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Under the previous single-tier tax system, the tax on company profits is final, and dividends distributed are exempted from tax at the shareholder level.
However, starting from 1 January 2025, a 2% dividend tax will be imposed on individual shareholders, both residents and non-residents, including individuals holding shares through nominees. This tax applies to chargeable dividend income.
The 2% dividend tax is applicable based on the date the dividend is received by the individual shareholders, which corresponds to the date the dividend is paid by the company. The declaration date of the dividend is not used to determine the applicability of this tax. For example, if a dividend is declared in 2024 but payment is made to the shareholder in 2025, the dividend will be subject to the 2% tax.
Threshold for Taxation
- Only individual shareholders with annual dividend income exceeding RM100,000 will be subject to the 2% tax.
- Dividend income below RM100,000 remains exempt from this tax.
Formula To Determine Chargeable Dividend Income
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:
A – Dividend statutory income
B – Aggregate income
C – Chargeable income
D – Chargeable dividend income
A rate of 2% is imposed on chargeable dividend income after taking into account allowances and deductions.
Exemption from Dividend Tax is as follows:
- dividend income from abroad;
- dividend income distributed from the profits of companies that received pioneer status and reinvestment allowances;
- dividend income paid, credited or distributed from the profits of shipping companies that is exempted from tax;
- dividend income distributed by cooperatives;
- dividend income declared by closed-end funds;
- dividend income received by residents from Labuan entities; and
- any exemption given on dividend income at shareholder level.
Dividend Tax is not applicable to profit distributions made to contributors and depositors by:
- Kumpulan Wang Simpanan Pekerja (KWSP);
- Lembaga Tabung Angkatan Tentera (LTAT);
- Amanah Saham Nasional Bumiputera (ASNB); or
- any unit trust.
Tax Planning Considerations
To mitigate the impact of the upcoming 2% dividend tax on individual shareholders, companies can consider the following strategies:
Dividend Payment Before 31 December 2024
Distribute dividends to individual shareholders on or before 31 December 2024 to exhaust retained earnings before the new tax takes effect.
Progressive Dividend Payments After 2025
Limit annual dividend payments to RM100,000 per shareholder starting in 2025 to stay below the taxable threshold.
Replace individual shareholders with a foreign corporate shareholder to avoid the 2% tax on individuals. However, companies must consider the potential impact on their SME tax status, as SMEs may lose SME tax benefits (such as the preferential tax rate) if foreign ownership exceeds 20%. Additionally, it is essential to assess the foreign tax exposure, including whether dividends received from Malaysian companies are taxable in the foreign shareholder’s country and whether any Double Tax Agreement (DTA) benefits can help reduce or eliminate double taxation. Furthermore, if dividends are remitted back to Malaysian shareholders from the foreign corporate shareholder, they could be subject to Malaysian tax. It is essential to consider the tax implications both in Malaysia and in the foreign jurisdiction to ensure optimal tax planning.
