(Tax Update) Dividend Income in Malaysia: What Changed and What It Means for You

The Malaysian government introduced notable changes to the taxation of dividend income in Budget 2025, presented on October 18, 2024. Let’s break down these changes and explore how they impact individual taxpayers and entrepreneurs.

New Dividend Tax Structure

Starting from the 2025 assessment year, a 2% tax will apply to annual dividend income exceeding RM100,000. Importantly, this tax will only apply to the amount above the RM100,000 threshold.

Example:
If you receive RM120,000 in dividends, only RM20,000 will be subject to the 2% tax, resulting in RM400 in additional tax.

Although the Prime Minister mentioned that this tax would be introduced “progressively,” it’s not yet clear if this means different tax rates for higher amounts or whether the 2% rate will apply uniformly.

Pre-2008: The Imputation System – A Taxpayer’s Sweet Deal

Before 2008, Malaysia operated under an imputation system. Companies paid corporate tax on their profits, and when dividends were distributed, shareholders received tax credits for the tax already paid by the company.

Example:
If Company A paid 24% corporate tax and distributed RM1,000 in dividends to you, the corporate tax was credited against your personal tax. If your personal tax rate was 15%, you got a refund on the excess tax paid.

2008 Onwards: Introduction of the Single-Tier Tax System

In 2008, Malaysia adopted the single-tier tax system, simplifying dividend taxation. Under this system, companies continued to pay corporate tax, but shareholders no longer received tax credits. However, dividends were fully exempted from personal income tax.

Example:
You received RM1,000 in dividends from Company B in 2015, and the entire amount was tax-free, with no further tax obligations on your end.

2025 Onwards: A New 2% Dividend Tax for High Earners

From 2025, a new 2% tax will apply to the portion of dividend income exceeding RM100,000. This change aims to target high-income earners.

Example:
If your total dividend income for the year is RM150,000, you will be taxed 2% on the RM50,000 exceeding the RM100,000 threshold. That translates to RM1,000 in additional tax.

Double Taxation: A Concern for Entrepreneurs and Investors

A key concern is the issue of double taxation. Malaysian companies already pay 24% corporate tax on their net profits before distributing dividends. With dividends currently tax-free for shareholders, the practice has been perceived as fair.

However, the new 2% dividend tax introduces an extra layer of taxation, particularly affecting high-income individuals.

Impact on Competitiveness:
This tax may make Malaysia less attractive to entrepreneurs and investors. When compared with countries offering lower corporate tax rates or tax-free dividends, Malaysian companies could appear less competitive. Entrepreneurs may be inclined to relocate their operations or explore jurisdictions with more tax-efficient regimes.

Conclusion

While the new dividend tax aims to boost government revenue, it raises concerns about double taxation and could affect Malaysia’s attractiveness to individual entrepreneurs and investors. As the rules take effect in 2025, it’s crucial to stay updated and explore tax planning strategies to manage these changes efficiently.

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