Malaysia’s Budget 2025, which was tabled in Parliament on 18 October 2024, includes a number of proposals that will affect businesses operating in the country (for a comprehensive analysis of the budget measures, see the tax alert prepared by BDO in Malaysia). The most notable measures are:
To make the individual income tax structure more progressive and expand the tax base, a 2% tax on dividend income exceeding MYR 100,000 annually will be introduced for resident and nonresident individuals starting in year of assessment 2025. Income that will be exempt from the dividend tax include:
Sales tax is imposed on taxable goods manufactured in Malaysia and on imported goods at various rates that depend on the type of goods. Service tax is imposed on taxable services provided by service providers, including imported taxable services and digital services as specified in the relevant rules.
The scope of the SST will be expanded as from May 2025 to strengthen the fiscal position and broaden the tax base. Sales tax rates would be increased on nonessential and imported goods, such as premium foods, although sales tax exemption would be maintained on basic food items consumed by the public. The scope of the service tax would be expanded to include commercial service transactions between businesses, such as fee-based financial services. Further details are expected to be announced by the tax authorities following consultations with industry.
A new incentive framework will be introduced (likely in the third quarter of 2025) that focuses on high-value activities to improve the practice of providing product-centric incentives. Examples of the proposed incentives include the following:
David Lai
BDO in Malaysia
- Introduction of a 2% dividend tax on certain dividend income received by individual shareholders.
- Broadening of the scope of Sales Tax and Services Tax (SST) to increase revenue and expand the tax base.
- Streamlining of existing incentives, the introduction of new non-tax incentives and conducting a study on the feasibility of strategic investment tax credits.
- Introduction of a carbon tax by 2026 on iron and steel and the energy industry to encourage the use of low carbon technology. Revenue from the tax would be used to fund green research and technology programmes.
Dividend Tax on Resident and Nonresident Individuals
To make the individual income tax structure more progressive and expand the tax base, a 2% tax on dividend income exceeding MYR 100,000 annually will be introduced for resident and nonresident individuals starting in year of assessment 2025. Income that will be exempt from the dividend tax include:
- Foreign dividends;
- Dividends distributed from the profits of companies with pioneer status and reinvestment allowances;
- Dividend income paid, credited or distributed from the profits of shipping companies that is exempted from tax;
- Dividends distributed by cooperatives;
- Dividends declared by closed-ended funds;
- Dividend income received by residents from Labuan entities; and
- Any exemption on dividend income at the shareholder level.
Sales Tax and Service Tax (SST)
Sales tax is imposed on taxable goods manufactured in Malaysia and on imported goods at various rates that depend on the type of goods. Service tax is imposed on taxable services provided by service providers, including imported taxable services and digital services as specified in the relevant rules.The scope of the SST will be expanded as from May 2025 to strengthen the fiscal position and broaden the tax base. Sales tax rates would be increased on nonessential and imported goods, such as premium foods, although sales tax exemption would be maintained on basic food items consumed by the public. The scope of the service tax would be expanded to include commercial service transactions between businesses, such as fee-based financial services. Further details are expected to be announced by the tax authorities following consultations with industry.
Incentives
A new incentive framework will be introduced (likely in the third quarter of 2025) that focuses on high-value activities to improve the practice of providing product-centric incentives. Examples of the proposed incentives include the following:
- To increase the level of economic complexity in the electrical and electronics sector, by way of high value-added activities such as integrated circuit (IC) design services and advanced materials, tax incentives for increasing exports will be extended to IC design activities.
- To provide high-income jobs to the public in artificial intelligence (AI) and R&D, special tax deductions will be granted to private universities and skills training institutions that develop new courses, such as AI, robotics, Internet of Things (IoT), data sciences, FinTech and sustainable technology.
- To enhance the local supply chain and primary sector ecosystem, a supply chain initiative will be introduced with the following incentives:
- A double tax deduction for multinationals spending up to MYR 2 million annually for three consecutive years;
- A tax deduction on the amount invested in a joint venture initiative by multinationals or their suppliers that jointly invest in other local vendors; A curated tax incentive package for local supply chain suppliers; and
- A matching fund of MYR 100 million that will be set up through an equity crowdfunding platform to support the expansion of local suppliers in the electrical and electronics, specialty chemicals and medical devices industries.
- Economic “clusters” or groups will be established based on state specialisations (e.g., renewable energy in Perlis and Sabah and the specialised chemical industry in Pahang and Terengganu).
- Special income tax incentives will be offered for investments made in 21 economic sectors in states such as Perlis, Kedah, Kelantan, Terengganu, Sabah and Sarawak, based on the success of the economic spillovers.
- Tax incentives such as investment tax allowances or income tax exemptions will be provided for carbon capture, utilisation and storage activities to encourage more investments that comply with ESG standards.
David Lai
BDO in Malaysia