Overview of Budget 2025 Tax Measures
The Malaysian government's Budget 2025, announced on 18 October 2024, introduces substantial changes to the tax framework designed to enhance revenue collection and promote economic equity. These measures represent the most significant tax policy shifts in recent years and require careful analysis for compliance planning.
Major Tax Changes for Individuals
New 2% Dividend Tax
Starting from the Year of Assessment 2025, Malaysia will impose a 2% tax on dividend income exceeding RM100,000 annually for resident and non-resident individuals. This marks a departure from the single-tier dividend system that has exempted dividend income at the shareholder level.
Key Features of the Dividend Tax:
- Applies to annual dividend income above RM100,000 threshold
- 2% rate on excess amount only
- Covers both resident and non-resident individuals
- Includes specific exemptions for certain dividend categories
Exempted Dividend Categories:
- Dividends from pioneer status companies
- Dividends from companies with reinvestment allowances
- Dividends from shipping companies with tax exemptions
- Dividends from cooperatives and closed-ended funds
- Foreign-sourced dividends (subject to existing exemption rules)
Enhanced Individual Tax Reliefs
Budget 2025 introduces several new and expanded tax reliefs to support various social and economic objectives:
Housing Loan Interest Relief
- Relief for housing loan interest payment on first residential property
- Available for properties with Sale and Purchase Agreements executed from 1 January 2025 to 31 December 2027
- Can be claimed for up to three consecutive years
- Property must not be used for income generation
Expanded Child and Elderly Care Exemption
- Current child-care exemption up to RM3,000 annually extended to include elderly care
- Covers care for parents or grandparents
- Effective from Year of Assessment 2025
Corporate Tax Developments
Global Minimum Tax Implementation
Malaysia will implement the Global Minimum Tax in 2025, affecting multinational companies with global income of at least EUR750 million. This aligns Malaysia with international tax initiatives and may impact large corporations' tax planning strategies.
Capital Gains Tax on Unlisted Shares
A 10% capital gains tax on net profit from disposal of unlisted shares by local companies became effective from 1 March 2024, continuing to impact corporate transactions and restructuring activities.
Sales and Service Tax (SST) Expansion
New Coverage Areas
Effective 1 July 2025, SST will expand to cover additional service categories, particularly in the rental and leasing sector:
- 8% service tax on rental and leasing services under Group K, STR 2018
- Expanded scope to cover more businesses leasing tangible assets
- Enhanced compliance requirements for affected service providers
Implementation Considerations
Businesses must evaluate the impact of SST expansion on their operations, pricing strategies, and customer relationships. This includes:
- Reviewing current service offerings for SST applicability
- Updating pricing structures to account for tax implications
- Implementing new compliance procedures and documentation requirements
- Training staff on expanded SST obligations
Business Tax Incentives and Exemptions
ESG-Related Deductions
Budget 2025 continues support for Environmental, Social, and Governance (ESG) initiatives with tax deductions up to RM50,000 per year (YA 2024 to YA 2027) for ESG-related expenditure, including:
- Transfer Pricing Documentation preparation
- E-Invoicing implementation costs
- ESG reporting requirements compliance
Carbon Capture and Storage Incentives
New tax incentives for carbon capture, utilization, and storage activities encourage investments that comply with ESG standards and environmental sustainability goals.
Administrative and Compliance Changes
E-Invoicing Expansion
The mandatory e-invoicing rollout continues with expanded coverage for taxpayers in different income brackets beginning 1 July 2025. This represents a significant digitalization effort requiring system upgrades and process changes.
Enhanced Corporate Governance
LHDN has updated its Tax Corporate Governance (TCG) Programme guidelines, introducing new sections on Tax Control Framework and enhanced reporting requirements for risk management and governance.
Strategic Tax Planning Implications
Individual Tax Planning
- Review dividend investment strategies for high-income earners
- Consider timing of dividend distributions to optimize tax efficiency
- Evaluate property investment timing to benefit from housing loan relief
- Plan family care arrangements to maximize available exemptions
Corporate Tax Strategies
- Assess global minimum tax implications for multinational operations
- Review dividend distribution policies and timing
- Evaluate SST impact on pricing and service delivery models
- Consider ESG investment opportunities for tax benefits
Compliance Timeline and Action Items
Immediate Actions (2025)
- Update tax calculation systems for dividend tax implementation
- Review and register for expanded SST coverage if applicable
- Implement e-invoicing systems for expanded taxpayer categories
- Update tax planning strategies for new relief opportunities
Medium-term Considerations (2025-2027)
- Monitor global minimum tax implementation details and guidance
- Develop ESG investment strategies aligned with tax incentives
- Evaluate long-term impact of dividend tax on investment decisions
- Prepare for ongoing digitalization requirements
Conclusion
Malaysia's Budget 2025 tax changes represent a significant evolution in the country's tax policy, balancing revenue enhancement with social and environmental objectives. Successful adaptation requires proactive planning, system updates, and strategic tax advice. Businesses and individuals should begin preparing immediately to ensure compliance and optimize their tax positions under the new framework. Professional tax guidance will be essential for navigating these changes effectively and maximizing available opportunities while meeting enhanced compliance obligations.