Introduction
sme tax malaysia rules give small and medium enterprises (SMEs) favourable income tax treatment under the Income Tax Act 1967. However, not every company qualifies and certain investment-holding companies (IHCs) are excluded. This guide explains who qualifies, how rates apply, and when SME benefits are lost under the law.
What Defines an SME in Malaysia?
To qualify as an SME under Malaysian tax rules, a company must meet all of the following criteria at the start of the assessment basis period:
- Registered in Malaysia with paid-up capital ≤ RM2.5 million
- Resident in Malaysia
- Not part of a group where any holding or subsidiary has paid-up capital exceeding RM2.5 million
- Annual revenue ≤ RM50 million
If qualified, the company pays tax at 15% for first RM150,000, 17% for the next RM450,000, and 24% on subsequent chargeable income. Otherwise, it is taxed as a non-SME company at 24%.
Why Some Companies Are Not Considered SMEs – The Case of IHC
An Investment Holding Company (IHC) primarily holds investments rather than carry on active business operations. To qualify as an IHC, at least 80% of its gross income must come from dividends, interest or rent (investment income), not business trade.
Because IHCs lack “business source” income, they are generally not eligible for SME tax benefits and are taxed at standard 24%.
What Happens If a Company Has No Business Income?
If a company has no revenue from active business. e.g. it only receives interest, rental, dividends, or passive investment returns, it will be treated like an IHC and cannot enjoy SME preferential tax rates, even if its paid-up capital or revenue size meets SME thresholds.
Special Provisions for Non-Listed IHCs under Section 60F
Non-listed IHCs under Section 60F can deduct certain permitted expenses (PE) even though they are taxed as non-SMEs. Permitted expenses may include director fees, salaries, management fees, office rental and maintenance costs.
However, these deductions do not entitle the IHC to SME tax rates, and the tax treatment remains at 24%.
Practical Implications for Business Owners & Accountants
- Small trading or service businesses with modest capital & revenue can benefit from lower tax rates.
- But companies holding mostly passive investments must structure carefully — mixing business and investment income may jeopardise SME status.
- Proper bookkeeping and clear separation of business income vs investment income are critical to maintain eligibility.
- When in doubt, classify the nature of the company before declaring as SME — misclassification can trigger audits or penalties.
Key Takeaways
- SMEs in Malaysia enjoy reduced corporate tax rates if they meet strict paid-up capital and revenue criteria.
- Investment Holding Companies (IHCs) and entities without business-source income are excluded from SME status.
- Mixed income sources (business + passive income) require careful accounting to preserve eligibility.
- Non-listed IHCs can claim permitted expense deductions but remain taxed at standard rates.
- Always maintain clear, separate records of business vs investment income for compliance.
FAQ
Q: What if my company’s revenue exceeds RM50 million but paid-up capital is under RM2.5 million — am I SME eligible?
A: No — both paid-up capital and revenue thresholds must be met. Exceeding either disqualifies SME status.
Q: If my company holds only investments (rent, dividends, interest), can I claim SME tax?
A: No — such companies are treated as IHCs or non-SME companies regardless of capital or revenue size.
Q: Can I switch between SME and non-SME in different years?
A: Yes, if eligibility conditions change (e.g. revenue drops below threshold again). But classification must be accurate and documented.
ANC Group – Your Personal Tax Advisor
Tax consulting is the core service of ANC Group. Our tax professionals provide clients with comprehensive tax support and guidance. We offer tax consulting and compliance services for expatriates, entrepreneurs, and listed and non-listed companies.
Our tax consulting services include business tax, transaction tax, personal tax, and corporate income tax. We don’t just guide you in interpreting and applying complicated taxation rules, but to explore new opportunities and business trends.
ANC Group keep you abreast with Malaysia tax updates and any changes in the local regulations.
We work closely with industry specialists, authorities, and associated professionals within ANC Group to provide the best-in-class integrated tax planning solutions. ANC specialists coordinate the accounting and taxation services to bring your business to success.
If you need professional tax advisory services regarding the Malaysia Income Tax Act 1967, our team is ready to assist you. Contact us here to discuss how we can support your business.
