Why does it matter if a company is a small and medium-sized enterprise (SME) or not? The most simple and direct answer to that question is—a difference in taxation rates.

If a company is considered an SME, the tax rate would be:

• 17% on the first RM600,000 chargeable income
• 24% on the subsequent chargeable income

Whereas for normal corporate tax, a flat rate of 24% applies across the board. 

Therefore, if a company is an SME, it would be entitled to a whopping 7% reduction in taxes on its first RM600,000 chargeable income. The amount of tax payable would be significantly lower due to the preferential tax rate!

Criteria to Determine If a Company or Limited Liability Partnership (LLP) Is an SME

Prior to Year of Assessment (YA) 2020, there were only 2 criteria:

• The company or LLP must be resident and incorporated in Malaysia.
• At the beginning of the basis period for a year of assessment:

(i) For a company: Paid-up capital of ordinary shares of not more than RM2.5 million

(ii) For an LLP: Capital contribution of not more than RM2.5 million

An additional criterion was then added via Practice Note No.4/2020 issued by the LHDN 3/2020:

• The gross business income of the company or LLP must not exceed RM50 million for the basis period.

However, even when the above 3 criteria are fulfilled, it may still be possible for a company or LLP to not qualify as an SME. 

On top of the criteria stated above, we would still need to take into account the law laid out in subparagraphs 2B and 2E, Part 1, Schedule 1 of the Income Tax Act (ITA) 1967 pertaining to holding or subsidiary companies. If your company fulfils the above 3 criteria, but a holding or subsidiary company in your group of companies has a capital of more than RM 2.5 million, would your company be an SME?