According to the 2021 data in the Malaysia Statistical Business
Register (MSBR) published by the Department of Statistics, Malaysia (DOSM), micro, small, and medium enterprises (MSMEs) account for 97.4% of the overall business establishments in Malaysia. That is why they are considered the backbone of the Malaysian economy.
Owing to that, the government provides a two-tier preferential tax rate for this special class of businesses. The normal corporate tax rate is a flat rate of 24%. However, if your company is an SME, the tax rate for the first RM600,000 of your company’s income would be 17% instead.
The three criteria of whether a company can be considered an SME are:
1. Resident and incorporated in Malaysia;
2. Having a paid-up capital or capital contribution of not more than RM2.5 million for a company or limited liability partnership (LLP) respectively; and
3. Having gross business income not exceeding RM50 million for the basis period (additional criteria from Year of Assessment (YA) 2020 onwards.)
A failure to fulfil any of the criteria above will result in your company not qualifying as an SME, which means that your company will not be able to enjoy the preferential tax rate.
Here, let us consider whether the following constitutes gross business income or not.
Investment Holding Company
An investment holding company does not generate profit from business
operations in a conventional sense and they are earning investment income (i.e. rental income, dividend income, interest income & etc). Does investment income be considered gross business income?
According to section (s.) 60FA of the Income Tax Act (ITA) 1967, if an investment holding company is listed on Bursa Malaysia for that YA, the company is deemed to have gross business source income.
On the contrary, if an investment holding company is not listed on Bursa Malaysia, then it is deemed to have no gross business source income. Thus, it does not fulfil the criteria of SME according to the ITA 1967. As a consequence, it is not eligible to enjoy the preferential tax rate.
Other Income
Should a business’ income not fall within s.
4(a) of the ITA 1967, the company would thereby not fulfil the criteria of SME and is not eligible for the preferential tax rate.
Current Year Business
Loss
Sometimes, it is possible that a company incurs losses instead of a profit. When there is no income to speak of due to the loss, can a company still satisfy the third criteria to be considered an SME?
In such a situation, the company or LLP is still deemed to have a gross business income even if it is currently non-existent. It can still get the preferential tax rate provided that the other criteria are also
fulfilled.
Temporary Closure of Business Operation
Should a business close down temporarily and not generate any income, it is still deemed to have a gross business income similar to the above situation of when a company enters a loss. Therefore, as long as the other SME criteria are fulfilled, the company or LLP can still enjoy the preferential tax rate.
What if my company has business income coming from overseas? Is it taken into account? What is the position for exempted business income?
