Check Taxable Income First, Then Confirm SME Eligibility
The standard income tax rate for a company in Malaysia is 24%. Only small and medium-sized companies that meet specific conditions can use the lower, tiered rates. Simply incorporating a small Sdn. Bhd. does not automatically qualify a company for the preferential rates.
These percentages apply to taxable income as calculated under tax law, not to turnover directly. Book profit may also need adjustment, for example by adding back non-deductible expenses before applying any capital allowances and other relevant items.
The 15% and 17% Rates Have Thresholds, and Foreign Ownership Is Only One Factor
For a company that meets the preferential conditions, taxable income is taxed in tiers:
| Portion of Taxable Income | Tax Rate |
|---|---|
| First RM150,000 | 15% |
| Next RM450,000 (the portion up to RM600,000) | 17% |
| Portion above RM600,000 | 24% |
The basic conditions include: the company is incorporated in Malaysia and is a Malaysian tax resident; its paid-up ordinary share capital at the start of the relevant basis period does not exceed RM2.5 million; and its gross business income does not exceed RM50 million. The equity and capital of related companies can also affect eligibility.
A company with only investment income first needs to confirm how that income is classified. The absence of turnover does not automatically mean a company meets the “gross business income not exceeding the cap” condition.
More Than 20% Foreign Ownership Is Different From Exactly 20%
Starting from the 2024 assessment year, a company whose paid-up ordinary share capital is more than 20% held, directly or indirectly, by a company incorporated overseas or by a non-Malaysian citizen does not qualify for the SME preferential conditions. Its taxable income is generally then subject to the standard 24% rate; cases involving approved incentives or special tax regimes need to be assessed separately.
The threshold here is “more than 20%,” not “20% or more.” Being at exactly 20% only means this particular limit is not breached — it does not mean every other condition is automatically satisfied.
Checking this also cannot stop at the first layer of shareholders. Shareholding through an overseas company, indirect holdings through a local company, and the capital of related companies all need to be mapped onto the same ownership structure. A foreign shareholder who has become a Malaysian tax resident does not thereby become a Malaysian citizen.
Common Misunderstandings
“Our revenue is only a few hundred thousand ringgit, so we should definitely qualify for 15%.”
Company size is not the only condition, and the 15% rate only applies to the first tier of taxable income for a company that already qualifies.
“Adding a local director gives us the local company’s preferential rate.”
A director’s nationality cannot substitute for the shareholding test. A company’s tax residency status is determined separately, under rules such as management and control.
What to Check Next
Compile direct and indirect shareholdings, shareholders’ nationalities, the place of incorporation, paid-up ordinary share capital, and the source of income, then have a tax agent confirm eligibility. Only after that should estimated taxable income be used for projections, so that a lower rate is not built into a budget before it is confirmed to apply. Specific tax treatment should be confirmed by a qualified tax professional.
Frequently Asked Questions
Q1: What tax rate generally applies to a 100%-foreign-owned company?
Its taxable income is generally taxed at the standard 24% rate, and it does not qualify for the SME preferential rates described above; any special incentive would need to be verified separately.
Q2: Is the 24% rate charged on turnover?
No. Taxable income is calculated first under tax law, and the applicable rate is then applied to that figure.
Q3: Does exactly 20% foreign ownership guarantee the preferential rate?
Not necessarily. Tax residency status, paid-up ordinary share capital, gross business income, and the position of related companies all still need to be checked.
Disclaimer
This article is based on information available as of October 8, 2026, for general reference only, and does not constitute legal, tax, financial, or immigration advice. Actual arrangements should be confirmed according to the company’s circumstances, applicable law, and the current requirements of the relevant authorities.
Sources
LHDN — Public Ruling 8/2025: Tax Treatment for Micro, Small and Medium Companies; LHDN — Company Tax Rates
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