Table of contents
- Introduction
- The slight comeback to dividend imputation system
- Components of the new dividend tax
- Areas of consideration
- Why this change now
- The outlook moving forward
Introduction
On 4th December 2024, the long fully exempted dividend income from taxation is finally to be taxed at 2% on chargeable dividend income for annual dividend income exceeding RM100,000 beginning from year of assessment 2025 (meaning from 1st January 2025), with the Finance Bill 2024 passed at the Parliament of Malaysia. Further guidelines and/or public ruling have not been published by the Inland Revenue Board of Malaysia (IRBM) for deeper details on the application and/or technicalities of this unique tax, and also income tax exemption orders are expected from the Federal Government for further details on the exemptions available, however based present available information, a few striking observations could be made on the dividend tax model.
The slight comeback to dividend imputation system
Prior to year of assessment 2008, dividends were taxed at both the company and shareholders level under the full imputation system, however allowing for tax credits, where the tax imposed on the shareholders would be adjusted to reflect the amount satisfied by the company. Meaning that the shareholders would only be taxed for the difference between their marginal tax rate and the corporate tax rate. Effective 2008, to enhance the efficiency and administration of this system, it was replaced with the single-tier system, where taxes on company profits are considered final and dividends are tax exempted in the hands of shareholders. There was no further need to deduct taxes for dividend payouts and it could be freely distributed without having to keep track of a dividend franking account.
Following the recent announcement, after 17 years of tax exemption, a Dividend Tax has been introduced and legislated in Malaysia, sparking the main concern that dividends will now once again be taxed on shareholders. An unexpected and startling move after all these years.
Components of the new dividend tax
This new Dividend Tax is imposed on dividends paid, credited or distributed, whether in monetary form or otherwise, by a company to any of its shareholders which is an individual, either through direct shareholding or a nominee, and the dividend is deemed by virtue of Section 14 of the Income Tax Act 1967 (ITA 1967) to be derived from Malaysia, in excess of RM100,000 annually at the rate of 2% on the chargeable income in respect of such dividend beginning from 1st January 2025. Amendments to the ITA 1967 were made in respect of Section 6 of the ITA 1967 and inclusion of Part XXII of Schedule 1 of the ITA 1967 to incorporate these new changes. Paragraph 12B of Schedule 6 of the ITA 1967 has expanded to state that individual shareholders earning below RM100,000 annually will not be affected by this Dividend Tax.
The primary focus on the above amendments is that the liability of this new tax falls on high-value individual shareholders which consists of residents, non-residents and individuals who hold shares through nominees. It is to be noted that corporate shareholders are not affected by this new mechanism. This is further confirmed by the amendment to Paragraph 12B of Schedule 6 of the ITA 1967.
Furthermore, there are exemptions and/or exclusions from this Dividend Tax, which are summarized as follows:
