As a small or medium-sized enterprise (SME) owner in Malaysia, understanding the tax system is crucial for your business success.  It is vital to the country’s economic health, generating revenue that funds essential public services and development projects. According to the Organisation for Economic Co-operation and Development (OECD),  personal income tax accounted for 15% of Malaysia’s total tax revenue, with other taxes on goods and services accounting for 26%.  On the other hand, a staggering 50% of Malaysia’s total tax revenue comes from corporate taxation. Understanding how this system functions is essential for anyone navigating the financial landscape in Malaysia, from individuals to businesses.

Who is responsible for collecting taxes in Malaysia?

The Inland Revenue Board of Malaysia (IRBM), also known as Lembaga Hasil Dalam Negeri (LHDN) Malaysia, plays a crucial role in this domain. Essentially, the LHDN is the government agency responsible for managing tax matters in Malaysia. This includes:

• Collecting taxes: The LHDN is responsible for collecting various taxes from individuals and businesses, including income tax, which is likely the most relevant tax for your SME.
• Administering tax laws: The LHDN oversees the implementation of tax laws and regulations in Malaysia. Understanding these regulations is vital for ensuring your SME remains tax-compliant.

By familiarising yourself with the LHDN’s role, you can confidently approach tax filing and compliance. This guide offers a simplified overview of the Malaysian tax system, focusing on key aspects relevant to SMEs.

Taxation basics for SMEs in Malaysia

The Malaysian tax system consists of two main categories: direct taxes and indirect taxes.

• Direct taxes are levied directly on individuals and businesses. They are based on a person’s income or a company’s profits. Examples of direct taxes include income tax for individuals, corporate tax for businesses, and capital gains tax on the profit earned from selling assets. Importantly, direct taxes are designed to be progressive, meaning those with higher incomes or profits contribute a larger portion of national revenue.

• Indirect taxes, on the other hand, apply to the consumption of goods and services. Malaysia’s most common indirect taxes are the Sales and Service Tax (SST) and customs duties. These taxes are not directly levied on income but on spending, making them valuable tools for managing the economy and creating a more diverse and stable revenue stream for the government.

Corporate tax in Malaysia

Corporate tax in Malaysia applies to all companies registered in the country. It’s levied on a company’s chargeable income, representing the profit earned in Malaysia during its business operations.

Malaysia utilises a self-assessment system (SAS) for corporate tax. This mechanism replaced the manual process of calculating, submitting, and paying taxes.  Under SAS, companies are responsible for calculating their own tax liability and filing their tax returns electronically.

Malaysia offers a competitive corporate tax rate of 24% to attract foreign investment while ensuring domestic businesses contribute their fair share. However, recognising the importance of small and medium-sized enterprises (SMEs) to the economy, the government provides a lower tax rate for the first MYR 600,000 of their chargeable income. Additionally, specific sectors and business types may qualify for even lower tax rates or special incentives to stimulate growth and encourage innovation in key industries. As of 2024, the proposed tax rate for SMEs offers an even greater benefit, with the rate on the first RM150,000 of chargeable income potentially dropping to 15%. The chargeable income and tax rate are as follows:

Chargeable Income	Tax Rate
First RM150, 000	15%
RM150, 001 to RM600, 000	17%
RM600, 001 and above	24%

Special tax rates for SMEs:

In Malaysia, a company’s yearly sales turnover, number of full-time employees, and percentage of foreign shareholders are among the parameters that determine whether a company qualifies as an SME.  To qualify as an SME for tax purposes, your company must meet these criteria:

• Paid-up capital: Not exceeding RM2.5 million
• Gross income: Not exceeding RM50 million (from business sources)

Businesses that surpass these limits are classified as non-SMEs and are charged the usual 24% corporate tax rate.

Taxable profits for SMEs in Malaysia

It’s important to distinguish taxable profits from business expenses. Companies pay tax on their taxable profits, not the total income they generate. These taxable profits can be categorised into two main groups:

• Retained earnings are the profits a company reinvests in itself for future growth or to cover upcoming expenses. They are included when calculating the company’s corporate tax liability.
• Profit dividends: Dividends distributed to shareholders are not considered taxable income for the company itself. Instead, they are taxed in the hands of the individual shareholders who receive them.

Understanding common deductible expenses is also crucial. Companies can deduct various expenses from their gross income to arrive at their final taxable profits.  These commonly include startup costs, operating expenses, advertising expenses, salaries and bonuses paid to employees, and contributions made towards employee medical insurance and retirement plans.

Understanding tax obligations as an SME in Malaysia

When to pay corporate tax?

New companies in Malaysia have specific deadlines for paying corporate tax. Within the first three months of registration, you must submit an estimate of your tax liability. Starting from the sixth month of your first assessment year, monthly tax instalments become due by the 15th of each month.

Once the assessment year concludes, all companies must file their tax return electronically. If the final tax amount exceeds your estimated payments, you’ll be responsible for settling the remaining balance. Conversely, if you’ve overpaid based on your estimates, you can apply for a tax refund.

It’s important to note that Sdn Bhd companies with a paid-up capital of RM2.5 million or less are exempt from submitting estimated tax payments for their first two assessment years.

Filing corporate tax in Malaysia

Here’s a breakdown of the key steps companies in Malaysia must follow when filing their corporate tax:

• Estimating Tax Liability (e-CP204):
  • All companies must submit an estimate of their tax liability.
  • New companies have three months from starting operations to do this.
  • Existing companies must file their estimate 30 days before the beginning of a new year.
  • You can submit your estimate electronically through e-filing (e-CP204) or by delivering it to the LHDNM Processing Centre.

• Paying Estimated Tax (CP207):
  • Companies are required to pay installments on their estimated tax liability.
  • Use form CP207 for these payments.
  • The due date is the 10th of each month.
  • New companies begin making these payments in the 6th month of their first assessment year.
  • Existing companies start making payments in the 2nd month of their assessment year.
• Filing Tax Return (Form C):
  • Once the assessment year ends, all companies must file their final tax return electronically (e-filing) using form e-C.
  • Alternatively, you can submit it physically at the LHDNM Processing Centre.

Following these steps ensures your company fulfils its corporate tax filing obligations in Malaysia.

What happens if you don’t pay corporate tax?

Failure to comply with these responsibilities can result in penalties under both criminal and civil law:

• Criminal penalties:  These can be imposed for serious offences such as not submitting tax returns within the designated timeframe or deliberately reporting false income on the Income Tax Return Form (BNCP).

• Civil penalties:  Companies that fail to pay their taxes within the prescribed period will be subject to civil penalties, which may include interest charges and late payment fees.

Taking proactive measures to ensure timely and accurate tax filing and payment is essential for companies operating in Malaysia. This not only avoids potential legal repercussions but also fosters a positive relationship with the tax authorities.

To sum up

Understanding the Malaysian tax system, particularly for SMEs, is essential for navigating your business finances effectively. This guide has provided a simplified overview of key concepts, but remember, this is just the starting point.

Consider consulting a qualified tax advisor for more in-depth information and guidance tailored to your specific circumstances. They can assist you in maximising your tax benefits, ensuring compliance with regulations, and achieving your financial goals.

By familiarising yourself with your tax obligations and taking a proactive approach, you can ensure your SME thrives in the Malaysian business landscape.