Malaysia’s New 2% Dividend Tax.

Introduction 

Effective 1 January 2025, annual dividend income exceeding RM100,000 will be subjected to a 2% tax pursuant to the Finance Act 2024 (“Dividend Tax”)[1]. This is a departure from the previous full exemption of dividend earnings for individuals. While the tax rate is relatively low, its introduction signals a shift in fiscal policy aimed at broadening the tax base and ensuring equitable contributions from high-income earners. 

Understanding Profits and Dividends 

Pursuant to Section 131 of the Companies Act 2016, a solvent company may only make dividend distribution to its shareholders out of profits available. While the word ‘profit’ has not been explicitly defined, the word typically refers to the net earnings or surplus generated by the company after accounting for all income, expenses, and taxes.[2] 

Dividends, on the other hand, constitute payments made by a company to its shareholders drawn from the company’s profits and are the returns on investment for shareholders typically issued at regular intervals. Dividends can come from multiple sources such as publicly traded companies, private enterprises, and unit trusts. 

Key Features of the New Dividend Tax 

Malaysia’s newly introduced 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. The dividend is deemed by virtue of Section 14 of the Income Tax Act (“ITA”) 1967 to be derived from Malaysia, and dividend tax is levied at a rate of 2% on every ringgit of chargeable income from dividends exceeding RM100,000.[3] Section 6 of the ITA 1967 was amended and Part XXII of Schedule 1 of the ITA 1967 has been included to incorporate these new changes. 

It is pertinent to note that pursuant to Paragraph 12B of Schedule 6 of the ITA 1967, individual shareholders receiving dividends below RM100,000 annually will not be affected by this Dividend Tax.[4] 

The implementation of the dividend tax is primarily aimed at ensuring that the income tax revenue collected does not depend exclusively on contributions from salaried individuals but also encompasses contributions from company owners and individuals with significant equity holdings.[5] 

Exemptions and Exclusions from Dividend Tax [6] 

The following dividends are exempted from the tax: 

1. Dividend income from sources outside Malaysia; 

2. Dividends distributed from profits of companies that received pioneer status and reinvestment allowances; 

3. Dividends distributed from profits of shipping companies that are exempted from tax; 

4. Dividends distributed by co-operative societies; 

5. Dividends declared by closed-end funds; 

6. Dividends received by residents from Labuan entities; 

7. Profit distributions by Employees Provident Fund (“EPF”), Armed Forces Fund Board, Amanah Saham Nasional Bumiputera (“ASNB”), or any unit trusts under Permodalan Nasional Berhad (“PNB”); and 

8. Any exemption granted on dividend income in the hands of individual shareholders as determined by the Finance Minister. 

Payment Mechanism for Dividend Tax 

The Dividend Tax system operates on a self-assessment basis, this means that shareholders are responsible in determining their taxability and liability for Dividend Tax and declaring this in their tax returns. Additionally, shareholders must ensure that their declared dividend income matches the amounts shown on their dividend certificates or vouchers provided by the paying companies, as any under-declaration or incorrect reporting may result in tax audits and potential penalties. 

If the taxpayer has dividend income and other than dividend income, the determination of the distribution of the amount of chargeable income from dividends is based on the following formula:[7] 

It is pertinent to highlight that as no amendments were made to Section 108 of the ITA 1967 where it was stated that companies are not entitled to deduct tax from dividends paid, therefore, Dividend Tax will not be withheld and paid to the Inland Revenue Board by the dividend-paying companies. Instead, individual shareholders are responsible for their own payment of Dividend Tax, and this will be made together with their final taxes post-tax return submission. 

Additionally, according to Section 108 of the ITA 1967, from year of assessment 2025, it is compulsory for dividend-paying companies to furnish individual shareholders with a dividend certificate upon distributing dividends to them. This certificate is intended to assist these shareholders with their self-declaration, especially those who receive dividends from multiple sources or multiple dividend payouts from a company in a year. 

Conclusion 

The recent introduction of the 2% Dividend Tax in Malaysia is part of the government’s effort to create a more progressive individual income tax system and broaden the tax base, which is currently narrower compared to Malaysia’s Southeast Asian neighbours. This change aims to address tax leakages, particularly in family-owned businesses where owners receive dividend payouts instead of higher salaries to avoid higher tax rates. With a unique set of exemptions and a comparatively lower tax rate, this system is expected to help the Inland Revenue Board identify high-net-worth individuals and curb tax non-compliance. 

For further information, please contact:

Dato’ Azmi Mohd Ali, Partner, Azmi & Associates

azmi@azmilaw.com

1. Section 16 of the Finance Act 2024. 

2. Crowe on ‘Dividend Tax: A Taxing Issue for The Ultra-Rich?’. 

3. Ibid. 

4. Section 17 of the Finance Act 2024. 

5. Paragraph 45 of the Budget Speech 2025. 

6. Wolters Kluwer on ‘The new 2% Dividend Tax: Strategic insights and impact on high-value shareholders’. 

7. Appendix 10 of the Budget Speech 2025.