Introduction
The tax treatment of Limited Liability Partnership (LLP) in Malaysia is governed by the Income Tax Act 1967 (ITA) and the Limited Liability Partnerships Act 2012 (LLPA).
LLPs combine the flexibility of a partnership with the protection of limited liability, and are taxed as separate legal entities. Understanding their tax obligations helps ensure compliance and optimize tax planning.
LLP Tax Rate in Malaysia
An LLP is taxed at a standard income tax rate of 24% on its chargeable income.
However, certain resident LLPs enjoy reduced tax rates if they meet all of the following conditions:
- Total capital contribution ≤ RM2.5 million at the beginning of the basis period;
- Gross business income ≤ RM50 million per YA; and
- The LLP is resident in Malaysia.
Applicable tax rates:
- 15% on the first RM150,000;
- 17% on the first RM600,000;
- 24% on the balance of chargeable income.
⚠️ These rates do not apply if:
- More than 50% of the LLP’s capital is owned by a company;
- The LLP owns >50% of a company’s ordinary share capital; or
- Both are controlled by another company.
Partner’s Salary Deduction
Under Section 33(1) of the ITA, remuneration paid to partners (basic salary and fixed allowances) is deductible only if it is wholly and exclusively incurred in the production of income.
To qualify for deduction:
- All remuneration terms must be stated in the LLP Agreement (as required by Section 39 ITA).
- Any new partner or change in remuneration requires a supplementary agreement.
Otherwise, such payments will not be tax deductible.
Incorporation Expenses
Generally, incorporation expenses are non-deductible as they are capital in nature.
However, LLPs with capital contributions ≤ RM2.5 million are allowed a one-time tax deduction for incorporation expenses in the basis period for that YA.
Losses and Capital Allowances
When a conventional partnership or company converts to an LLP under Section 29 or 30 LLPA, it is deemed to be a continuing business.
1️⃣ Adjusted Losses
- Current year business losses can be carried forward to offset future profits.
- Under Subsection 43(2) and 44(5F) of the ITA, unabsorbed business losses may be carried forward for up to 10 years (from YA2019–YA2028).
2️⃣ Capital Allowances
- Unabsorbed allowances can be carried forward to future YAs.
- However, LLPs cannot claim capital allowances on assets already claimed by partners or companies in the same YA of conversion.
- LLPs may start claiming allowances in the following YA.
3️⃣ Qualifying Expenditure (QPE) on Transferred Assets
When assets are transferred during conversion, it is deemed a control transfer. The LLP’s QPE equals the residual expenditure (RE) of the transferred assets — not their market value.
Small Value Assets
Under Paragraph 19A, Schedule 3 ITA, LLPs can claim 100% capital allowance on small value assets costing not more than RM2,000 each.
Distribution of Profits to Partners
According to Paragraph 12C, Schedule 6 ITA, profits distributed to partners are exempt from tax.
There is no withholding tax on profit distribution made by an LLP to its partners.
Key Takeaways
- LLPs in Malaysia are taxed as separate legal entities under ITA 1967.
- Eligible resident LLPs may enjoy tiered tax rates (15%, 17%, 24%).
- Partner’s remuneration is deductible only if stated in LLP Agreement.
- Conversion losses can be carried forward for 10 years.
- Profit distribution to partners is tax-exempt.
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.
