KUALA LUMPUR, Oct 20 — Do you dabble in investing in the Malaysian stock market and are worried you will have to start paying a two per cent personal income tax on dividends from companies in which you have shares?
The first thing to know is you will only be taxed if the taxable dividend you receive in a year is more than RM100,000. In other words, the new tax that will take effect in the tax assessment year 2025 is mainly for individuals who derive a significant earnings from dividends.
So, who will have to pay the new dividend tax? And will the Malaysian government have an easy time collecting it? Here’s what tax experts told Malay Mail:
Veerinderjeet Singh, senior adviser on tax policy for KPMG Malaysia, said this new tax on dividend income “is aimed at taxing the T20 group”, which meets the criteria in the Budget 2025 speech. The T20 group refers to those whose income are in the highest 20 per cent bracket in Malaysia.
But since the Malaysian government intends to give multiple tax exemptions on dividend income, “it may not result in too much of an impact to the T20 group”, he said.
He listed these exemptions as: dividends from the deposits or savings in the Employees Provident Fund (EPF), Amanah Saham Nasional Bumiputera (ASNB), Lembaga Tabung Angkatan Tentera (LTAT) and unit trusts, as well as dividends received from cooperatives, Labuan entities, tax-exempt profits of companies, and on foreign dividend income (which would have been subjected to tax overseas).
While the new dividend tax is aimed at those in the high-income T20 group, Veerinderjeet said those in the upper range of the M40 group — otherwise known as the middle 40 per cent of earners or middle-income group in Malaysia — could also have to pay this new tax, depending on their investments.
“The 2 per cent tax will apply to annual TAXABLE dividend income exceeding RM100,000 —so it is imposed only on the TAXABLE dividend income exceeding RM100,000.
“Having said that the tax will impact the T20 group, it is also possible to impact someone at the top end of the M40 group who has invested substantially in the stock exchange over the fees to the extent that the person derives substantial dividend income annually exceeding the RM100,000 threshold,” the vice chair of the International Chamber of Commerce (ICC) Global Tax Commission told Malay Mail yesterday when contacted.
Veerinderjeet said other countries impose tax on dividend income just like any other types of income such as employment or business income, and some countries “impose a withholding tax on companies when they distribute dividend income to shareholders”.
On the other hand, Malaysia has decided to only impose a two per cent flat rate of tax on dividend income, he said.
He also said it would not be difficult to collect this tax as it will “probably be taxed in the personal income tax returns submitted annually by individuals who will have to declare the relevant amount that is taxable”.
Asked if individual shareholders could possibly find ways to avoid paying this new tax, Veerinderjeet said: “I do not see any way of avoiding the dividend tax as it is dependent on companies declaring dividends. If a company does not declare dividends, then there would be no tax applicable.”
Why Malaysia won’t see much impact now from dividend tax, and what about the future?
Veerinderjeet said the new tax is unlikely to boost the government’s revenue significantly now: “The 2 per cent tax rate is a very low rate. As such the impact is not substantial. It is also unlikely to generate a substantial amount of tax revenue given the many exemptions. So what is worrying is that the tax rate could be increased over the years.
“Given the low rate of tax, I do not see it affecting investments in Malaysia. It does create more tax compliance obligations.
“It is possible that, in future, this dividend tax may be extended to companies as well which hold equity investments and if so, then that may be a cause of concern to investment holding companies,” he said.
SM Thanneermalai, managing director of Thannees Tax Consulting Services, said the new dividend tax likely won’t affect foreign investors in the Malaysian stock market, as foreign investors are mostly companies instead of individuals.
Currently, companies which have already paid the corporate tax (maximum corporate tax rate is 24 per cent in Malaysia now), and would then pay dividends from their after-tax profits, and their individual shareholders would then receive these dividends as income that are not taxed by Malaysia, he said.
But with the new dividend tax, Thanneermalai said those who would be affected would be family-owned companies, as the majority of individual shareholders in such companies would typically not be taking salaries or directors’ fees, but instead receive dividends as income.
Instead of getting dividends as tax-free income, such individual shareholders would now have to pay two per cent tax on their dividend income, he said.
He said most of these individuals could be in the high-income group and “most likely closer to the top personal tax bracket of 30 per cent”, and said the new dividend tax would mean “ they will have to pay effectively 30 per cent on the top slice of the income which includes the dividend income”.
He said the new tax could affect quite a substantial number of individuals as RM100,000 is not an insignificant amount of money.
Asked if possible there may be individuals who seek to work around the new two per cent tax, Thanneermalai said this could possibly be done easily such as by having the dividends paid to an offshore company or a company in Labuan, but that it would depend on how the rules and regulations on the dividend tax come out.
“What happens if you plan it in such a way that the individuals do not receive the dividends, but an intermediary like a company or a trust or some other vehicle receives the dividend, then the two per cent tax may not apply and you bypass the two per cent,” he said when asked for examples.
“If they don’t come up with watertight regulations, people will go around this two per cent,” the former president of Chartered Tax Institute of Malaysia (CTIM) said.
However, he said the additional two per cent in tax is actually not a “big burden” for such individual shareholders, and said they could pay the extra two per cent tax if those who are extremely wealthy and a loyal citizen take on a different perspective.
In contrast to other countries which impose dividend tax through the method of companies withholding dividend income, he said Malaysia’s dividend tax will not be difficult to implement, as it is an easy tax to calculate and collect the tax that should be paid by individual shareholders.
Thanneermalai said the dividend tax was introduced at a time when the government needs revenue, but hoped it would only be a temporary measure and not a permanent measure.
He said this is because Malaysians’ personal income taxes are already quite high within the region at a maximum 30 per cent tax rate, and the new dividend tax could result in Malaysians considering the option of moving their capital and investing overseas, or shifting ownership of their interest to their locally-owned company or a company they form overseas.
While the new dividend tax may not have a big impact in real terms or in actual value of money invested here, he said it could be a “dampener” on investors’ sentiments.
“If you keep on increasing this, they will say why am I investing here, or I will still invest in Malaysian stocks through another vehicle overseas,” he said, noting that it would weigh psychologically on Malaysian investors on the new tax on high dividend incomes, while new investors would see it as a disadvantage.
As for whether the new dividend tax would encourage shareholders to invest in other alternatives such as unit trusts, he said this was possible, but that individual shareholders would not simply change their investments.
“They won’t simply move to other instruments, they will look at the highest returns, and if they can afford to pay the two per cent, they will still remain where they are,” he said, noting that they would not mind receiving a slightly lesser return on investment if such dividends still provide the highest returns.
On Friday, Prime Minister Datuk Seri Anwar Ibrahim in his Budget 2025 speech said the new dividend tax is intended to have tax collected also from company owners as well as individuals who own shares worth millions of ringgit.
Soh Lian Seng, Head of Tax at KPMG in Malaysia, said on Friday in a statement that the new dividend tax is “obviously targeted at the top 15 per cent taxpayers without further burdening the other 85 per cent”.
KPMG has issued a booklet online detailing questions that arise with the announcement of the new dividend tax, including whether Malaysian companies’ attractiveness to investors would be affected, and whether high-net-worth and ultra-high-net-worth individuals would use alternative methods to hold assets that pay dividends or if they would change to alternative investments.
