Tax Incentives for SMEs (LHDN Discounts!)
Meet Company A and Company B.
Same industry. Same year. Same profit: RM420,000.
Company A pays RM68,400 in tax.
Company B pays RM100,800.
That's an RM32,400 difference. How is that so? Nobody cheated, and nobody hired a magician.
Company A simply qualified as an SME in LHDN's eyes. Company B didn't.
Yes, LHDN gives discounts. No, they won't WhatsApp you about it.
So today, we're answering the questions every business owner should be asking:
Am I an SME? What do I actually get? What's the catch? And which incentives have already expired, so you can stop chasing them?
Let's go.
Wait, what counts as an "SME" to LHDN?
Here's the fun part. Malaysia has two definitions of an SME.
SME Corp. Malaysia defines SMEs by annual sales and number of employees. A services business with under RM20 million in sales, for example.
But LHDN doesn't use that definition when it comes to tax.
The Income Tax Act has its own test, and it even has its own name for you: MSMC (Micro, Small and Medium Company).
For tax purposes, only LHDN's version matters. So let's look at that one.
The 4-question test: Do you qualify as an SME for tax?
Answer "yes" to all four, and you're eligible for the discounts.
1/ Are you a Malaysian resident company or LLP?
Your company must be incorporated in Malaysia (or your LLP registered here), and resident in Malaysia for tax purposes.
Most local Sdn Bhds tick this box without trying.
2/ Is your paid-up capital RM2.5 million or less?
This is checked at the beginning of your basis period.
So if you top up your capital to RM3 million halfway through the year, it won't hurt you this year. But it will next year.
Think before you inject.
3/ Is your gross business income RM50 million or less?
Note the word "gross." This is your income before any deductions, not your profit.
The good news is that losses don't disqualify you.
Take a bakery that was forced to close for nine months during the MCO. It earned zero business income that year, but it still passed the test. LHDN treats it as having zero gross income, which is comfortably under RM50 million.
(Small consolation for losing nine months of business. But we'll take it.)
4/ Who owns you?
There are two rules.
Rule 1: The "big brother" rule.
You're disqualified if more than 50% of your company is owned, directly or indirectly, by a company with paid-up capital above RM2.5 million.
"Indirectly" means LHDN multiplies the percentages down the chain. If Big Co owns 70% of your parent company, and your parent owns 80% of you, Big Co effectively owns 56% of you (70% × 80%).
56% is more than 50%. You're out.
Rule 2: The foreign ownership rule. You're disqualified if more than 20% of your company is owned, directly or indirectly, by foreign companies or non-Malaysian citizens.
Plot twist
Rizal and Jeffrey are both Malaysian citizens. They set up a holding company in Singapore, which owns 100% of their Malaysian Sdn Bhd.
Everyone involved is Malaysian. Surely they qualify?
Nope.
Their Sdn Bhd is 100% owned by a company incorporated outside Malaysia. That breaks the 20% rule, so they lose SME status. It doesn't matter who owns the Singapore company.
Now, if that Singapore company owned only 20% of their Sdn Bhd (and its own paid-up capital was under RM2.5 million), they'd keep their SME status.
This is exactly why structure matters, and why you should talk to someone before setting up that fancy offshore holding company.
5 tax incentives for SMEs in Malaysia
Passed the test? Here's what you get.
1. Lower tax rates on your first RM600,000
Regular companies pay 24% tax on all their chargeable income.
SMEs pay less on the first RM600,000:
15% on the first RM150,000
17% on the next RM450,000 (RM150,001 to RM600,000)
24% on anything above RM600,000
Let's revisit Company A from earlier, with its RM420,000 in chargeable income:
First RM150,000 × 15% = RM22,500
Next RM270,000 × 17% = RM45,900
Total tax = RM68,400
Company B, which doesn't qualify, pays a flat 24% on everything: RM100,800.
That’s how you end up with an RM32,400 difference for the same profit.
2. Claim small assets in full, with no cap
Normally, when you buy an asset like a machine or a car, you claim its cost bit by bit over several years through capital allowances.
But small value assets (items costing RM2,000 or less each) can be claimed in full in the year you buy them.
For regular companies, total claims for small value assets are capped at RM20,000 per year.
For SMEs, there’s no cap.
Laptops, office chairs, printers, and the coffee machine that keeps your team sane. As long as each item costs RM2,000 or less, you can claim them all.
Catch: This unlimited version is only for SME companies. LLPs are limited by the RM20,000 cap.
3. No need to estimate your tax (CP204) for your first 2 years
Normally, every company has to submit a CP204 before its financial year starts. It's an estimate of how much tax you'll owe, and you pay it in monthly instalments.
For a brand-new company, that's basically asking you to predict the future.
Estimate too low, and LHDN slaps on a penalty. Estimate too high, and your cash gets stuck with LHDN. (We once had a client who overpaid until LHDN owed him RM93,000. Instead of refunding him, they audited him.)
The good news: newly commenced SME companies are exempt from submitting CP204 for their first two years of assessment.
To qualify, your paid-up capital must stay at RM2.5 million or less, and you can't own, or be owned by, a company with paid-up capital above RM2.5 million.
Catch: this exemption doesn't apply to LLPs, including companies that convert into LLPs.
4. Up to RM50,000 in tax deductions for e-Invoice costs
First, LHDN made e-Invoicing mandatory.
Then LHDN offered to help pay for it.
Not that we’re complaining.
SMEs can claim up to RM50,000 per year of assessment for expenses related to e-Invoice implementation. This includes:
Consultation fees for developing customised e-Invoice software for your business
Fees for external service providers to help you implement e-Invoicing
But it doesn't cover:
Costs incurred at the planning or initial stages of developing the software
Consultation fees for issuing e-Invoices through the MyInvois Portal
Also, no double-dipping. If you've already claimed these costs under another deduction, you can't claim them again here.
5. The RM20,000 tax rebate for new companies
This incentive gave new SMEs a tax rebate of up to RM20,000 a year for their first three years of assessment.
Sounds great, right?
Here's the bad news: it only applies to companies that started operations between 1 July 2020 and 31 December 2022.
If that's you, check whether you've claimed it. If not, sorry.
One more thing: if your rebate is bigger than your tax bill, the extra disappears. It won't be refunded or carried forward.
LHDN is generous, but only up to a point.
The fine print
Before you celebrate, watch out for these red flags.
1/ Passive rental income doesn't count as business income
If your company owns property and rents it out, that rental income only counts as business income if you provide comprehensive, active services like maintenance, cleaning, and security.
A company that just rents out two shophouses and provides a security guard? LHDN says that's not a business. It's passive rental income, and that company doesn't qualify as an SME.
2/ Tax-exempt income still counts toward the RM50 million limit
Enjoying pioneer status with a 100% tax exemption? Your gross business income still counts toward the RM50 million threshold. Exempt doesn't mean invisible.
3/ Your SME status can change every year
Every test is applied year by year. Raise your capital, bring in a foreign investor, or cross RM50 million in gross income, and you could lose your discounts the following year.
That's why you can't set up your structure once and forget about it.
So, are you getting the discounts you deserve?
Qualifying as an SME isn't just about being small.
It depends on how much capital you put in, who owns your shares, where your holding company is incorporated, and how your group of companies is structured.
Get it right, and you keep thousands (sometimes tens of thousands) of ringgit every year. Get it wrong, and you pay the full 24%, often without realising you had a choice.
At Douglas Loh & Associates, we've spent 22 years helping business owners structure their companies the smart way, so they pay what they owe and not a sen more.
Want to focus on your business while we manage the boring paperwork for you?
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