Malaysia Tax Regime

Malaysia operates a territorial income tax system administered by the Inland Revenue Board of Malaysia (LHDN/HASiL): tax is charged on income accruing in or derived from Malaysia and, for residents, on foreign-sourced income received in Malaysia, though broad exemption orders currently neutralise most remittance-based taxation. Companies pay corporate income tax at a 24% standard rate, with reduced 15%/17% tiers for smaller resident companies; individuals pay progressive rates up to 30%. There is no general goods-and-services tax — Malaysia abolished GST in 2018 and instead levies a single-stage sales tax on manufactured and imported goods and a service tax on prescribed services, a base that was significantly widened from 1 July 2025.

The system is in a period of deliberate modernisation. A capital gains tax on disposals of unlisted shares took effect in 2024, ending Malaysia’s status as a jurisdiction with no tax on share gains outside real property; a 2% tax on large individual dividend receipts arrived in 2025; the OECD global minimum tax applies to large groups for financial years beginning on or after 1 January 2025; mandatory e-invoicing has been phased in across 2024–2026; and stamp duty moved to self-assessment from 2026. Ownership of the rules sits with the Ministry of Finance, with LHDN administering direct taxes and the Royal Malaysian Customs Department administering sales tax, service tax, excise and customs duties.

1.1 Sources of law and treaties

The principal statutes are the Income Tax Act 1967 (income tax, withholding, transfer pricing, and — since 2024 — the new Part XI global minimum tax and the capital gains tax provisions), the Real Property Gains Tax Act 1976, the Labuan Business Activity Tax Act 1990, the Promotion of Investments Act 1986, the Sales Tax Act 2018 and Service Tax Act 2018, the Stamp Act 1949 and the Customs Act 1967. Annual Finance Acts implement the Budget; the Finance Act 2025 (gazetted 31 December 2025) enacted the Budget 2026 measures described in this handbook. LHDN supplements the statutes with binding public rulings, guidelines and practice notes.

Malaysia has one of Asia’s larger treaty networks, with roughly 73 comprehensive double tax agreements in force. It ratified the OECD Multilateral Instrument in 2021, so a principal purpose test now conditions relief under most covered treaties. Because Malaysia levies no dividend withholding tax of its own, treaty relief matters mainly for inbound passive income and permanent-establishment questions.

1.2 Recent developments

The most consequential recent and pending changes are:

Budget 2026, enacted through the Finance Act 2025 (gazetted 31 December 2025): the foreign-sourced income exemptions were extended — foreign dividends and foreign capital gains received by resident companies and LLPs to 31 December 2030 (widened to co-operatives and trust bodies from 2027), and all foreign-sourced income of resident individuals (other than partnership business income) to 31 December 2036; the capital gains tax “disposal” definition was broadened from 1 January 2026 to capture redemptions, conversions, buybacks, capital reductions and liquidations; and the 2% tax on large individual dividend receipts was extended to LLP profit distributions above RM100,000 from year of assessment 2026.

The 2% dividend tax on individual shareholders receiving more than RM100,000 of dividends per year applies from year of assessment 2025 — the first shareholder-level charge since Malaysia adopted the single-tier system.

Capital gains tax on disposals of unlisted Malaysian shares by companies, LLPs, trusts and co-operatives applies from 1 March 2024, at 10% of the net gain (or an elective 2% of gross proceeds for pre-2024 acquisitions).

The global minimum tax (Pillar Two) — a domestic top-up tax and a multinational top-up tax — applies to groups with consolidated revenue of at least EUR 750m for financial years beginning on or after 1 January 2025.

Service tax was expanded from 1 July 2025 to rental and leasing, construction, fee-based financial services, and private healthcare and education for non-citizens, with calibration in January 2026 (rental rate cut from 8% to 6%, higher tenant-relief thresholds).

Mandatory e-invoicing (MyInvois) was phased in by turnover from August 2024, reaching businesses above RM1m turnover on 1 January 2026; businesses below RM1m are exempt after the final phase was cancelled.

Stamp duty moved to a phased self-assessment regime from 1 January 2026, and foreign buyers of residential property now pay a flat 8% conveyance duty.

The Johor-Singapore Special Economic Zone opened in January 2025 with a 5% corporate rate for up to 15 years for qualifying new investments, and a New Investment Incentive Framework is phasing in from March 2026. A carbon tax for the iron, steel and energy sectors has been announced for 2026 but the enabling legislation had not been enacted as of mid-2026.

Headline statutory corporate income tax rate for a resident company. Where sub-national (state, provincial, cantonal or municipal) corporate taxes apply, the combined rate reported by the OECD is shown. Projected 2026–2028 rates carry the current rate forward unless a change is already enacted or officially scheduled. As-of 2026.

Top marginal statutory personal income tax rate on employment income for a resident individual. Where sub-national (state, provincial, cantonal or municipal) income taxes are a standard part of the system, the combined top rate is shown. Projected 2026–2028 rates carry the current rate forward unless a change is already enacted or officially scheduled. As-of 2026.

2.1 Residence and scope

A company is Malaysian tax resident if the management and control of its business is exercised in Malaysia at any time in the basis year — in practice, if the board meets in Malaysia to manage the company; the place of incorporation is irrelevant. Residents are taxed on Malaysia-source income and on foreign income received in Malaysia (subject to the exemptions in section 5.1); non-resident companies are taxed only on Malaysia-source income, at the same 24% rate, and on certain gross payments through withholding. Malaysia does not levy a branch profits tax, but branches are generally treated less favourably for incentives and some deductions.

2.2 Rates

The SME tiers apply to resident companies with paid-up ordinary capital of RM2.5m or less and gross business income of RM50m or less, provided no more than 20% of the paid-up capital is owned by foreign companies or non-citizen individuals and no related company exceeds the RM2.5m capital ceiling. Labuan entities carrying on Labuan trading activity pay 3% of audited net profits, and Labuan holding (non-trading) activity is not taxed, in each case conditional on prescribed substance (employees and operating expenditure in Labuan); entities failing substance pay 24%.

2.3 Income determination and deductions

Taxable income starts from accounting profit with adjustments. Expenses are deductible if wholly and exclusively incurred in producing gross income; non-deductibles include capital expenditure, 50% of most entertainment expenses, fines and penalties, unapproved donations, and payments to non-residents where the required withholding tax has not been remitted. Payments by Malaysian residents to Labuan companies face statutory deduction restrictions (97% of most payments, and 25% of interest and lease rentals, disallowed).

Depreciation is replaced by capital allowances: general plant and machinery attracts a 20% initial and 14% annual allowance, heavy machinery and motor vehicles 20%/20%, computers and ICT equipment a 20% annual allowance, and industrial buildings a 10% initial and 3% annual allowance. Unabsorbed capital allowances carry forward indefinitely within the same business. Budget 2026 added an accelerated allowance (20% initial, 40% annual) for qualifying expenditure between 11 October 2025 and 31 December 2026 on locally manufactured machinery, ICT equipment and customised software.

2.4 Interest and financing

Earnings-stripping rules under section 140C cap deductions for interest on related-party (controlled) financial assistance at 20% of tax-EBITDA, where such interest exceeds a RM500,000 de minimis in the basis period; restricted interest carries forward indefinitely subject to the same annual cap. Withholding tax of 15% applies to most interest paid to non-residents (bank deposit interest is exempt), and thin-capitalisation questions are otherwise handled through transfer pricing. Domestic transactions must be settled in ringgit and the currency is non-internationalised, so cross-border financing is typically documented in foreign currency with Bank Negara Malaysia’s Foreign Exchange Policy notices governing residents’ offshore borrowing.

2.5 Losses and group relief

Unabsorbed business losses may be carried forward for a maximum of ten consecutive years of assessment; there is no carryback. Group relief allows a resident company to surrender up to 70% of its adjusted loss to a related resident company (70% common ownership, both with paid-up capital above RM2.5m), but only for the surrendering company’s first three years after commencing operations, per LHDN Public Ruling 2/2025. Continuity-of-ownership restrictions apply to dormant companies.

2.6 Capital gains

Since 1 March 2024 Malaysia taxes gains on disposals of unlisted shares in Malaysian-incorporated companies — and shares of foreign companies deriving at least 75% of value from Malaysian real property — when disposed of by companies, LLPs, trusts and co-operatives: 10% of the net gain, or an irrevocable one-time election of 2% of gross proceeds for shares acquired before 2024. Returns and payment are due within 60 days of disposal. From 1 January 2026 the disposal definition also captures redemptions, conversions, share buybacks, capital reductions and distributions in a winding-up. Intra-group restructurings within a Malaysian group can be exempted under a ministerial order through 2028. Individuals remain outside the capital gains tax; real property disposals fall under the separate RPGT (section 6.3), and gains on foreign capital assets received in Malaysia are exempt with economic substance through 2030.

2.7 Transfer pricing

The Income Tax (Transfer Pricing) Rules 2023 and the 2024 guidelines require arm’s-length pricing with an interquartile arm’s-length range (37.5th–62.5th percentile) and allow LHDN to adjust to the median. Contemporaneous documentation must be completed by the return-filing date and produced within 14 days of request; full documentation is required where gross business income exceeds RM30m with cross-border related-party transactions of RM10m or more, or controlled financial assistance exceeds RM50m. A surcharge of up to 5% applies to transfer pricing adjustments even where no additional tax arises, and failure to furnish documentation attracts fines of RM20,000–100,000 per year. Country-by-country reporting applies to Malaysian-parented groups with consolidated revenue of RM3bn or more.

2.8 Incentives

Malaysia runs an extensive incentive architecture: pioneer status (70–100% exemption of statutory income for five years), investment tax allowance (60% of qualifying capital expenditure against 70% of statutory income over five years), reinvestment allowance (60% of qualifying expenditure for manufacturers, claimable for fifteen years), and sectoral regimes administered by MIDA and MDEC. Malaysia Digital status offers electing companies 0% on qualifying IP income and 5% or 10% on qualifying non-IP income for up to ten years. The Johor-Singapore Special Economic Zone (from January 2025) offers a 5% corporate rate for up to fifteen years for qualifying activities such as AI and quantum supply chains, medical devices, aerospace and global services, plus a 15% rate for knowledge workers; the Forest City Special Financial Zone adds a 0% rate for qualifying family offices for up to twenty years. A New Investment Incentive Framework — outcome-based and replacing several legacy schemes — phases in for manufacturing from March 2026. Incentives increasingly interact with the 15% global minimum tax for large groups, which can claw back the benefit of very low effective rates.

2.9 Pillar Two

Malaysia enacted the OECD global minimum tax through the Finance (No. 2) Act 2023: a qualified domestic minimum top-up tax and a multinational top-up tax (income inclusion rule) apply for financial years beginning on or after 1 January 2025 to groups with consolidated revenue of at least EUR 750m in two of the four preceding years. The undertaxed profits rule has not been adopted. The GloBE information return and any top-up tax return for the first reporting year are due within 18 months of that year-end. Large inbound groups should assume Malaysian operations benefiting from tax holidays will be tested against the 15% minimum effective rate.

3.1 Residence and rates

Individuals are resident principally by physical presence — 182 days or more in the basis year, with supplementary linked-period and habitual-residence tests. Residents pay progressive rates from 0% on the first RM5,000 to 30% on chargeable income above RM2m, after personal reliefs (RM9,000 personal, plus spouse, child, EPF and insurance, medical, lifestyle and education reliefs, several of which Budget 2026 broadened). Non-residents pay a flat 30% on Malaysian-source income with no reliefs. Employment income is collected through monthly tax deductions (MTD/PCB), which can serve as a final tax for employment-only taxpayers.

Special regimes soften the headline rates for target groups: the Returning Expert Programme offers returning Malaysian professionals a 15% flat rate on employment income for five years, and approved knowledge workers in the Johor-Singapore SEZ, Forest City and Iskandar pay 15% on qualifying employment income.

3.2 Investment income, dividends and capital gains

Malaysia’s single-tier system means ordinary dividends reach shareholders with no further tax — subject, from year of assessment 2025, to a 2% tax on an individual’s chargeable dividend income above RM100,000 a year (resident or not, including nominee holdings). Distributions from EPF, ASNB and unit trusts, foreign dividends, and dividends from pioneer-status, shipping, co-operative, closed-end fund and Labuan entities are outside the charge; from year of assessment 2026 the same 2% applies to LLP profit distributions above RM100,000. Individuals face no general capital gains tax: gains on shares are tax-free outside the RPGT net, while real property gains are taxed under RPGT at rates that fall to 0% for citizens after five years of ownership (foreigners: 30% within five years, 10% thereafter). Interest from Malaysian banks is exempt for residents. REIT distributions lost their concessionary 10% final withholding at the end of 2025 — resident individuals now include them at progressive rates and non-resident individuals pay 30%.

3.3 Inheritance, gift and the absence of a wealth tax

Malaysia levies no inheritance, estate, gift or net wealth tax — estate duty was abolished in 1991 and periodic reform debates have not produced legislation. Combined with the territorial treatment of individuals, the exemption of foreign-sourced income received by residents through 2036, no tax on unlisted-share gains for individuals, and the RPGT taper to zero for citizens, personal wealth planning in Malaysia turns chiefly on the 2% dividend charge, RPGT timing and stamp duty.

Withholding must be remitted to LHDN within one month of paying or crediting the non-resident; unremitted withholding makes the underlying payment non-deductible. Interest on deposits with Malaysian licensed banks is exempt, and service fees are generally within scope only where the services are performed in Malaysia. Treaties commonly cut interest to 10% and royalties to 8%. There is no dividend withholding under the single-tier system — the 2% individual dividend tax is a self-assessed income tax, not a withholding.

5.1 Foreign-sourced income

Since 2022 foreign-sourced income received in Malaysia by residents is within the charge, but exemption orders currently blunt the change: resident individuals are exempt on all foreign-sourced income received through 31 December 2036 (except income from a Malaysian partnership business), and resident companies and LLPs are exempt on foreign dividends — and on gains from disposals of foreign capital assets — received through 31 December 2030, subject to conditions built around origin-country taxation (a 15% headline-rate participation test) and economic-substance requirements set out in LHDN guidelines. Foreign income that fails the conditions is taxed at the prevailing rate on receipt, with foreign tax credit available. Unremitted foreign income remains wholly outside the Malaysian net.

5.2 Anti-avoidance and disclosure

Section 140 of the Income Tax Act gives LHDN a broad power to disregard or recharacterise transactions with a tax-avoidance purpose, complemented by the transfer pricing regime and its 5% adjustment surcharge, earnings-stripping interest limits, and the MLI principal purpose test across the treaty network. Malaysia participates in the Common Reporting Standard and country-by-country exchange. There is no CFC regime. Mandatory e-invoicing gives LHDN near-real-time transaction visibility, and the 2025 audit frameworks signal a more data-driven enforcement posture; the statute of limitations is five years (seven for transfer pricing), with no limit for fraud or wilful default.

5.3 Foreign tax relief

Residents may credit foreign tax against Malaysian tax on the same income under a treaty (full bilateral credit) or, for non-treaty countries, a unilateral credit of half the foreign tax; the credit is capped at the Malaysian tax on the doubly taxed income and claimed within two years. In practice the broad foreign-sourced-income exemptions mean credits matter mainly for income classes outside the exemption orders — notably foreign branch profits of companies and partnership-source income of individuals.

6.1 Sales and service tax

Malaysia’s single-stage SST replaced GST in September 2018 and Budget 2026 confirmed no GST revival is planned. Sales tax applies to locally manufactured and imported goods at 5% or 10% (with broad exemptions for essentials; the rate schedule was recalibrated toward discretionary and premium goods from 1 July 2025), with manufacturers registering above RM500,000 of annual taxable turnover. Service tax applies at 8% to most prescribed services — 6% for food and beverage, telecommunications, parking and logistics — and the 1 July 2025 expansion brought rental and leasing (6% from January 2026, after starting at 8%), construction (6%), fee-based financial services (8%), and private healthcare and education supplied to non-citizens into scope, with registration thresholds of RM500,000–1.5m depending on the service. Imported low-value goods sold online bear a 10% sales tax, and foreign providers of digital services to Malaysian consumers charge 8% service tax above a RM500,000 threshold. Returns are bimonthly.

6.2 e-Invoicing

Mandatory e-invoicing through LHDN’s MyInvois platform rolled out by turnover: August 2024 for businesses above RM100m, January 2025 for RM25–100m, July 2025 for RM5–25m, and January 2026 for RM1–5m. Businesses below RM1m annual turnover are permanently exempt after the final planned phase was cancelled in December 2025. Each phase enjoyed an interim relaxation permitting consolidated monthly e-invoices; from 2026, transactions above RM10,000 require individual e-invoices. e-Invoicing is now a practical prerequisite for deductions and refunds and materially raises the compliance bar for mid-sized businesses.

6.3 Property, stamp and other taxes

Real property gains tax applies to Malaysian land and real-property-company shares: companies pay 30% for disposals within three years, tapering to 10% from the sixth year; citizens taper to 0% and non-citizens to 10% after five years. RPGT moved to self-assessment in 2025. Stamp duty applies at 1–4% on property conveyances (a flat 8% for foreign buyers of residential property from 2026), 0.3% on unlisted share transfers, 0.15% on listed contract notes (capped per note), and 0.5% on loans; a phased self-assessment regime began in January 2026, and employment contracts bear a nominal RM10 duty with an exemption for wages up to RM3,000 a month. States levy quit rent and local councils levy assessment rates on property. Excise duties are heavy on vehicles (60–105%), tobacco, alcohol and sugar-sweetened beverages; a 3% windfall levy applies to palm oil above price thresholds; a RM10-per-night tourism tax applies to foreign guests; and the announced carbon tax on iron, steel and energy remained unenacted as of mid-2026.

6.4 Social security and customs

Employers contribute 12–13% of wages to the Employees Provident Fund (13% for monthly wages up to RM5,000) and employees 11%; from October 2025 foreign workers with valid passes contribute at a mandatory 2% + 2%. SOCSO employment-injury and invalidity contributions run to about 1.75% (employer) and 0.5% (employee) and the employment insurance system adds 0.2% each, all on wages capped at RM6,000 a month; a 1% HRD training levy applies to most employers with ten or more Malaysian employees. Import duties range from 0–30% (ASEAN-origin goods largely duty-free under ATIGA), and free industrial and commercial zones plus licensed manufacturing warehouses suspend duty and SST for export-oriented operations.

7.1 Filing and payment

Malaysia is a self-assessment jurisdiction with near-universal e-filing through MyTax. Companies estimate tax in advance on Form CP204 (filed 30 days before the basis period, at no less than 85% of the prior estimate) and pay twelve monthly instalments by the 15th, with revisions in the sixth and ninth months and a 10% penalty where the final tax exceeds the estimate by more than 30%; the annual return (Form e-C) is due seven months after the financial year-end. Individuals file by 30 April (Form BE) or 30 June (Form B, business income), with short e-filing extensions; employers withhold monthly tax deductions and file Form E by 31 March. Withholding tax is remitted within a month; SST returns are bimonthly; capital gains tax returns are due within 60 days of disposal.

7.2 Audit, rulings and limitation

LHDN’s 2025 audit frameworks (income tax, employer, withholding and a separate transfer pricing framework) formalise a data-led audit programme fed by e-invoicing. Incorrect returns attract penalties of up to 100% of the undercharged tax, administratively graduated — typically 15% for voluntary disclosure before audit. Assessments may be raised within five years of the year of assessment (seven for transfer pricing), with no limit for fraud, wilful default or negligence. Taxpayers can rely on binding public rulings or seek fee-based advance rulings and advance pricing arrangements (bilateral APAs with treaty partners under the 2023 APA rules).

7.3 Disputes

Appeals begin with Form Q to the Director General within 30 days of the assessment; LHDN has twelve months to review before forwarding the case to the Special Commissioners of Income Tax, with onward appeals on points of law to the High Court and Court of Appeal. Indirect tax disputes go to the separate Customs Appeal Tribunal; a merged tax appeal tribunal has been debated for years but not legislated. Treaty disputes can proceed through the mutual agreement procedure. Payment of tax is generally not suspended by an appeal, so disputed assessments are usually paid and recovered later.

Indicative deadlines. As-of June 2026.

9.1 Entity choice and foreign ownership

The Sdn Bhd (private company limited by shares under the Companies Act 2016) is the standard vehicle: one shareholder suffices, there is no minimum capital beyond RM1, and incorporation through SSM’s MyCoID portal typically completes in days — but at least one director must be ordinarily resident in Malaysia and a licensed company secretary is required. LLPs suit professional practices; branches of foreign companies are permitted but are generally less tax-efficient and excluded from most incentives. Most manufacturing and services sectors allow 100% foreign ownership, with sector-specific caps and licensing in banking, insurance, oil and gas, distributive trade and logistics. Tax registration follows incorporation largely automatically, and employer, EPF and SOCSO files must be opened before hiring.

9.2 Incentive structuring and special zones

Location and incentive strategy dominate inbound structuring: the Johor-Singapore SEZ’s 5% rate and knowledge-worker concessions target regional relocations from Singapore; Labuan offers a 3% regime for trading activity with substance; free zones and licensed manufacturing warehouses suspend duty and SST for export manufacturing; and Malaysia Digital status carves out low rates for technology operations. Two systemic constraints deserve early attention — the 15% global minimum tax neutralises deep incentives for groups above EUR 750m revenue, and payments from Malaysian residents to Labuan entities suffer statutory deduction disallowances. The New Investment Incentive Framework will progressively replace legacy incentives from 2026, so lock-ins and grandfathering deserve attention in timing decisions.

9.3 A worked illustration

A foreign group establishing a Malaysian distribution and services subsidiary with RM10m of chargeable income pays 24% corporate tax (RM2.4m) — the SME tiers are unavailable because foreign ownership exceeds 20%. Royalties charged by the parent bear 10% withholding (often 8% under treaty) and management fees for services performed in Malaysia bear 10% unless treaty-protected; both are deductible only if the withholding is remitted. Profit repatriation by dividend attracts no withholding tax and no further Malaysian tax at the parent level. If the group’s consolidated revenue exceeds EUR 750m, a 24% domestic rate leaves no Pillar Two exposure; had the subsidiary enjoyed a 5% SEZ rate, the domestic top-up tax would recapture the difference to 15% — the incentive calculus differs fundamentally for large and mid-market groups.

9.4 Compliance and practical points

Practical friction points are predictable: e-invoicing onboarding (mandatory above RM1m turnover, with individual e-invoices required for transactions above RM10,000); the CP204 estimate cycle and its 30% underestimation penalty; withholding-tax hygiene on any cross-border service, royalty or interest flow; transfer pricing documentation completed by the filing date rather than on request; service tax registration mapping across the widened 2025 base, including intra-group rentals and fee-based financial services; and ringgit settlement rules with repatriation deadlines on export proceeds. The 2% dividend tax makes shareholder-level planning relevant for founders and family shareholders for the first time under single tier, and the broadened 2026 capital gains tax definition means corporate reorganisations — buybacks, redemptions, capital reductions — now need CGT analysis alongside stamp duty.