(Tax Update) Dividend Income in Malaysia: What Changed and What It Means for You (Part 2)

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 (see the example for illustration)

Example:

Employment Income is RM300,000.
Dividend Income from companies in Malaysia is RM250,000. From this, RM100,000 is exempted from tax, leaving RM150,000 as the Statutory Dividend Income.
Aggregate Income is the total of Employment Income and Statutory Dividend Income, resulting in RM450,000.
After deducting Relief of RM9,000, the Total Chargeable Income is RM441,000.
To calculate the Chargeable Dividend Income, they take the Statutory Dividend Income (RM150,000), divide it by the Aggregate Income (RM450,000), and then multiply by the Total Chargeable Income (RM441,000). This results in a Chargeable Dividend Income of RM147,000.
Finally, the tax on this Chargeable Dividend Income is calculated at a 2% rate, giving a tax amount of RM2,940.

Exemption

The exemptions listed for taxation on dividend income for individuals are as follows:

Dividend income from sources outside Malaysia (Foreign Source Income) until the Year of Assessment (YA) 2036.
Dividends from the profits of companies with pioneer status (under the Promotion of Investments Act) and reinvestment allowance.
Dividends from the profits of shipping companies (under Section 54A of the Income Tax Act 1967).
Dividend income distributed by cooperatives (under Paragraph 12A, Schedule 6 of the Income Tax Act 1967).
Dividends distributed by closed-end funds (under Section 60H of the Income Tax Act 1967).
Dividends from domestic companies paid from dividends of Labuan entities.
Profit distribution by EPF (Employees Provident Fund), KWAP (Retirement Fund), LTAT (Armed Forces Fund Board), ASNB (Amanah Saham Nasional Berhad), or unit trusts.
Any exemption granted on dividend income in the hands of individuals as determined by the Minister.

Scope of Taxation

The scope of taxation for dividend income includes the following categories:

Resident and non-resident individuals – This means that both Malaysian residents and foreigners receiving dividends in Malaysia are subject to this tax.
Individuals holding shares through a nominee – Individuals who hold shares via a nominee (another person or entity holding the shares on behalf of the actual owner) are included in the scope.
Dividend income distributed by companies in Malaysia – Only dividends distributed by Malaysian companies fall within this scope, making locally-sourced dividend income taxable.

Key Unresolved Questions

Key issues requiring clarification by the Inland Revenue Board (IRB) regarding the taxation of dividend income include:

Taxable Individuals: Are both resident and non-resident shareholders, including those holding shares through nominees, liable to this tax?
Timing of Taxation: Should the tax be imposed when the dividend is declared, or only when it is paid or credited?
Non-Resident Exemptions: Are non-resident individuals eligible for the RM100,000 exemption on dividend income?
Withholding Tax: Will a withholding tax system be introduced for dividend income?
Deductions and Reliefs: Will shareholders be allowed deductions or reliefs, such as those related to interest on loans for acquiring shares or approved donations?
Application to LLPs and Partnerships: Will limited liability partnerships (LLPs) and partnership income distributions fall under the scope of this tax?
Dividend Voucher Details: Are companies and company secretaries required to specify dividends derived from tax-incentivized profits, like those from pioneer status or reinvestment allowances, on dividend vouchers?

Past blog on 2% Dividend Tax

17 Oct 2024 https://www.ktp.com.my/blog/2percent-tax-dividend-income-above-rm100k/17oct2024

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