Additional Criteria for Special Treatment of MSMEs in Malaysia
With effect from the Year of Assessment (“YA”) 2024, the definition of a Small and Medium Enterprise (“SME”) under the Income Tax Act 1967 (“the Act”) has been refined to include a new ownership condition.
Under this updated definition, a company will only qualify as an SME if not more than 20% of its paid-up capital in respect of ordinary shares is directly or indirectly owned by foreign shareholders, that is, by one or more companies incorporated outside Malaysia or by individuals who are not Malaysian citizens.
This change applies from YA2024 onwards, and companies with foreign ownership are advised to review their shareholding structure to determine whether they continue to qualify for SME status.
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SME Definition and New Foreign Shareholding Condition
Under the Act, a company is regarded as an SME if, at the beginning of the basis period for a particular YA, it satisfies all of the following conditions:
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Paid-up capital in respect of ordinary share of the company does not exceed RM2.5 million at the beginning of the basis period;
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Gross income from all business sources for the basis period does not exceed RM50 million;
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None of its related companies has paid-up capital in respect of ordinary shares exceeding RM2.5 million at the beginning of the basis period
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The above three conditions have long formed the basis for determination of SME status under the Act. However, the Finance (No. 2) Act 2023 introduced an additional condition, effective from YA2024, which provides that:
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20% of the paid-up capital in respect of ordinary shares of the company at the beginning of the basis period for a YA is directly or indirectly owned by one or more companies incorporated outside Malaysia or by one or more individuals who are not citizens of Malaysia.
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This new requirement means that a company exceeding the 20% foreign shareholding threshold, whether directly or indirectly will no longer qualify as an SME for tax purposes.
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Tax Impact of the Change of Foreign Shareholding Condition
The new foreign shareholding condition affects a company’s eligibility for several tax benefits and administrative concessions available to SMEs. The key changes are summarised below.
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Item
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Prior to YA2024
(Qualifying as SME)
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YA2024 onwards
(if >20% foreign shareholding)
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Preferential tax rate
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Eligible for preferential tax
rates
First RM150,000 – 15%
Next RM450,000 – 17%
Excess amount – 24%
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Not eligible for preferential
tax rates, entirely taxed at 24%.
|
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Small value asset (SVA) special
allowance
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Entitled to claim 100% capital
allowance on all qualifying SVA, without any limit on the total expenditure
incurred per YA.
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Entitled to claim 100% capital
allowance on all qualifying SVA, however the special allowance claim is
capped at RM20,000 per YA.
|
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Form CP204 submission
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Exempted from submitting the
estimate of tax payable (Form CP204) for the first two YA following
incorporation.
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Exemption is no longer
available.
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The loss of SME status can therefore lead to a higher effective tax rate, restriction on SVA claims and compliance obligations. Companies with notable foreign shareholding should review their current ownership structure and evaluate potential implications on their SME classification and tax position.
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Practical example
TDM Sdn. Bhd. is a company incorporated and resident in Malaysia. Its shareholding structure is as follows:
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HOC Sdn. Bhd. (incorporated in Malaysia) – 80%
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Mr. Ng (resident individual) – 10%
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Ms. Celine (non-resident individual) – 10%
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Separately, HTE Limited, a company incorporated outside Malaysia, holds 100% of the shares in HOC Sdn. Bhd.
Although 90% of TDM Sdn. Bhd.’s shares are held directly by Malaysian residents (80% by HOC Sdn. Bhd and 10% by Mr. Ng), the SME definition considers both direct and indirect foreign ownership. Since HTE Limited, a foreign-incorporated company, holds 100% of HOC Sdn. Bhd., the 80% shareholding in TDM Sdn. Bhd. owned by HOC Sdn. Bhd. is indirectly held by a foreign company.
This means 90% of TDM Sdn. Bhd,’s paid-up capital in respect of ordinary shares (80% indirectly held by HTE Limited and 10% directly by a non-resident individual) is ultimately owned by foreign shareholders.
As TDM Sdn. Bhd.’s foreign shareholding exceeds 20%, the company fails to meet the SME qualifying condition under the Act.
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Conclusion
It is important for companies to understand the changes in the foreign shareholding as affects the company’s compliance and tax treatment on certain items. Companies need to plan ahead to maximize their tax efficiency.
For further information, please visit the official website of the Inland Revenue Board of Malaysia at
https://www.hasil.gov.my/en
KAIZEN Group, together with its associate firms in Malaysia, can help the clients to perform these compliances formalities so as to maintain the Malaysia company in good standing. Please call and talk to our professional accountants in Kaizen for further clarification.
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