually exclusive.

Earnings stripping rules (ESR)

The ESR applies on interest expense (of more than RM500,000 in a basis period) in connection with or on any financial assistance granted in controlled transactions (as defined), whether directly or indirectly, to a person. The ESR guideline narrows the application of the prescribed rules to cross-border controlled transactions.

The prescribed rules specify that the maximum amount of interest deduction allowed is 20% of the Tax-EBITDA (Earnings Before Income Tax, Depreciation and Amortisation) from each of the sources of income consisting of a business. The interest expenses in excess of the maximum deduction allowed may be carried forward indefinitely to be deducted against future income. In the case of a company, the carry forward of the above-mentioned interest expenses would not be allowed if there is a substantial change in the company's shareholders.

Global minimum tax (GMT)

Under an OECD Inclusive Framework, more than 140 jurisdictions agreed to enact a two-pillar solution to address the challenges arising from the digitalisation of the economy. Pillar Two introduces a global minimum Effective Tax Rate (ETR) via a system where multinational groups with consolidated revenue over EUR 750 million are subject to a minimum ETR of 15% on income arising in low-tax jurisdictions. 

The GMT will be effective for MNEs with financial years beginning on or after 1 January 2025. The provisions of the GloBE rules including the Qualified Domestic Top-up Tax (QDTT) rules have been incorporated into the Malaysian tax legislations, i.e. the ITA 1967, Petroleum (Income Tax) Act 1967 and LBATA 1990. The provisions closely aligns with the OECD Model Rules which includes: 

• The Multinational Top-up Tax under the Income Inclusion Rule and QDTT on in-scope MNEs commencing on or after 1 January 2025

• A substance-based income exclusion amount for all top-up taxes 

• A minimum tax rate at 15%

To mitigate the impact of GMT, it is proposed that existing tax incentives be streamlined, new non-tax incentives introduced, and the feasibility of strategic investment tax credits considered.