Business

Common Tax Deductions for Businesses in Malaysia

The schemes and projects of the local government of Malaysia underline various provisions providing common tax deductions for businesses in Malaysia, which ultimately promotes a cost-effective business environment for the companies enrolled in targeted businesses. The government of Malaysia also introduced the concept of double tax deductions, providing tax deductions of twice the amount incurred.

A guide describing the common tax deductions for businesses in Malaysia claims to ensure the tax planning for the business and maximize the tax liability of many small-scale business establishments in Malaysia.

A Detailed Description of Business Tax in Malaysia

Malaysia is a Southeast Asian country that adopts a territorial tax structure administered by a strong Inland Revenue Board (IRBM). Corporate legal entities or business establishments are accessed and taxed on the income accrued or derived from any source in Malaysia, irrespective of the fact of being a resident or not. The business or corporate income derived from any source outside Malaysia and remitted by a resident business entity is exempted from the payment of business tax in Malaysia. The standard and statutory corporate tax rate for all resident and non-resident business entities with paid-up capital of at least RM 2.5 million and gross business income of at least RM 50 million is 24% (as accessed in the year 2023).

Insights of Tax Deduction for Businesses in Malaysia

The adjusted income, as provided under section 33(1) of the Income Tax Act of 1967, provides a clear provision explaining tax deductions for businesses in Malaysia. The provision reads as adjusting the gross income of the business establishments by making relevant tax deductions of all outgoing expenses incurred at the time of production of gross income for the business setup. Simply put, tax deductions for businesses in Malaysia are generally categorized as expenses that are adjusted or subtracted from the gross income accrued by the business entity during its assessment year. The Internal Revenue Service (IRS) of Malaysia states that tax deductions for businesses in Malaysia are ordinary and necessary expenses for maximizing the taxable income and reducing the tax liability of the corporate legal entities registered and accruing income from sources in Malaysia. The tax wire-off or tax reliefs are given to businesses of Malaysia organized as sole proprietorships, partnership firms, C-corporations, S-corporations, and companies to maximize the ordinary and routine expenses essential for the survival of the business.

Strategies for claiming tax deductions for businesses in Malaysia

Tax deductions are beneficial for businesses in Malaysia once claimed. Legal business entities in Malaysia are now eligible to enjoy reduced corporate or business tax liability. The tips for successfully claiming tax deductions for businesses in Malaysia primarily allow legal business entities to maintain records of necessary documents, receipts, invoices, and notes related to the conduct of the business. The legal business entities of Malaysia, in consonance with the guidelines of the Internal Revenue Service, must knock for professional tax consultancy services to claim applicable tax deductions for businesses in Malaysia.

The reduction in the corporate tax for business establishments in Malaysia can be ensured by opting for the following strategies:

• By maximizing the allowable business expenses;
• The proper documentation and accounting of the wages and salaries paid;
• Indulging in the promotional activities and campaigns;
• By claiming all tax deductions;
• By ensuring timely submission of the corporate tax for the legal entities;
• Being aware and applying for tax incentives;
• Engaging in a charitable business, etc.

Types of Tax Deductions for Businesses in Malaysia

All the costs are not eligible for deduction under section 39 of the Income Tax Act of 1967.

The gross income of the business entities in Malaysia is allowed for deduction only if the following conditions are satisfied:

1. It must be an outgoing expense;
2. Must not be a capital expense;
3. Must be exclusively and wholly incurred during the assessment year;
4. Must be sustained during the production of gross income;

The list of following deductible expenses for businesses in Malaysia must be ensured during the filing of the annual corporate tax return, which is as provided below:

Business Expenses

The expenses incurred during normal or daily business operations are exempted or deducted from the taxable income of the businesses registered and sourcing income from Malaysia. Certain types of deductible business expenses are explained below:

Repair and maintenance expenses

The expenses incurred for any repair, maintenance, or renewal from the gross income of the business are accountable for being deducted from the taxable income of the businesses in Malaysia. Section 33 (1) (c) of the Income Tax Act of 1967 allows tax deductions for businesses in Malaysia emphasizing the following activities:

• The cost of repairing the machinery, plants, premises, or fixtures used during the production of the gross income;
• The cost of renewing, altering, and repairing the utensils, implements, and employed articles;
• The cost of enrolling any means of conveyance;

Wiring and software expenses

The repair cost of wiring expenses is deductible from the gross taxable income of the business entities in Malaysia. The fee charged for the purchase of software programs and platforms for business formation in Malaysia is also deductible under the provision providing for business expenses.

Furniture and Equipment Expenses

The expenses incurred in the purchase of or renting items of furniture (including chairs, tables, stools, desks, sofas, window displays, etc.) for $5000 (not more than that) and equipment for businesses like copiers, printers, vehicles, etc. are allowed for tax deductions under the category of business expenses.

Rent Expenses

The cost or expense of occupying a property for establishing a legal corporate entity, manufacturing unit, office, storage, retail space, factory, etc., in Malaysia, is accountable for tax deductions under the head business expenses.

Start-up Expenses

Certain expenses incurred during the starting of a corporate legal entity, i.e., business, trade, or profession in Malaysia, are allowed for tax deductions in Malaysia. The expenses accountable for claiming the tax deductions for businesses in Malaysia are:

Incorporation Expenses

Expenses incurred during the process of incorporation are liable for being deducted from the taxable income of the business under the head start-up expenses.

Remuneration Expenses

Expenses incurred during the recruitment of employees and special staff include the cost or expense of managing and paying remuneration to certain staff enrolled in the business, which is accountable for tax deductions under the proviso of business expenses. The remuneration of the staff exempted or deducted from the taxable income includes:

• The wages, salaries, overtime payment, commission, fees, and incentives of disabled staff are supported by double tax deductions for businesses in Malaysia ;
• The remuneration paid to a senior citizen above the age of 60 is supported by double tax deductions for businesses in Malaysia;
• The full-time remuneration of any ex-convict or parole-supervised staff is supported by double tax deductions for businesses in Malaysia;
• The remuneration paid to the ex-drug addict is supported by double tax deductions for businesses in Malaysia.

Interest Expenses

The interest expenses incurred on money borrowed or assets held anytime during the production of gross income are eligible for tax deductions of businesses in Malaysia.

Charitable Donations

Any form of cash donations made to charitable institutions in Malaysia (approved and defined under the laws of Malaysia) during the assessment year are allowed for 10% tax deductions from the gross income of the businesses. The charitable expenses must be made in the form of cash, property or equipment, and travel expenses while helping the charitable institutions.

Home Office Expenses

The gross income incurred while operating the business office from home is eligible for exemption or tax deductions for businesses in Malaysia for carrying out or using the following methods of performing the business activities or operations:

• The cost of utilities like electricity, water supply, etc., used for carrying the business operations from the home office;
• The cost or expense of utilizing the telephone and internet connectivity for carrying the business operations from the home office;
• The expense of using the home premises is accountable for deduction as the business portion of real estate taxes.

Salaries of Directors’

The expenses of payment of salary to the directors’ of the company are yet another tax deductions for the businesses in Malaysia. The salary of the directors of any company is considered an allowable expense for deduction from the gross income accrued during the assessment year.

Business Travel Expenses

The cost or expenses incurred while planning business travels and trips are deducted from the gross income accrued in the assessment year. The Inland Revenue Service has outlined certain criteria for fulfilling the requirement of business travel expenses, as provided below:

1. The duration of business travel must be longer than a regular workday;
2. The business travel must be outside the ‘tax home’ of the business;
3. The object of business travel must be to focus on the conduct of business;
4. The business travel expenses must include the fair of transportation like airlines, bus, or train;
5. The expense for business travel must also include the cost of choosing the type of accommodations for lodging;
6. Only 50% of unreimbursed costs are deducted for any expenses in meals after 1^st January 2023.

Reduced Rents

This is a kind of special deduction offered on reduced rents offered by the landlords. Small and medium-scale business entities or enterprises engaged in manufacturing, agriculture, or other services get a rental discount of at least 30% on the rent paid for operating or setting up a business premises like an office, workshop, warehouse, childcare, or rented stall.

Professional Development Expenses

The expenses or fees accrued from the professional development programs for the employees or other members of the business entity are considered crucial expenses for claiming the tax deductions of businesses in Malaysia. Certain expenses targeting the professional development programs in a corporate organization are:

Training Programs

The training programs that offer specified courses are designed for the ultimate growth and development of the skills of the staff and employees working in the business entity are exempted or deducted from the taxable income of the business entities registered in Malaysia. The knowledge gap among the employees of the company is filled by the sensitive training programs offering in-store equipment training, retail employee training, etc.

Conferences and Meetings

The cost or expense of conferences and meetings conducted for the benefit of the legal business entity is eligible for tax deductions in Malaysia. The object of the meetings and conferences must be to benefit the conduct of business in Malaysia and be relevant for attracting tax deductions.

Professional Membership Expenses

The expenses containing the cost of enrolling into a professional membership program of another organization may be subject to tax deductions. The membership expenses are only considered in case the membership program is subject to any professional course targeting business development and growth.

Health Insurance Expenses

The business entities registered and sourcing income from Malaysia are responsible for paying the expenses of the employee, which reduces the tax liability of the business owners. The medical insurance premiums (including health and dental) are the expenses allowed for tax deductions in Malaysia only if the exemption also applies to the employee’s taxable income.

Payments to foreign affiliates

Tax deductions for businesses in Malaysia can be claimed upon the charges for providing management services, the payment of royalties, and interest made to foreign affiliates.

Other Expenses

Certain other categories of business expenses are allowed for tax deductions for businesses in Malaysia. The following list deducts the items from the taxable income of the company as provided below:

• The charges or cost of employment;
• The charges of other business insurance (including business property insurance, liability insurance, or business income insurance);
• The cost of advertisement strategizing the promotion of the sales in the business;
• The cost of renewing the license for the business;
• The charges of  printing and stationery;
• The charges of legal services recovering the debt, etc.

Other Special Tax Deductions for businesses in Malaysia

There are certain expenses adjusted or deducted at the time of accessing the taxable income for the legal business entity registered and sourcing income in Malaysia during the assessment.

Special Deduction on Renovation

The governing authorities of Malaysia have introduced another special deduction during the period of COVID-19, which applied from 1^st March to 31^st December 2021. The special deduction targets the exemption of the maximum cost of RM 3 lakhs for renovating or refurbishing the business premises in consonance with the supportive documents like invoices, service agreements, etc.

Allowable Special Expenses

Certain special expenses incurred by businesses in Malaysia for encouraging government programs aiming to achieve social and national objectives are allowed for tax deductions under Section 34(6) of the Malaysian Income Tax Act of 1967. The expenses, as described in the section, are provided below for your reference:

• Business expenses to provide types of equipment for disabled employees enrolled in carrying out the operations of the business;
• Business expenses sourced for any publication in the National language of Malaysia;
• Business expenses: any services, contributions, charity, or any amenities to the public or the projects of the community;
• Business expenses in running and maintaining a child care centres inside the business organization for the benefit of the employees;
• Business expenses sourced at the time of establishing and managing a musical or cultural group;
• Business expenses or charges for conducting or sponsoring any cultural event.

Tax Deductions for Specific Business Establishments in Malaysia

Some specific business entities establishing their operations and sourcing income from Malaysia are also eligible to enjoy specific benefits in the form of tax deductions in Malaysia. The common tax deductions observed in all types of corporate legal entities in Malaysia are explained in the blog below.

Electric Vehicles

The 12^th Malaysian Plan prioritizes the acquisition of electric vehicles, i.e., EVs in Malaysia, to get the benefits of local tax incentives or exemptions from tax deductions for businesses acquiring or renting more sustainable and economical modes of transportation. The main aim of the Plan is to reduce carbon emissions by the end of the year 2050. The acquisition or renting of EVs in the business model of corporate legal entities offers multiple opportunities for tax deductions. Section 39(1) (k) of the Income Tax Act of 1967 ensures tax deductions for businesses in Malaysia, which are as provided below:

1. The RM 100,000 rent of a non-commercial Electric vehicle costing RM 150,000 is exempted or allowed for a tax deduction in Malaysia till the end of the year 2025;
2. The maximum rent of RM 50,000 for a non-commercial Electric vehicle costing above RM 150,000 is also exempt from being taxed or allowed for tax deductions in Malaysia until 2025;
3. The road tax of businesses engaged in acquiring an Electronic vehicle in Malaysia is deducted or exempt till the year 2024;
4. Exemption or deduction of excise and import duties on the imported Electronic vehicles by the end of the year 2025;
5. Tax deduction or exemption on the import duty on the imported components for locally assembling the Electronic vehicles by the end of the year 2027.

Child Care Centres

The well-established provisions of the Income Tax (Deduction for the Provision of Child Care Centre) Rules of 2013 ensure the establishment and maintenance of Child Care Centres and Allowances for the employees or mothers enrolled with the office or conduct of business in Malaysia. The maintenance of the Child Care Centres and the Child Care Allowances incurred by the employer are eligible for claiming the tax deductions for businesses in Malaysia.

Food Production Projects

The following list of companies engaged in several food products are allowed to claim tax deductions for the businesses in Malaysia:

1. The corporate legal entities investing in a subsidiary company engaged in a new project targeting food production in Malaysia are allowed to claim equal tax deductions similar to the amount of investment made;
2. The corporate legal entities engaged in a new project of food production are allowed to claim 100% tax deductions on the statutory income accrued for the next 10 assessment years;
3. The corporate legal entities aiming to expand their existing company by enrolling in new projects of food production are allowed to claim tax deductions on the statutory income of the company for the next 5 assessment years.

Businesses holding Bio-Nexus Status

The Malaysian Bio-economy Development Corporation holds the new business establishments and other existing businesses expanding their projects in Malaysia with bio-nexus status eligible for a 70% tax deduction on their statutory income for the next 5-10 assessment years.

Aerospace Manufacturing

The Malaysian Investment Development Authority holds the companies or corporate legal business establishments indulging in high-valued business activities of manufacturing, maintaining, repairing, assembling, overhauling, and engineering the designs, systems, devices, and parts of the aircraft eligible for claiming tax deductions for businesses in Malaysia. The tax deductions for the new companies opting to indulge in the high-valued aerospace manufacturing industry are 70 to 100% of the statutory income calculated for a period of the next 5 to 10 assessment years.

Charitable Hospitals

Section 44(6) of the Income Tax Act of 1967 holds the existing private hospitals and medical centers carrying out business operations for charity are allowed to claim tax deductions similar to the amount of charity received. The section not only allows charitable hospitals to claim tax deductions but also includes specified established institutions and organizations (including universities, education institutions, public institutions, government-associated institutions, technical training institutions, organizations for the protection of animals, etc.) for fulfilling charitable purposes.

Section 127 (3A) of the Income Tax Act of 1967 allows charitable hospitals registered as a company limited by guarantee to claim tax deductions of the equal amount of the expenditure accrued over the 5 years.

Malaysian Handicrafts

Section 33 of the Income Tax Act of 1967 exhales special tax deductions for businesses in Malaysia over the subsequent purchase or expenditure of Malaysian-made handicrafts (assets for the business), valuing at least RM 2,000.

Conclusion

The relevance of corporate tax deductions for businesses in Malaysia aims to reduce the tax liability of business owners or establishments accruing or sourcing income from Malaysia. The provisions of the Income Tax Act of 1967 ensure provision for the application of tax deductions for businesses in Malaysia. The enticing opportunities for tax deductions for businesses in Malaysia secure the growth and development of small and medium-scale enterprises. The maximized business expenses and other tangible expenses ensure a strategic application of tax incentives or deductions for businesses in Malaysia.

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